Hungary is making changes to the KATA taxes system for independent contractors, which could cause problems for them and their clients.
The Hungarian government has announced significant reforms that take effect on September 1, 2022 as a result of misuse and incorrect interpretation of the fixed-rate KATA tax system. This provides firms and entrepreneurs only a short time to understand the new regulations before most of them lose their KATA eligibility.
In addition to providing possible employment alternatives for businesses wishing to continue working with Hungarian contractors, we'll provide a summary of this tax rule, explain the impending change and its implications, and give you information about it.
The tax code known as KATA (short for Small Business Taxpayers) governs how self-employed people in Hungary pay their taxes. It's a fixed-rate tax structure that enables people to pay a set sum each month to cover all necessary taxes and payments, such as pension and social security.
In order to promote local small enterprises and entrepreneurs and make it easier for them to handle employment and administration, the KATA system was introduced in 2013. The low rate and flat tax made income taxes fairly straightforward. Online registration was available for applicants, and it quickly gained popularity, especially among entrepreneurs.
The obligations of taxpayers have not changed over time. An individual paid a monthly tax of 50,000-75,000 HUF (130-196 EUR) or 25,000 HUF (65 EUR) depending on whether they were a full-time self-employed person or had a 36-hour per week employment arrangement with a Hungarian company. For the previous month, the due date for these tax obligations was the 12th of the month.
As a KATA taxpayer, a person's total annual income was restricted to 12 million HUF (31365 EUR). If a self-employed individual earns more than this cap, they must pay tax on the additional income at a rate of 40% by February 25 at the latest for the prior year.
The KATA tax program was offered to:
- Private business owners
- Individual corporations
- Limited partnerships (with private owners only)
Self-employed business owners had to guarantee they complied with at least five of the following seven requirements in order to be eligible for KATA:
1. You must submit invoices to several clients.
2. One client's income cannot make up more than half of your annual income.
3. The choice of your working hours must be yours alone.
4. The tools and equipment you need for the job must belong to you.
5. You shouldn't conduct all of your business operations by yourself.
6. You work on a property that you own or have written authorization from the owner to operate your business.
7. You can't take orders from your customers about how to operate your company.
Up until this point, contractors in Hungary took advantage of the KATA taxation system's favorable conditions to pay a fair tax rate without the aid of an accountant or tax adviser. Both contractors and clients found this form of business relationship to be advantageous, particularly foreign businesses who were spared the hassles of employing personnel from abroad.
If it is determined that a taxpayer is a fictitious self-employed person rather than a legitimate self-employed person, their eligibility for the program will stop.
The result of employment misclassification, which is already a major problem globally, is disguised workers. The misclassification of workers prevented them from receiving their legal benefits, according to the Hungarian Ministry of Finance, and resulted in a considerable loss of tax income for the nation.
In response, the government reviewed the KATA rules in July 2022 and passed a revision that will become effective on September 1, 2022. Future taxpayers won't be able to "bypass the original objective" of the KATA system thanks to this new ruling. The government believed that there were too many cases of firms evading their tax obligations and forcing people to comply with KATA rules when, in fact, these individuals should have been accorded employee status.
The government considered it imperative that the law return to its original goal of cutting the tax and administrative burden for small enterprises and self-employed professions like hairdressers, painters, and electricians, according to the prime minister's chief of staff Gergely Gulyás.
Around 450,000 entrepreneurs will lose their KATA registration as of September 1, 2022.
Anyone offering goods or services to businesses will be expelled from KATA by the new rule, which restricts self-employed taxpayers to issuing invoices to only natural persons.
Only full-time independent contractors will be qualified to use this tax scheme. For those who still qualify, the upper salary level has been raised to 18 million HUF (47000 EUR).
To maintain their working ties with their clients, however, the taxpayers who lose their KATA status will need to look for alternatives. Either a contract for employment must be made available, or businesses must stop utilizing the contractors' goods or services.
The fact that many former KATA taxpayers will now require an accountant, although they were previously able to manage their taxes on their own without professional support, is another less evident consequence of this adjustment taking effect. The local market may not be equipped to handle such a surge of accounting clients.
Taxpayers who lose their KATA eligibility must select a replacement system by the following deadline:
- If you want to continue with the new KATA program, you have until September 25;
- if you want to switch to fixed-cost accounting, you have until October 31.
Worker conversion to alternative taxation arrangements, such as the flat-rate taxation system, in which taxpayers pay 15% of personal income tax, 18.5% of social security contributions, and 13% of social contribution tax on a percentage of their profits.
The most challenging problems will be faced by foreign businesses that have engaged Hungarian labor. Foreign firms can think about the three possibilities accessible for hiring international workers as they lose the chance to do so under the KATA system:
1. moving to the nation where the company is headquartered (can be very costly and demanding paperwork-wise, and also may trigger further tax events, which is why every case needs to be analyzed individually)
2. Create a regional legal entity - a time-consuming process that calls for extensive market research, familiarization with regional labor and tax regulations, preparation of your paperwork, and a sizeable financial outlay)
3. Hire your former contractors as full-time staff through an employer of record (this can be quick and easy and eliminates the need for you to become familiar with local compliance requirements).
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Note: This information is from official sources and should not be considered as a substitute for legal advice. Always check official websites or consult a lawyer or tax consultant before taking action.