As of 1 September 2022, the new law will narrow down the range of taxpayers who can opt for the kata tax for small taxpayers, because unlike the previous rules, from this date only full-time self-employed individuals will be able to apply this preferential form of taxation. As a result of the change, limited partnerships, partnerships limited by shares and law firms with only private members can no longer be subject to the special tax on small taxable enterprises. Self-employed persons who work more than 36 hours a week or more elsewhere, or who are insured in another state or under another legal relationship (e.g. full-time students or self-employed persons), or who are retired, are also not eligible for this form of taxation.

A further significant tightening is that the entrepreneur who receives an invoice from a company the day before the receipt of the income, except for the entrepreneur who carries out the activity of transporting passengers by taxi, will no longer be subject to the kata. In practice, this means that only self-employed persons who deal exclusively with private individuals can use the kata form of taxation.

Rate of kata:

The tax rate will be HUF 50,000,- per month, the increased tax rate of HUF 75,000,- will be abolished. As kata can no longer be chosen as an additional activity, the HUF 25,000,- per month flat tax will also be abolished. Payment of the tax will result in an insured status and a benefit fund of HUF 108,000 (i.e. much less than the minimum wage).

The deadline for payment of the tax will remain the 12th of the month following the month in question, and the deadline for declaring income for the tax year will continue to be 25 February of the following year.

Individual  kata entrepreneurs can still opt for the simplified method of calculating the local business tax base (HUF 2 500 000 flat-rate tax base).

Limit on income

However, the limit on income has changed, from HUF 12 000 000 to HUF 18 million, so those remaining in the kata will only have to pay the 40% extra tax on income above this amount.

In many cases, those who opt for the kata tax regime are exempt from VAT. However, even if the income limit for the kata is raised to HUF 18 000 000, the VAT exemption limit remains HUF 12 000 000. This means that entrepreneurs who exceed the HUF 12 000 000 limit will not have to pay 40% VAT, but will have to pay VAT and open a bank account.

Cease of administrative tasks

Taking into account that from 1 September 2022, only self-employed persons who are exclusively connected with private individuals and derive their income from them will be eligible forthe kata, the new law will not contain the provisions that served to prevent hidden employment, and the monitoring of the HUF 3 million income limit from a single payer and the 40% tax on income exceeding HUF 3 000 000 will also be abolished. Both the small taxable entrepreneur and payer will no longer have to report data related to income exceeding HUF 1 000 000 per year. 

Transitional rules:

The substantive changes will come into force from 1 September 2022, so existing small taxpayers will be able to continue their activities unchanged until that date. On 31 August 2022, the status of small taxpayers will automatically cease for all small taxpayers, and from 1 September only those who meet all the conditions set out in the law and notify their intention to do so in time will be subject to the tax.

Anyone who meets the conditions set out in the new law following the changes will be able to submit a declaration of tax residence from 1 August 2022. If the declaration is made by 25 September 2022, the taxable entity will be established retroactively from 1 September.

Entrepreneurs who are not entitled to opt for the flat-rate taxation under the Personal Income Tax Act may notify the tax authority of their choice until 31 October 2022.

An entrepreneur or company that does not meet the new conditions will have to choose a new tax form.

Self-employed persons also have an inventory obligation if they cease to be small taxpayers. For the first day of the first tax year following the tax year in which the entrepreneur ceases to be  small taxpayer, the entrepreneur must - in accordance with the provisions of the  Personal Income Tax Act - draw up a detailed inventory of all assets that they will use in the course of their entrepreneurial activity.

A relief for taxpayers leaving the kata tax regime in September is that they will have to calculate the 40% extra tax as the product of the months subject to the kata tax liability and HUF 1 500 000. This means that until 31 August 2022, the limit for every kata taxpayer every month is HUF 12 000 000. A small taxpayer opting to become a small taxpayer after 1 September 2022 will pay the 40% extra tax on the part of the month covered by the kata tax liability exceeding the multiplication of HUF 1 500 000, i.e. for a taxpayer paying the full year's tax on a kata basis, the income limit is HUF 18 000 000.

Alternatives for individual entrepreneurs

From 1 September 2022, anyone who does not meet the conditions of the new kata law will have to decide on the basis of the specific circumstances of their business which is the most favourable tax form for their activity.

Those self-employed persons who have significant deductible expenses and benefit entitlements may wish to consider "normal" entrepreneurial personal income taxation under the Personal Income Tax Act.

Flat-rate taxation may be an advantageous option for self-employed persons who also have business customers, if their self-employed income did not exceed ten times the annual minimum wage in the tax year preceding the start of the flat-rate taxation or in the tax year of the switch. A flat-rate taxpayer must pay taxes and contributions on the basis of their income calculated according to the presumed cost ratio applicable to their activity.

Switching to both forms of taxation will place a much greater tax and administrative burden on entrepreneurs.

Entrepreneurial personal income tax

As of 1 September 2022, taxpayers who do not comply with the new rules will automatically be moved to this form of taxation. Under this tax regime, the tax burden for self-employed persons will be made up of three different tax types.

1. taxes on profit,

2. taxes on entrepreneurial withdrawals,

3. business tax

1. Taxes on profit:

The self-employed person must determine their profit by keeping records of their income and expenses.

The self-employed person pays entrepreneurial personal income tax of 9% on the entrepreneurial tax base, and then entrepreneurial dividend tax of 15% on the dividend base after the tax is deducted. An additional 13% social contribution tax will now be added to the tax base.  The taxable amount for social contribution tax on dividends is capped at 24 times the minimum wage, so in 2022 the maximum amount of 13% will be payable on a dividend base of HUF 4 800 000.

