KATA Taxation System: What the 2022 Changes Mean for Contractors in Hungary
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Last updated: September 8, 2022
Misuse and misinterpretation of the fixed-rate KATA tax system have spurred the Hungarian government to announce significant changes that come into effect on September 1, 2022. This gives only a few weeks for businesses and entrepreneurs to figure out the new rules, which will cause most to lose their KATA eligibility.
Deel’s global employment team has been monitoring the changes. We’ll give you an overview of this tax regulation, explain the upcoming change and its consequences, and provide potential hiring alternatives for companies looking to keep working with Hungarian contractors.
Review: What is the KATA taxation system?
The KATA (abbreviation for Small Business Taxpayers) taxation system is federal legislation that regulates how self-employed individuals in Hungary pay their taxes. It’s a fixed-rate tax system that allows individuals to pay an equal amount every month to cover all required taxes and contributions, including pension and social security.
The KATA system was introduced in 2013 with the goal of supporting local micro businesses and entrepreneurs and enabling them to deal with hiring and administration more easily. The flat tax and low rate made income taxes very simple. Applicants could register online, and it became a popular program, especially for startups.
Taxpayers’ obligations have remained the same from the beginning. Depending on whether an individual worked as a full-time self-employed person or had an employment agreement of 36 hours per week with a Hungarian employer, they paid a monthly tax of 50,000-75,000 HUF ($130-$196 USD) or 25,000 HUF ($65) respectively. The deadline for paying these tax obligations was the 12th of the month for the previous month.
The limit on an individual's total annual income as a KATA taxpayer was set to 12 million HUF ($31,365). If a self-employed person exceeds this limit, they pay the tax at a 40% rate on the extra income by February 25 at the latest for the previous year.
The KATA tax program was available to:
- Private entrepreneurs
- Individual companies
- Limited and general partnerships (with private owners only)
To qualify for KATA, self-employed entrepreneurs needed to ensure they met at least five out of these seven criteria:
- You need to send invoices to more than one client.
- Your income from one client must be less than 50% of your total annual income.
- You must be the one determining your working hours.
- You must be the owner of your tools and equipment necessary to do the job.
- You mustn’t exclusively run all your business activities on your own.
- You perform the work on a property in your possession or you have written permission from the property owner to run your business.
- You mustn’t receive instructions from your clients on how to run your business.
What caused the 2022 revision of the Itemized Tax for Small Businesses law?
Up until now, contractors in Hungary used the favorable conditions of the KATA taxation system to pay a reasonable tax rate without needing to help of an accountant or tax consultant. This type of business arrangement was convenient both for contractors and clients, especially foreign companies who got to avoid the complications of hiring international employees.
However, eligibility for the program ends if it’s found that the taxpayer isn’t a genuine self-employed individual, but a disguised employee.
Disguised employees are the consequence of employee misclassification, already a significant issue worldwide. According to the Hungarian Ministry of Finance, misclassification cut out workers from access to their statutory benefits and caused a significant loss of tax revenue for the country.
This is exactly what moved the government to review the KATA regulations and pass a change in July 2022 that will take effect on September 1, 2022. This new decision will prevent future taxpayers from “bypassing the original aim” of the KATA system. The government felt there were too many instances of employers avoiding their tax responsibilities and requiring employees to work under KATA regulations, while in reality, these workers should have been given employee status.
Gergely Gulyás, the prime minister’s chief of staff, explained that the government felt it was critical for the law to return to its original idea of lowering the tax and administrative burden for small businesses and self-employed professions like hairdressers, painters, and electricians.
What are the implications of the 2022 revision of the KATA tax system?
As of September 1, 2022, around 450,000 entrepreneurs will lose their KATA status.
Under the new law, self-employed taxpayers will only be able to issue invoices to natural persons, which means anyone providing products or services to companies will automatically be forced out of KATA.
Only full-time self-employed individuals will be eligible for this taxation system. Those who remain eligible can benefit from an increase in the income limit to 18 million HUF ($47,100).
However, the taxpayers who lose their KATA status will need to search for alternative options to continue the working relationships with their clients. Companies will either have to offer an employment contract or stop using the contractors’ products or services.
Another less obvious implication of this revision taking effect is that many former KATA taxpayers will now need an accountant, which they were previously able to manage their own taxes without professional help. It’s uncertain if the local market is ready to cater to such an increase in accounting clients.
The deadline for taxpayers who lose their KATA eligibility to choose a new system is:
- September 25 for those who wish to stay in the new KATA program, and
- October 31 for those who decide to move to fixed-cost accounting.
What are the KATA alternatives?
Workers who perform their job as contractors instead of employees will convert to other taxation structures, like the flat-rate taxation system, where the taxpayers pay 15% of personal income tax, 18.5% of social security contributions, and 13% of social contribution tax on a portion of their profits.
Foreign companies that have hired Hungarian workers will face the most complex issues. As they lose the possibility of hiring them as independent contractors under the KATA system, foreign employers can consider the three available options for hiring international workers:
- Relocation to the country where the company is based (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)
- Open a local legal entity (also a time-consuming process that requires a lot of market research, learning about local labor and tax laws, getting your documentation in order, and significant capital investment)
- Hire your former contractors as full-time employees through an employer of record (can be fast and simple and doesn’t involve you getting familiar with local compliance).
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With a complete workforce management system in one platform, we help handle the paperwork, payroll, taxes, and every other tedious aspect of a legal employment relationship. Combined with intellectual property protection and ISO 27001-compliant data security, we can onboard employees and contractors in a matter of weeks while ensuring they enjoy a fantastic worker experience with 24/7 customer support.
If Deel sounds like the ideal solution, book a demo with our team of experts to discuss your options today.
This post is provided for informational purposes and should not be considered legal advice. Talk to a legal professional such as an employment lawyer for more info about your individual case.