What is the best taxation method in Hungary? Personal income tax (PIT), KATA, KIVA or Corporate income tax (CIT)?
In this article, I would like to demonstrate the main characteristics of the generally applied taxation systems in Hungary including the iconic KATA as well.
The aim of this blog entry is not a deep and professional investigation of the Hungarian taxation but to provide a general and precise knowledge about the structure which may be understood by non-professional as well.
Please be noted that this article was written in 2021 based on the current legislation so be sure that you look for updates if you happen to read this blog entry at a later date.
How do you setup your enterprise taxation in Hungary?
When you are about to set up your taxation of your Hungarian business, you may perceive it as a puzzle game where different puzzles should be attached to others by certain rules.
Imagine Hungarian taxation as a set of modules that are related to each other and each module should be connected before the whole things gets working.
The “modules” you should consider:
- Legal form of your enterprise
- Income tax
- Social security
- Local tax
Before you can move on, you need to have basic knowledge about these modules, so the following part of the article will teach you some of the basics.
Legal business forms in Hungary
The followings are the most common enterprises in Hungary:
- Private enterprise
- Business association (Bt.)
- Limited liability company (Kft.)
- Non-public limited company (Zrt.)
- Public limited company (Nyrt.)
Without going into the details, it is important to note that private enterprises are non-legal persons (i.e. considered as natural persons), while the others are legal persons. Also private businesses have unlimited liabilities, while Kft., Zrt. and Nyrt. have limited financial liability. Bt. is a hybrid from this point of view since this business entity has both limited and unlimited financial responsibility.
By the way, what does limited and unlimited financial responsibility refer to? This is a legal terms and indicates that whether you, as a private person owner, are liable for the debts of the company.
Introduction to the Hungarian taxation system
In order to understand any taxation related information, you will need to understand the basic taxation structure and attitude in Hungary.
All around the world, the state always happens to be very tricky when it is about to get your money. There so many titles why one has to pay taxes.
In Hungary, the reason of taxation may be classified into five six main categories:
- Income taxes
- Social security
- Value added tax (VAT)
- Excise duty
- Local taxes
- Other taxes
You will meet income taxes when it is about to tax your incomes, dividends and profits. The typical taxes are: corporate income tax, personal income tax, dividend tax, KIVA and KATA
If you stay in Hungary, you will have to pay certain amount to have social insurance. Well, to be honest, it is quite a high amount. Paying social security results in a valid TAJ (social security) number which allows you to have health services for free.
Value added tax (VAT)
It is the all time favorite tax in Hungary. In Hungarian it is called: ÁFA (általános forgalmi adó, meaning: generally applied sales/turnover tax). You will meet this every time you purchase something. The percentage is rather high, 27%, one of the highest in Europe.
This tax is paid when you buy fuel, cigarette, tobacco or alcohol. However, you will also face this tax when you purchase a car, a property or you just get a gift.
You also pay certain fees when you obtain government services. Guess what, that is also regulated by the excise duty law.
In Hungarian, this one is called Illeték and may be translated as a share or part that the government deserves.
In Hungary, local governments (önkormányzat) also have the right to introduce certain taxes. Namely: property tax, turnover tax, tourist tax, communal tax, car tax.
I already addressed several taxes but it is still far from the end of the line. There are – and I guess there always will be – other taxes as well. Fortunately, you will not meet them on a daily basis. Good examples are: business car tax, tourist development contribution tax, environmental protection tax.
Setting up your enterprise’s taxation
Let’s put the pieces together: business format, income taxation, social security, VAT and local tax.
To do this, you will have to know the rules of the combination of the different elements.
The following sheet will help you understand the rules. I left out Zrt. and Nyrt. since those business forms are for big companies.
|Business form||Income tax||Social security||VAT||Dividend tax||Local tax|
|Private enterprise||PIT (default) or KATA (optional)||KATA or Tbj.||VAT free (optional) or normal (default)||KATA or PIT||Fixed 50.000.-HUF/year (optional) or 2%|
|Bt.||CIT (default, 9%) or KATA (optional)||KATA or Tbj.||VAT free (optional) or normal (default)||KATA or PIT||Fixed 50.000.-HUF/year (optional) or 2%|
|Kft.||CIT (default, 9%) or KIVA (optional, 11%)||Tbj.||VAT free (optional) or normal (default)||PIT||2%|
KATA: KATA taxation
KIVA: KIVA taxation
PIT: Personal income tax law
CIT: Corporate income tax law
Tbj.: Social security law
The following infograph demonstrates the above mentioned correlations. The color represents the main category of the given tax. KATA, of course, is an exception sinde that is a all-in-one solution.
Let us investigate the above mentioned elements one by one.
Personal income tax
This is the default taxation for private persons and private enterprises in Hungary. The rate 15% and it is linear.
