The tax alternatives after the KATA changes

Analysis

The most popular form of taxation for small entrepreneurs and businesses will fundamentally change from September 1, after the government voted on the so-called “KATA law” on July 12. Niveus Consulting Group has examined what types of taxation solutions could be available.

Under the new regulations, the income value limit will rise to HUF 18 million. Only individual entrepreneurs who provide their services to individuals (not companies) and sell products can continue to choose the KATA taxation. Thus, people can only receive income from private individuals, with the notable exception of taxi operators.

For small entrepreneurs working with a low-cost ratio, such as consultants, lawyers, IT, and advertising professionals, the revised flat-rate taxation could be a favorable solution for individual entrepreneurs, though not limited partnerships, Niveus says.

Miklós Pálffy, the cooperating legal partner of the Niveus Consulting Group, highlighted that the most significant advantage of the flat tax is the application of a 40% or, in some instances, 80% cost ratio.

It means that there is no need to collect invoices for the costs of the business; 40% of the income is automatically recognized as an expense. In essence, the taxpayers will receive this amount tax-free. The remaining 60% is taxed as wages, with 13% social tax, 18.5% social security contribution, and 15% personal income tax.

Overall, the tax burden from September will be higher than under KATA. However, the income defined as the basis of the tax is considered a “declared” salary, after which people are entitled to a higher amount of pension.

This “declared” salary will be the basis of the social security legal relationship, so it will also be the basis of child care subsidies and sick pay. In contrast to KATA, this income can be used to claim tax benefits (first married couple’s and family tax benefits) and contribution benefits.

The burden is further reduced by the fact that the first HUF 1,200,000 income per year is tax-free and, under certain conditions, contribution-free, which is also exempt from local business tax.

For those who have chosen the so-called part-time KATA, with a monthly payment of HUF 25,000 besides employment, HUF 1,200,000 will be tax and contribution-free. For this year, up to HUF 2,000,000 in income can be obtained tax-free. If this income limit is not exceeded by next year, then the part-time job becomes tax-free next year as well.

The disadvantage of choosing flat taxation is the increased administration, the selection of the appropriate tax type, and, in the case of full-time taxpayers, preparing the returns requires an accountant. Moreover, the minimum contributions must be paid even if there is no income or it is unevenly distributed throughout the year.

Those impacted by the new law, many of whom protested against the regulation in Budapest, will need to submit a change request form to the National Tax and Customs Administration to switch to a new tax system.

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