We asked representatives of local accounting firms and tax consultants to suggest ways to save on taxes. These are the answeres we received.
partner and tax advisor,
For most foreigners, the highly administrative nature of the Hungarian tax system, with its strict and mechanically formal requirements, is the largest and most unpleasant surprise. To fulfil all of these – invoice and invoicing program requirements, Electronic Public Road Trade Control System (EKAER) reporting, transfer pricing documentation, accounting policies, etc. – requires significant efforts in time and costs; especially in consideration of the huge penalties for potential non-compliance. Consequently, I believe it is very important to choose a tax and accounting services provider who proactively assists the company with these requirements of the Hungarian business sphere, so the company may eliminate unexpected surprises and, more importantly, can save on penalties. From another point of view, the Hungarian tax system could be very attractive due to the favourable main tax categories (e.g. low income taxes, relatively good employment taxation). Especially good news is that companies may enforce several corporate income tax allowances and EU funding opportunities, which may – with good optimization – even counteract the relatively high social security contributions and sectoral taxes.
director of operations,
Colling Accounting and Consulting
In our practice, we have found it is key to involve the accountant and tax advisor before starting with a business activity – even before the legal procedures. Business people can develop a proper business model, but it can only work smoothly and effectively over the long-term if it is financially and administratively optimal. An accountant and a tax advisor can ensure that the established structure is the optimal and most effective, with the least risk possible. Different means of tax optimization provide opportunities that can be taken into account relatively easily before starting a business activity. Once operation begins, however, the company and the accountant should always keep their eyes open for possible risks – to reduce or correct them – as well as unused sources of benefits for taxation. The key here is to find the right provider who can provide assistance with this kind of professional attitude, working together with the client as a reliable partner, and not as a robotic administrator who puts the handling of tax matters on autopilot.
WTS Klient Tax Advisory
First of all, entrepreneurs should make a decision to choose the best taxation type for keeping their tax burden at an optimum level. As mentioned in the EU Commission country report for Hungary, the Hungarian corporate tax system still features a multitude of tax regimes (including simplified tax schemes). In order to decide on the best taxation type, the nature, volume and specialties of the activity and the costs have to be analyzed first. A 10% flat rate for a tax base of up to a HUF 500 million (TAO) can be attractive, but the administration costs can be higher compared to running the business by using simplified tax types like KIVA or EVA. It is good to know that there are additional legal options to decrease the tax burden if someone opts to set up a company and pay TAO. As an example, if a small- or medium-sized company is owned by private persons, the tax base can be decreased by the capitalized value of certain assets. Since the issue is quite complex, it is worth involving a good tax advisor in the planning phase.
I recommend that Hungarian companies try to implement KATA. This low-tax-payment scheme is good for all independent work that is performed on a freelance work schedule. These two requirement are enough to choose the KATA regime, but if an employer needs further reasons, they can go for the other requirements – though this is not a “must”. KATA is a wide ranging tax scheme used by approximately 200,000 taxpayers, and it can also be used by any EU citizen who would like to work in any EU country. To learn more about the tax efficiency of KATA, you can use the Ministry for National Economy’s calculator here:
There are several ways to reduce a company’s tax burden in Hungary. From a payroll tax perspective, a company can implement the cafeteria system. As part of this, employers can offer certain benefits to their employees with favorable tax rates compared to a simple salary tax. If it is implemented correctly, the cafeteria system also gives employees the opportunity to set up their own benefit structure within the system, which could serve as a motivating factor for them. From an income tax perspective, at 10% the Hungarian corporate income tax is rather low compared to many other European countries, so that is already a positive factor. However, the 2% local business tax is not a very friendly rate, because its tax base is the company’s gross profit. Both of these taxes can be reduced by locating research and development activities in Hungary, which results in tax benefits. So that is one way to utilize the tax regulations to a company’s benefit.
head of indirect tax services,
RSM Hungary Adótanácsadó és Pénzügyi Szolgáltató
There are many ways to reduce the tax burden, but the applicability of such advice depends on the sector, specific business model and the specific facts of each case. As such, no advice would be simple and general enough to summarize here. It is worth mentioning that the easiest way to reduce a tax burden is to set up and run smooth and compliant tax processes within the company, pay attention to deadlines, keep necessary records, get the ERP system to communicate with invoicing and reporting, and more generally take tax obligations seriously. To avoid tax penalties and thus reduce its tax burden, a company should invest into developing its internal tax or accounting team with a sound understanding of taxes, or rely on external bookkeepers or – in more complex cases – on external tax advisors. This advice may seem so obvious that it is not even worth mentioning, yet we see that many companies get the basic tax matters wrong.
partner, managing director,
In our practice, we have found it is foreign companies which decide to obtain tax registrations, set-up representative offices, local branches or companies when starting up business in Hungary. Each legal form may have different tax implications, so careful up-front analysis is recommended. Depending on the size, when setting up a company in Hungary it is worth considering putting different business units into separate legal entities to benefit from the lower corporate tax rate of 10%, applicable up to the tax base of HUF 500 million. When deciding on how to fund the Hungarian company, the loan-to-equity ratio should be properly determined and maintained in order to benefit from potential interest expense deduction. Please pay attention to existing special sector taxes and government communication about plans to levy taxes on certain industries.
VGD Ferencz & Partner
Each stage of a business’ life cycle is equally important, and the issues associated with starting, operating, restructuring/transforming or exiting a business are no exception. While Hungarian tax regulations are exceptionally multidimensional compared to other countries in Europe, they are designed to provide a constructive tax environment for both local and international businesses in any stage of their life cycle. It is imperative that the owners of a business can prepare for the next stage and have access to all the legal and financial information that helps decision making. Of course, no “general approach” exists to find one optimum solution that fits all. It is therefore all the more important that the owners understand the rules that have relevance to and affect both their in-border and cross-border trading and organizational structure. In order for both management and owners to find the optimal legal and tax solutions whatever stage their business is in, they need a comprehensive, yet carefully customized analysis, complete with solution recommendations that can be used to develop a strategic plan which will be able to serve the particular interests of the business long-term. VGD’s very own “Wealth Management ModelTM” is an unrivalled tool that brings us, advisers, together with businesses to join forces in a genuine strategic partnership with VGD for their sustainable success.