How to save a lot of tax legally?

Save tax, tax minimization

Introduction

As society has developed over history, tax became a constant part of that system. That is some annoying thing that is unavoidable on one side, however, on the other side, everybody tries to evade it somehow.

Numerous tricks and frameworks have been invented and applied in practice. Some of them are legal but some of them are not. This article focuses on a great and absolutely legal opportunity for those who really want to expand their tax possibilities.

Hungary and KATA

Hungary is an EU member country in the heart of Europe. There is a great new taxation system introduced by the government 3 years ago, called KATA (it is an abbreviation, it may  be translated to English like “Small Taxpayers’ Tax”). It is a fixed amount of tax in every month that is independent of the actual income. The two great advantages of this system are fairness and simplicity.

What enterprises may enter KATA system?

Hungarian private entrepreneurs, Bt-s and Kkt-s (business associations) may apply the system. Hungarian limited liability and private or public limited companies may not apply this form of taxation.

Is there any limit for this tax?

Well, according to the regulation, there is no limit, meaning, the system may be applied without any limitations and the taxpayer will not lose its status because of generating too much income.

However, there is an additional tax, which is 40%, above 12 million HUF (ca. 39.735.-EUR) of income per year. In practice, this greatly limits the whole application of the system.

How to start a Hungarian enterprise?

To start a Hungarian Bt. (Kkt. is not recommended as all the owners have unlimited financial liability) or private enterprise and register under the KATA system, you will need a Hungarian residence permit and a local social security number.

If you arrive outside of the EU (i.e. you have no EU citizenship), taking advantage of KATA may be tricky and difficult but not impossible.

For those who come from the EU, registering under KATA system is easier, since they can get a residence permit in a simplified process.

How much is the KATA tax?

It is 50.000.-HUF in each month plus 50.000.-HUF for the local government in each year. That makes 650.000.-HUF in a year (ca. 2.150.-EUR).

What does the tax include?

It includes the following items:

  • Social security – so you may terminate your social security in another EU country
  • Income and dividend tax – so you may keep the rest of the money as a 100% legal personal income

The tax is not connected to the value added tax (VAT) at all. It is independent of KATA.

How much tax you may save? (with an example)

Let us assume that you provide software development services in the UK. You earn 70.000.-EUR a year and you pay like 42% of overall tax before you can spend that money for private expenditures. In addition, you pay a lot of social security taxes also.

You move part or you activity to Hungary and invoice 39.000.-EUR a year and pay 2.150.-EUR tax on that income.

Comparison:

On 70.000.-EUR yearly income

In the UK only: 70.000*42%=29.400.-EUR tax

By applying the “split” system: UK 31.000.-*42%=13.020.-EUR tax, Hungary 2.150.- EUR tax, together: 15.170.-EUR.

Savings: 14.230.-EUR

Summary

All in all, KATA is a great, simple and fair taxation system that may carry huge advantages especially for those who can move their business activities through the borders (e.g. online, marketing, consultancy, software development services and the like). You may save considerable amount of tax and social security by applying this Hungarian taxation system.

How we can help you?

If you are interested, we will be very happy to:

  • Provide further information about KATA
  • Localize you (i.e. obtain local tax and social security number, apply for residence permit)
  • Start your enterprise
  • Do the required bookkeeping, comply with local regulations
  • Provide you with advice how to optimize your business framework

Please feel free to contact us and request an online consultancy.

You may also like our free e-Book and article about how to register a company and do business in Hungary.

Check out our company registration and accounting fees.