Before you start reading this article, you may consider checking out our latest post about starting a Hungarian Private Enterprise.
Also, you may be interested in our comparison of KATA, KIVA and Corporate Income Taxation systems.
Who can start a private enterprise in Hungary?
According to the law of 2009/115. about private enterprises, an adult (over the age of 18) natural person may start a sole proprietorship who is:
- a Hungarian citizen
- an EU citizen
- a citizen arriving from a third country (i.e. outside of EU) who has a valid residence permit with gainful activity, family reunification, study or has a permanent residency
What is a private enterprise?
A private enterprise is a non-legal person form of business with unlimited financial responsibility. That means that the private entrepreneur is responsible for all the obligations of his/her business (e.g. tax, accounts payables etc.).
A private enterprise, legally, is considered a natural person.
It is holding a tax number and may apply for an EU tax number.
Taxation of private enterprises
To make it understandable for non-professionals, I categorize the tax issues of the Hungarian private enterprise into two main groups:
- Taxation of the income (profit) of the enterprise
- Value added tax (VAT)
The two categories are absolutely independent of each other!
Profit tax of the private enterprise
As a private entrepreneur, you may choose the following taxation methods:
- Personal income tax (default setup): 15%, dividend tax is
- KATA: 50.000.-HUF or 25.000.-HUF/month
- KIVA: 12% based on a special calculation
- Average tax: not so popular anymore
Value added tax (ÁFA) of the private enterprise
Value added tax can be calculated:
- Based on default rules
- Based on VAT free status (alanyi mentes)
VAT free status may be chosen up to 12 million HUF of yearly income. This is proportional, so if you start you business during the year, you have to calculate the corresponding amount.
You will lose your VAT free status if
- You decide to terminate your status and apply the general ruels
- You exceed the 12 million HUF limit
- You import or export products from or to the EU. However, you may obtain and sell services within the EU.
Why is KATA a great choice?
KATA (small taxpayers’ tax) is one of the greatest taxation system ever introduced: simple, fair and easily manageable. It makes it super-duper smooth to legalize all your business incomes. Definitely, KATA kills the stress what taxation puts on most of the individuals. Let me explain why.
KATA is a fixed fee for each month. You should pay:
- 50.000.-HUF/month if you are a full-time entrepreneur
- 25.000.-HUF/month if you are studying or are retired or have an employment at least 36 hours/week
The income limit for KATA is 12 million HUF in each year. If you apply normal VAT regulations, VAT to be paid should NOT be calculated in that income. If you exceed this limit, you will have to pay a 40% extra tax on the difference.
What taxes are included in KATA?
- Income tax
- Dividend tax
- Personal income tax
- Social contribution, health and retirement contributions
Suspension of private enterprise activity
Private enterprise activity and, in parallel, KATA may be legally suspended up to 2 years. What does suspension mean? No KATA should be paid but you also cannot issue any invoices or carry out business activity.
After 2 year of continuous suspension, your enterprise will be closed! This is important, since in this case you will not be able to pick KATA for 2 years.
This is a great solution if your work is seasonal for one or another reason.
Please also note that suspensions months do NOT count in the 12 million HUF yearly limit. E.g. your activity is suspended for 5 month, than you operate 7 months. That makes 7 million HUF of income limit.
KATA and employment
KATA should not substitute employment. Legally, it should not cover or hide a work contract. To prevent this, each company should be reported where a KATA enterprise invoices more than 1.5 mllion HUF in a year. These legal relationships may be considered, with its tax consequences, as work contract.
Summary of KATA taxation
To put it real simple, in each year, you may clear and legalize 12 million HUF (around 36.000.-EUR) or equivalent foreign currency income for the cost of:
- 650.000.-HUF KATA
- 50.000.-HUF local turnover tax
- 5.000.-HUF chamber of commerce fee
- Alltogether 705.000.-HUF. That is a 17% of overall tax load.
This is your “weapon of choice” if you:
- Are a developer
- Generate online incomes (e.g. YouTube, AdSense, selling book, selling game keys etc.)
- Provide international consultancy services
Do you need a residence permit in order to start a private enterprise in Hungary?
To start your Hungarian private enterprise, you will have to obtain a social security number (so called TAJ-number). To comply this, if you are coming outside of EU, you will have to hold a valid residence permit with gainful activity, family reunification or studying.
If you are an EU citizen, however, you will have to go though a simplified immigration process to get a valid residence card in Hungary.
In another article, you may learn more about immigration.
How can we help you?
We can aid you in the following issues:
- General business, tax and immigration consultancy
- Help you to obtain Hungarian residency
- Find you the best way to legalize your income
- Opening a private enterprise with KATA taxation & do the mandatory registrations at the authorities
- Help you to open a Hungarian bank account
- Opening Personal Electronic Portal for you (www.magyarorszag.hu)
- Help you in invoicing and submission of tax declarations
- Legal assistance in developing your contracts
Check out and download our Guide for KATA newcomers
If you want to get a quotation for opening a Hungarian private enterprise, please be so kind as to contact us via e-mail or fill out the form below.
QUOTATION FOR STARTING A HUNGARIAN PRIVATE ENTERPRISE
If you have further questions or would like to request and inquiry, please feel free to contact us.
Tel: +36 20 548 4103