Sudden hit on the KATA system by the government
As already published yesterday in this article about the KATA change, from 1st September 2022, the good old KATA system will suffer a sudden impact.
The changes affect more than 450k KATA taxpayers in Hungary.
This is an obvious sign that something is very wrong with the budget of Hungary.
The government proposed and voted the execution of KATA overnight. At the time of this article, the law is already accepted which means the end of the life of the 9-year good-old-KATA. This was a very popular taxation method in Hungary.
Rest in peace KATA. It was nice being together with you.
What changes there will be in the KATA system from September?
According to the government plans, KATA taxation will change in the following manner from 1st September:
- KATA tax limit will increase from 12 million HUF to 18 million HUF a year.
- Bt-s cannot be in the KATA system anymore, only private enterprises.
- KATA tax payers will not be allowed to issue invoice for companies or government or other organizations only for private persons. The only exception will be taxi cab drivers.
- There will be no side activity taxpayer (i.e. 25kHUF/month) but KATA enterprise may be conducted only as main activity.
- Taxpayers will have to make their choices till 25th September whether they remain in the KATA system or not.
What are the alternatives to KATA?
Well, there is an obvious question: how to live without KATA since that is not a choice anymore if you happen to provide your service to non-individuals.
Fortunately, there are some alternatives, however, all of them are a step-back compared to KATA.
To put it funny, an obvious step is to become a taxi cab driver till 1st of September. But let us set aside humor for now and get serious.
The other possibilities are:
- Average personal income tax (a choice for private enterprises)
- Personal income tax (default system for private enterprises)
- Corporate income tax
The first two are meant for private enterprises and the latter two for companies.
All of these systems are more complicated and hard to understand.
Naturally, companies need a lawyer to be established, accountant to maintain etc.
I assume that you did not exceed either the 12 million HUF or the 3 million HUF limit, otherwise you already would have taken some steps.
As a result, every alternative means serious tax increase for you. Please be prepared.
The bright side of the change: no more 3 million HUF limit
There is some good in every bad thing: there is no more 3 million limit. You do not have to worry about invoicing or exceeding the limit or splitting the income. That era is over.
How to proceed?
Well, first of all, the time is limited. You will have to make your moves no later than the beginning of September. The due date is 25th September. Until this time, you will have to declare to the government whether you are eligible for KATA or not. But remember, if you invoice companies, you cannot be in the system anymore.
Second, it is summertime so it is quite unlikely that people want to take care about KATA right now which will lead to a rush during September.
What can you do during your vacation to step forward? Let me suggest a brief plan to you:
- Step number 1: Calm down. Everybody is upset right now for obvious reasons. This process was devastating from the government and that is being generous.
- Step number 2: Calculate. I have prepared a very detailed Excel sheet with plenty of parameters where you can compare every alternative taxation methods. The next obvious method is the average personal income tax. But this tax will require regular tax returns and the tax itself is dependent on your income. Below, you may download the Life after KATA tax calculation sheet for free.
- Step number 3: Make your moves and declare your choice to the government. If necessary, start a company and close down your enterprise.
Alternatives to KATA taxation
Corporate income tax and KIVA
If you happen to have a Bt. with KATA, from 1st September, the possiblity of applying this taxation method will end. There are two option for Bt-s:
- Corporate income tax
- KIVA (small taxpayer’s tax)
Corporate income tax is 9% based on the profit, while KIVA rate is 10% based on the actual wage but at least the minimal wage.
In the future, you will need regular accouting, send monhtly tax forms and you will have to pay dividend tax and publish yearly financial statements.
All in all, for KATA Bt.-s, the modification of this law is a disaster unless the services are provided only for private persons (e.g. massage or the like). In this case, you may still start a private enteprise with KATA.
To summarize your options of the KATA Bt-s:
- Switch to KIVA
- Switch to corporate income tax
- Shut down the company
Personal income tax
For private enterprises, personal income tax provides the only alternative.
Within this system, there are two methods:
- Default taxation
- Average tax
The default taxation, I think, is a disatvantage in every aspect.
Average tax, however, worths a caclulation and a try. In this approach, the tax basis is manifested as a certain percentage of your income depending on your activity. Besides, up to 1.2 million HUF, your income is tax free.
The downside of both approaches, although, is that you will need to send monthly tax forms.
To summarize your options of the KATA private enterprise:
- Switch to default personal income tax
- Switch to average personal income tax
- Start a company with KIVA or corporate income tax
Some personal thoughts
At the end, let me add some personal notes and feelings as well as a future ex-KATA taxpayer.
KATA was a wonderful taxation method for its simplicity. Everybody understands that, due to the war, the country and government is in a very bad financial situation.
Asking for more tax is a fair demand in this situation. However, pushing through a legislation overnight and not letting people to prepare is quite a bad attitude considering the number of people this change affects.
Besides, based on my 20 years of professional experience, the Hungarian mentality is about adaptation. Since every other alternative is based on your incomes, it will be no wonder that most of ex-KATA taxpayers will be interested in the decrease of their incomes so they will only invoice any sales if necessary or there will be double-pricing (i.e. an “official price” and a “without invoice price”).
Also, many private entrepreneurs set their prices in accordance with the tax load and now they will have to imply a price increase which will drive the inflation even further.
Anyways, KATA was a popular and helpful taxation method. Everybody loved it. Rest in peace.
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