Monday, 4 January 2016

TAXATION FOR PRIVATE ENTREPRENEURS IN HUNGARY

In the following guideline we will provide detailed information about the taxation of private entrepreneurs in Hungary. If you have questions about the discussed topic, or about doing business in Hungary don't hesitate to contact us!

Partnerships (Bt. and Kkt.) are treated as non-transparent taxable persons in Hungary and taxed as corporations. The taxation of private entrepreneurs is determined by Act no. CXVII of 1995 on Personal Income Tax (Act on PIT). The rules for their taxation are a combination of principles applicable for private persons and corporations. A general overview is provided below.










Unlimited tax liability and income
Hungarian tax residents are liable to Hungarian personal income tax on their worldwide income (unlimited tax liability).

Business income
By the taxation of private entrepreneurs, tax is levied at two different levels.

First, the entrepreneurial activity itself is taxed as business income. The following persons are considered to exercise business activities and are subject to business income tax: persons with a business license (Act no. CXV of 2009 on Private Entrepreneurs and Sole Proprietorships), public notaries, private legal executors, individual patent agents, lawyers and veterinarians. From 1 January 2010 an individual may establish a sole proprietorship which has to be registered by the Court of Registry. An individual who has established a sole proprietorship is no longer taxed under the Hungarian personal income tax regime, rather, his sole proprietorship is subject to the corporate income tax rate of 9%.

Secondly, at the level of the individual two income types may be taken into account: salary and dividend.
  1. The money taken out from the business by the private entrepreneur is considered to be salary. This income is part of the consolidated tax base, taxed at a flat rate of 15% and social security contribution due.
  2. Dividends are also taxable at a rate of 15% plus a health care contribution amounting to 14% (but only up to HUF 450,000; approx. EUR 1,500) has to be paid as well.
Coming back to the first level of taxation, the private entrepreneurs (as well as agricultural entrepreneurs and small agricultural entrepreneurs) may choose according to Hungarian tax law between the business income tax base method and the lump-sum method. These methods are described in the following sections.

Principles for determination of the business income tax base
Business income is calculated as the difference between gross income earned minus related expenses. The taxable amount comprises any amount received in connection with the activity performed (including sale of products, rendering services, interest income, income from the realization of products, compensations, income from the sale of materials, tangible assets, etc.). 

Payments to the private entrepreneur as a consideration for his services are treated as income from independent activity and are included in the consolidated income tax base. Due to the fact that these payments are taxable as part of the consolidated tax base of the individual, the payments are considered to be costs at the level of the entrepreneurial activity in order to avoid double taxation. In addition to the expenses that may be deducted in general according to the rules applicable to companies, the income may be further reduced – inter alia – by the following expenses:
  • remuneration paid to handicapped employees up to the minimum wage if more than half of the employees are disabled;
  • social tax paid by the entrepreneur for a trainee (for a period of up to 12 months) if the trainee is subsequently employed after having successfully passed his professional examination or if an unemployed person is employed; and
  • research and development costs within the private activity may be deducted up to three times the actually recorded R&D expenses, but not more than HUF 50 million (approx. EUR 161,000).
Depreciation
Depreciation is part of the expenses which an entrepreneur may take into account when calculating his tax base. The actual acquisition costs (or costs of production), as well as certain expenditures incurred prior to initial start-up form the depreciation base of assets. However, the assets with an acquisition cost of less than HUF 100,000 (approx. EUR 333) may be fully deducted in the year of their acquisition. Depreciation starts when the asset is capitalized and it ends on the day on which it is no longer used in the taxpayer’s business (e.g. it is sold, contributed, etc.), or its book value has become zero.

The Act on PIT permits depreciation keys to be used:
  • depreciation of buildings
    • buildings with long economic life: 2% per year
    • buildings with medium economic life: 3% per year
    • buildings with short economic life: 6% per year;
  • depreciation of machinery, equipment and accessories: 33%, 20% or 14.5% per year depending on their customs tariff number classification;
  • for the purpose of determining the depreciation rate the investment costs of intangible assets and certain tangible assets are divided by the years during which the private entrepreneur is expected to use them for entrepreneurial activities (i.e. economic life of the assets); and
  • a flat depreciation rate may be applied in respect of machinery, equipment and accessories that are not exclusively used for business purposes. This may not exceed 1% of the annual revenues or 50% of the book value of the tangible asset(s).
Carry-forward of losses
Entrepreneurs may carry forward losses for 5 years (new rule from 2015) without requiring permission from tax authorities. As a transitional provision, losses accumulated up to 2014 may be utilized until 2025. Loss utilization is also capped at 50% of the entrepreneur’s positive tax base. Special provisions apply to agricultural entrepreneurs.

Tax rates
The entrepreneurial activity itself is taxed as business income at a tax rate of 9%. Moreover, a minimum tax base amounting to 2% of the adjusted entrepreneur’s income is applicable if the calculated tax base of the entrepreneur falls below this target.

The entrepreneur's salary is subject to a flat tax rate of 15% plus social security contributions; its business dividend taxed at 15% personal income tax plus 14% health care contribution (this latter is capped at HUF 450,000; approx. EUR 1,500).

Lump-sum business taxation and lump-sum taxation of other categories of income
An entrepreneur may opt for a lump-sum business taxation; provided also that his annual income does not exceed HUF 15 million (approx. EUR 50,000) or HUF 100 million (approx. EUR 333,000) for retailers. If the option is exercised; expenses are deductible on a lump-sum basis.
  • The deduction amounts to 40% of the gross amount of income in general and
  • is increased to 80% for income from special activities (i.e. agricultural, processing and building industries, taxi services, photo industry, hairdressing and cosmetic services, laundry and cleaning),
  • to 87% for income derived by retail traders and
  • to 93% for income derived by retail traders from exclusively performing the above listed special activities.
  • Small agricultural entrepreneurs are entitled to deduct 85% and/or 94% from that part of their income which is derived from stock farming.
The tax is levied at a tax rate of 15%.

Other tax
Private entrepreneurs are subject to local business tax as well because of carrying on business activities on the territory of a municipality. The rate is set by the municipalities but may not be more than 2% over the adjusted net sales revenues. Moreover, municipalities may levy taxes on property located within their territory.

Tax assessment
Income tax is generally levied by self-assessment. Thus, the taxpayer is obliged to compute his income and the tax due on it, to prepare and file the tax return and to pay the tax. Private entrepreneurs, farmers and persons renting private accommodation must prepare and file tax returns at the end of every calendar year, irrespective of whether they derive any income or not. The annual tax return of private entrepreneurs must be filed by 25 February of the following year.

A taxpayer deriving income that belongs to the consolidated tax base must make income tax prepayments on a quarterly basis (until the 12th day of the subsequent month), unless a paying agent is required to withhold the income tax (taxes withheld must be transferred to the tax authorities by the 12th day of the following month). Any difference between the annual tax liability and the prepayments must be paid by the taxpayer by the filing deadline. Any excess tax payments must be refunded by the tax authorities within 30 days from the date the tax return was received.

If you need a reliable partner in tax advisory, accounting or audit, please don't hesitate to contact us!



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