2. taxes on entrepreneurial withdrawals

If the entrepreneur charges themselves an entrepreneurial withdrawal, they can claim it as an expense in this tax form. Entrepreneurial withdrawals are essentially the amount paid by a self-employed person who is taxed under the entrepreneurial personal income tax scheme to 'themselves' as a form of remuneration for work. Personal income tax of 15 % is also payable on this expense.

The social security contribution of 18.5% is payable on the entrepreneur's withdrawal, but at least on the minimum wage, i.e. HUF 200,000 in 2022, and on the guaranteed minimum wage, i.e. HUF 260,000 in the case of activities requiring vocational or secondary education. Social contribution tax at a rate of 13% is payable on the entrepreneur's withdrawal, but not less than 112.5% of the minimum wage or guaranteed minimum wage. The entrepreneur may deduct the social contribution tax paid on the entrepreneur's withdrawal as an expense. The social security contribution rate is 18,5 % and the social contribution tax rate is 13 %. For this year, this amount is: (260 000 × 0,185) + (260 000 × 1,125 × 0,13) = HUF 86 125 per month.

3.  Business tax

The business tax rate is set by local municipalities, but the maximum is 2%. The law regulating business tax allows entrepreneurs whose annual income does not exceed HUF 8 000 000 to be entitled to charge tax on 80% of their income.

Flat-rate taxation:

In the case of flat-rate taxation, if the annual income of a self-employed person does not exceed ten times the annual minimum wage, i.e. HUF 24 000 000 in the tax year 2022, the basis for the flat-rate tax may be determined by taking into account the cost ratio specified in the Act on Income Tax. The standard flat rate is 40%, but for certain activities it may be different, up to 80% or 90%. If you opt for this form of taxation, you should always check the rate for your activity.

The tax burden on flat-rate taxation is composed in the same way as for personal income tax for entrepreneurs.

1. taxes on profit,

2. social security contributions and social contribution tax,

3. business tax

1. Taxes on profit

Income tax is assessed on 60% of income calculated at the 40% cost rate. Unlike "normal" entrepreneurial personal income tax, however, this profit is subject to personal income tax at 15%, not 9%. However, there is a significant tax advantage here, as income below half of the annual minimum wage, HUF 1 200 000 in 2022, is tax-free. Also, only the taxable part of the income will be subject to advance tax.

2.social security contributions and social contribution tax

A flat-rate taxpayer does not have an entrepreneur's withdrawal, so the social security contribution is based on the income determined in the flat-rate, but at least the minimum wage or guaranteed minimum wage. Social contribution tax is also based on flat-rate income, but at least 112.5% of the minimum wage or guaranteed minimum wage.

As long as the flat rate does not reach HUF 1 200 000, contributions must still be paid on the minimum wage or guaranteed minimum wage. 

The rate at which the entrepreneur's income is received has a significant impact on the amount of tax due.

3. Business tax

In the case of business tax, flat-rate taxpayers have the option to treat the flat-rate tax base plus 20% as their tax base, and up to 2% of this will be the business tax.

Options for part-time self-employed workers

Self-employed persons who are self-employed on a part-time basis are those who have a contract of employment of at least 36 hours, or are partners in another business or are full-time students. This group of entrepreneurs is excluded from the kata tax regime in any case, even if they were only dealing with individuals. For them, too, the only two options are the two types of taxation detailed above: personal income tax for entrepreneurs or flat-rate taxation.

The difference compared to full-time self-employed workers is that there is no minimum contribution base for part-time self-employed workers. A person who opts for the part-time self-employed personal income tax system does not have to pay social security contributions and social contribution tax on the personal income tax exempted, if they do not have a withdrawal, which is not compulsory. Therefore, only the entrepreneurial tax base and the entrepreneurial dividend base are taxable. If part-time self-employed people opt for flat-rate taxation, they do not pay social security contributions and social contribution tax on half of your annual minimum wage (HUF 1,200,000).

Options for Kata taxpayer companies

Perhaps even more difficult than sole enterpreneurs will be the situation of general partnerships and small-and medium size enterprises that are currently kata taxpayers. In the event that the company ceases to be subject to the kata tax, it will revert to the accounting and taxation system under the main rule, which means that the rules of the Accounting Act and the Corporate Tax Act will apply again.

According to the Accounting Act, general partnerships small-and medium size enterprises and law firms that cease to be kata taxpayers must prepare an opening balance sheet based on an itemized inventory. The value of assets and liabilities included in the opening balance sheet must be verified by an auditor.

Having the inventory audited by an auditor can be a significant cost for companies. In addition, under the Corporate Tax Act, these companies are also required to declare corporate tax advances within 60 days of ceasing to be kata taxpayers.

If they opt for corporate tax, they have to pay corporate tax at the rate of 9% on profits and personal income tax, social security contributions and social contribution tax on all personal payments. In addition to increasing the tax burden, the return to the corporate tax law and the accounting law for these companies also creates a significant administrative and reporting burden.

Companies can also opt for the small business tax, which is also a benefitial tax option, although the Accounting Act applies. Small business tax can also be opted for during the year, in which case small business tax liability is established from the first day of the month following the month in which the declaration is made.

This tax type should be chosen for companies with a significant amount of personal payments, or where the company's profits are not intended to be primarily used as dividends but are to be used for investment.

Small business tax, at a rate of 10%, is payable mainly on personal payments and approved dividends.