One of the realities of international contracting is the need to navigate tax calculation and payment. Contractors may be liable for taxes both at home and in the host country, depending on the length of stay and tax residency. However, some countries do offer incentives to entrepreneurs and self-employed to ease the tax burden. Hungary has done this in the form of the KATA Small Business Tax.
Tax Calculation for Contractors in Hungary
International contractors who serve clients in Hungary will generally need to pay both tax and social contributions. Personal income tax is a flat 15% on all earnings, and social contributions are 18.5%. However, there is the KATA small business tax scheme that can significantly increase net earnings by reducing taxes. It was implemented in 2013 to support entrepreneurs and self-employed working inside Hungary.
How does the KATA small business tax help contractors?
Here are the basic guidelines for KATA:
- KATA is for self-employed contractors and entrepreneurs
- The fixed amount tax payment is 50,000 – 75,000 HUF ($165-$250) per month
- There is a 40% tax on annual income over EUR 39,000 from the same client, but the tax is paid by the client, not the contractor
- Covers all taxes, pension and social security contributions
- The contractor needs a residence permit, so it is easiest for EU citizens to qualify
If a contractor is working as a private entrepreneur or company, they can elect to have the KATA rates applied. They don’t have to pay personal or corporate income tax, and the KATA payment covers all social contributions as well.
Without KATA, contractors will pay a combined 33.5% (tax + social security) on their total income, so the low monthly KATA payment is quite an advantage.
How can you qualify for the KATA small business tax?
To qualify for KATA, five of seven criteria must be met, most of which ensure that you are truly self-employed:
- You do not exclusively run your business activities alone
- Your income from one client has to be less than 50% of your total income
- The client cannot instruct the one using KATA with regards to how to execute the business activity.
- The property where you run the business is in your possession or you have a letter from the owner allowing the address to be used as the seat of the business.
- Your tools, and devices for running the business are yours and in your possession.
- Working hours are defined by you and not determined by the customer.
- All invoices should not go to only one client.
For example, you can work alone as a sole proprietor as long as 5 of the remaining six criteria are met. In general, it is better to work with 2 or more clients to qualify for KATA.
To underscore this, a new rule is effective in 2021 that if an entrepreneur is invoicing only a single company, then there is a 40% tax on income over EUR 8500. This rule is designed to eliminate the use of KATA for ‘disguised employment’ by companies wanting to avoid those costs. The 40% tax is levied on the ‘payer’ (your client) not the supplier of services.
How can Contractor Taxation help contractors in Hungary?
Contractor Taxation has local experts and resources to help contractors who want to work in Hungary. Our network of umbrella companies can assist you with tax calculation, client contracts and payment facilitation. This leaves you free to concentrate on your work with Hungarian clients, while we help administer the relationship. Please contact us with your questions about taxation and contracting in Hungary,