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About the taxation scheme of KATA

Recently, we received many inquiries both from Hungary and abroad regarding KATA. These new clients were really enthusiastic about entering into this old-new taxation scheme.

Updated: 6 june 2018

Most of the inquirers did know one thing for sure: by paying 50,000 HUF per month as flat rate tax, they are all fine. When we asked them whether they had the chance to check the law itself, they obviously said no. However, they were absolutely sure that KATA is for them.

When we first look at the model, no doubt that we can see the lawmakers’ aim to make things simpler. However, from a different angle, the pure existence of the user manual issued by the Hungarian Tax Authority plus the not-so-comprehensive Act on Small Taxpayers shows something different.

So, we put together a list, for whom KATA is good for:

- If a foreigner would like to temporarily run a business with a certain type of residence permits.

- If someone loses their job, however has some marketable and billable skills or expertise

- A good thing that you can choose this taxation form even during the year, with a limited amount of administrative burden

- KATA can be good for entrepreneurs starting off in the first period. In terms of insurances it does not provide much, although at least you have insured status.

Who can choose KATA?

- licensed sole proprietor, sole trader
- individual company
- partnership with private persons partners only

Restrictions:

- if the company’s tax number is deleted or suspended
- if the company rents out properties

Many however see the great opportunity of avoiding taxes in the KATA taxation scheme.

Avoiding the taxes is not possible, since the law reduced this chance to a minimum.If your business is dealing with a lot of different customers, and its income is under annual 12 million HUF, KATA is the way to go.
If you only have one or two clients and you would like to use KATA for tax avoidance purposes, then KATA is not for you.

Avoiding taxes was restricted in the law. Basically, having an employment status is assumed by the law, and the person using KATA has to prove the he or she does not have such legal status.

Before choosing KATA, you might want to check some things:

IF your income from companies - that you are servicing - is under annual 1 million HUF each, then you are good, you do not have to read the following.

IF your income under KATA is more than 1 million HUF, from even one customer, then any two of the below prerequisites have to be true to avoid that your business under KATA gets defined as a hidden employment.

Criteria:

i. You did not exclusively run your business activities alone. If this is true, then this criteria is gone.

ii. Your income from one client has to be less than 50% of your total income. If it’s more than that, you will be fined.

iii. Client cannot instruct the one using KATA with regard how to execute the business activity. If the client can give instructions, then this is not KATA and you will be fined.

iv: the property where you run your business is in your posession. If it is not your property neither you rent it, then it is a no go.

v. Your tools, devices for running the business were not given to you by a company customer. If these are given by the the customer, then no-no.

vi. Working scheme, hours are defined by you. If it is determined by the customers, then you are not eligible for KATA and you will be fined

And here is the easter egg: when calculating the income of a businessperson using KATA, we have to sum up the income of the related parties.

Should you want to use KATA, equip yourself with accounting, some civil law and developed tax law knowledge. Hiring an accountant might not be necessary, however if you just chose this scheme out of the blue, you might need a tax advisor and a lawyer in the future to protect you from the tax authority.

Pros of KATA:

- fixed amount of monthly tax
- can be used as an alternative to more than one tax
- if you do not have an employee, the administration is simple
- you can choose it or leave it during the year
- if you exceed the specified income account, you will not be deleted from KATA, but you will have to pay and extra fee

Cons of KATA:

- recommended only in domestic sale relations and under the ‘exemption of VAT’ status
- in EU and non-EU relation the handling of VAT is very complicated and the easy administration of KATA quickly disappears
- people coming from different tax schemes will face massive difficulties in accounting
- people leaving KATA and going back to a different tax scheme will face massive difficulties in accounting
- does not make you exempt from local business tax, however you can choose a special and cheaper solution
- you are insured for a relatively small amount
- when certain criteria persist, you have reporting obligation together with your customer, therefore the one using KATA can be in a disadvantaged situation on the market
- if you have unpaid taxes, your KATA status will be deleted

As you see, KATA - and taxation in general - is not easy-peasy. We are here to help you, talk to us and get a quote here.

More info in the Act CXLVII of 2012: 2012. évi CXLVII. törvény

Disclaimer: it can happen that due to legal or market changes this blog post is not valid any more. intellaccount Kft. aims for the maximum punctuality and usability of these advices, however it does not take responsibility of the content and for the consequences of following them.

Information published on this site and the blog are for the sake of informing, and are not taking into account the readers’ individual need or tax status. Intellaccount Kft does not take responsibility for the accuracy and actuality of the data and information published. Information published is not considered as consultancy (tax, legal or other consultancy), therefore do not replace consultation with our experts. intellaccount Kft does not take responsibility for the consequences of business decisions made based on the content of webpages accessed through the links via this site.