In the past few days, the Parliament has already adopted bill No. T/583 on the itemized lump sum tax of low-tax businesses (KATA), which brings fundamental changes to KATA taxation.

One of the most important changes is that until now the subject of the KATA could have been private entrepreneurs, single-member companies, limited partnerships with only private members, general partnerships with only private members, and law firms. Under the new rules KATA can be chosen only by full-time private entrepreneurs but not any other entity on the above list. It is important to highlight that only full-time private entrepreneurs are allowed to choose their tax type.

In addition, at this moment private entrepreneurs are those businesses who are private entrepreneurs under the Act on private entrepreneurs and single-member companies (“Act on private entrepreneurs”) or are treated as such in the Act on Personal Income Tax. From 1 September 2022 only private entrepreneurs under the Act on Private entrepreneurs may choose KATA and private entrepreneurs under the Act on PIT may not choose it anymore (e.g. veterinarian).

In the past, those who chose KATA could have income from both private individuals and companies. However, the amended legislation states that the KATA status ceases if the taxpayer receives income from a payer (including any foreign payer) as defined in the Act on the Rules of Taxation, excluding income from taxi passenger transport under TESZOR (classification of products by activity code) 49.32.11. This means that the new KATA taxpayers can receive income only from private individuals, with the exception of taxi drivers for whom – according to the legislation – supplying services only to private persons would be unfeasible in practice due to the nature of the service.

Instead of the earlier three types of KATA tax amount of HUF 25, 50, 75,000, in the future the tax rate will be uniformly HUF 50,000. The previous income value limit of HUF 12 million will also change, the cap amount will be HUF 18 million, i.e. 40% special tax must be paid on the amount above this.

Considering that the legislation enters into force during the year, on 1 September, it also contains transitional provisions. The declaration on the registration of KATA status under the new rules can be submitted from 1 August 2022. A private entrepreneur who is not entitled to choose the tax status under the new provisions and falls under KATA on 31 August 2022 can submit his/her choice of flat-rate taxation under the Act on PIT for the 2022 tax year until 31 October 2022.

The legislation also precisely regulates how the income limit should be calculated if someone remains registered as KATA subject until August 31 or if someone registers under the new rules. Entities applying KATA on 31 August 2022 will pay a tax of 40 percent in the year 2022 if its income earned in the tax year until August 31 exceeds the product of HUF 1.5 million and the number of months while the taxpayer was KATA subject under the old rules. A KATA taxpayer who chooses to be KATA taxpayer from 1 September 2022 onwards will pay the special tax (40%) in 2022 on the part of his/her income which exceeds the product of HUF 1.5 million and the number of months while the taxpayer is subject to KATA under the new rules (tax of HUF 50.000).

The termination of being KATA subject will automatically result in the fact that the full-time private entrepreneur will become subject to the so-called entrepreneurial personal income tax under the Act on Personal Income Tax. However, in most cases, entrepreneurial flat-rate taxation can provide a more favorable form of taxation for entrepreneurs who fall outside the scope of KATA than entrepreneurial personal income tax payment.
If you have any further questions regarding the above, or if we can help you prepare the background calculations supporting the transition, please feel free to contact our staff.

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