Personal income tax is not so good for private enterprises since both the profit and the remaining sum are taxed. Besides, social security must be paid separately, which is a considerable amount.
There are tax exemptions and reductions in the Hungarian private tax system. Indisputably, the most popular is the family tax deduction which is calculated based on the number of children.
One of the most popular and, definitely, the simplest taxation method in Hungary. Its popularity is based on the simplicity and fairness.
The business should pay either 50k HUF or 25k HUF in each month independently of its real income.
It a real all in one joker tax: income tax, dividend tax and social security are all included.
The yearly KATA limit is 12 million HUF and it is proportional. I.e. the more months you operate in a year, the more limit you have.
For more details, please check out our article about private enterprise and KATA taxation system.
Also, you may be interested in current year’s tax changes which, unfortunately, brought some new disadvantages in the KATA system.
A VAT free KATA enterprise does not really require regular accounting. It is enough to invoice properly and file in a tax return once a year.
KATA may be your number one choice if you are working on your own and you are a service provider, an IT developer, a designer or the like.
It is not for you, however, if you are a merchant. Why? Since, and this is key point in KATA system, costs are not recognized at all, just the incomes so, if you sell goods, you will exceed KATA limit with a light speed.
Corporate income tax
The corporate income tax rate is 9% and it is paid on the profit of the enterprise (i.e. profit less recognized expenses). This is the default taxation system for companies.
Corporations need a regular up-to-date accounting and should prepare financial statements in each year.
Also, companies are obliged to pay social security fees separately.
In parallel with KATA, in fact in the same law, KIVA was also introduced by the Hungarian government. This tax system may be the best choice if you have several employees and/or high wages.
The rate of KIVA is 11%, however, the tax basis is very special. It is calculated on the wages. If the owners or general managers who participate in the company’s everyday life do not receive any salary, the state minimum salary should be considered.
By the way, dividend paid increases the KIVA basis as well.
If you pay KIVA, you should not pay: income tax, social security contribution and training contribution. To put it simple: corporate income tax and some taxes on wages are included.
Social security fees are bore by both the employer and the employee. The employer pays 15,5% social security tax and 1,5% training contribution while the employee contributes 18.5% social security fee and 15% personal income tax. Altogether 50,5%
Also, because of the regulation, the basis of the social security fees cannot be lower than the state minimal wage. There are two minimal wages as well: a lower for simple jobs and a higher one for tasks that require more education.
All in all, it is not simple. Social security represents a large proportion of the tax obligation of an average Hungarian business.
KATA and KIVA included social security elements, so significant sums may be saved by applying them.
VAT is a separate and complicated system. It does not depend on your income taxation or your business format. That is like and independent module that should be attached to your enterprise.
There are two basic choices in the Hungarian VAT system:
- VAT free (abbreviated as “AAM” in Hungarian)
- Normal VAT (default choice)
The turnover (sales) limit for VAT free system is 12 million HUF/year and it is proportional so if you start during the year, the limit falls down.
Why may VAT free system is good for you? Since you do not have to include VAT in your invoices and do not have to file regular tax returns. But….and there is a but always. If you have EU service transactions (i.e. you buy and/or sell services from or to another EU tax person), you will have to file in both VAT and EU tax forms.
If your sales is less than 125 million HUF in a year, you may consider to apply the so-called cash accounting method. That means that you only have to pay the VAT on your sales when you got paid by your customer. Compared to the default system it is an advantage since, as a general rule, once an invoiced is issued by you, you must pay VAT even if you still have outstanding receivables.
Last but not least, local turnover tax is also a crucial factor. The basis of the local tax is the turnover (i.e. sales) less costs of material and the costs of goods and services sold.
One may say that this tax is a fee on the added value.
This kind of tax should be paid to the local governments instead of the central one.
The maximum possible rate is 2% but it depends on the city or town which introduces this.
For KATA taxpayers, it is also a possibility to choose the fixed amount of tax (flat rate) instead of the 2% version. That is 50k HUF/year.
Local governments also may introduce property tax, tourist tax; in addition, they receive the car tax as well.
So the question remains still open: what is the best taxation system for you as a Hungarian business about to start up? And the answer is: it really depends.
Depends on your personal preference, your goals, your backgournd etc. So on many many factors.
As you see, Hungarian taxation system is not an easy one. The aim of this blog article was not to make a professional but to let you know the basics and to have an overall picture in your head.
But it can be stated without a doubt that any taxation decision in the Hungarian system needs a careful preliminary calculation and planning.
The wrong taxation choice may result in serious losses.
Once taxation mistakes are made, they are very hard if not impossible to be corrected.
The taxation choice that fits for one, may not for somebody else.
You may also find useful information on official webpage of the Tax Office (NAV),
If you have further questions or would like to request and inquiry, please feel free to contact us.
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