Hungarian Taxation System: A Comprehensive Guide for Companies and Entrepreneurs

b) Local Business Tax (LBT)

• • Municipalities in Hungary impose a local business tax, typically up to 2% of the company’s revenue. This tax is calculated after deducting costs of goods sold and intermediated services.
  • Companies are required to file and pay LBT in the municipalities where they operate.

c) Special Taxes

• • Hungary has introduced sector-specific taxes targeting industries such as banking, telecommunications, and retail. These taxes aim to generate revenue from sectors with significant economic influence.
  • For example, the financial sector contributes through a special tax calculated based on the institution’s balance sheet total.

2. Value Added Tax (VAT) in Hungary

Overview of VAT

Value Added Tax (VAT) is one of the most significant revenue sources for the Hungarian government and a key component of its tax system. Hungary’s VAT is governed by the general European Union VAT framework, as Hungary is an EU member state, but it also has certain distinctive features. The VAT system applies to the sale of goods and services, as well as imports and intra-community acquisitions.

VAT Rates in Hungary

Hungary has the highest standard VAT rate in the European Union, currently set at 27%. This rate applies to most goods and services, making it a primary contributor to the national budget. However, to support specific industries and ensure affordability of essential goods, Hungary also applies reduced VAT rates:

5% Reduced Rate:

• • Certain basic foodstuffs, including milk, bread, and poultry.
  • Pharmaceutical products and medical devices.
  • Books, newspapers, and e-publications.
  • New residential properties built under specific conditions.

18% Reduced Rate:

• • Certain food products, such as milk with higher fat content and certain baked goods.
  • Accommodation services, including hotel stays and other short-term lodging.

Exemptions: certain transactions are entirely exempt from VAT. These typically include:

• Financial and insurance services.
• Educational services.
• Healthcare services.
• Cultural and charitable activities.

VAT Registration
Businesses operating in Hungary must register for VAT if their taxable turnover exceeds the annual threshold of HUF 12 million (approximately EUR 30,000). Non-resident companies providing goods or services in Hungary are also required to register, regardless of turnover, if their transactions are subject to Hungarian VAT.

Intra-Community Transactions
As an EU member state, Hungary adheres to the EU VAT Directive for intra-community trade. This means:

• Goods sold to other EU member states are zero-rated for VAT if the customer is a VAT-registered business in the recipient country.
• Goods purchased from another EU country are subject to reverse charge VAT, where the Hungarian buyer accounts for both input and output VAT.

VAT Compliance and Filing
Hungarian businesses must file regular VAT returns, typically on a monthly or quarterly basis, depending on the size of the business and its annual turnover. Key compliance requirements include:

• Issuing invoices that meet Hungarian VAT invoicing standards, including the supplier’s VAT number and the VAT amount.
• Maintaining accurate records for at least 8 years as mandated by Hungarian tax law.

Impact of VAT on Businesses
Hungary’s high VAT rate poses both challenges and opportunities for businesses:

• Challenges: The 27% standard rate can significantly affect pricing strategies and consumer behavior, particularly for industries with price-sensitive customers.
• Opportunities: Exports to other EU countries benefit from zero-rated VAT, enhancing competitiveness in the broader European market.

Key Statistics

• VAT contributes to more than 30% of Hungary’s total tax revenues, highlighting its central role in the national budget.
• Despite the high VAT rate, Hungary maintains relatively high VAT compliance, thanks to stringent enforcement and digitalization measures.

Sector-Specific VAT Considerations
Certain industries face unique VAT rules:

• Real Estate: New residential properties are subject to a reduced VAT rate of 5%, but this rate is periodically reviewed and adjusted by the government. Resale properties, however, are exempt from VAT.
• Tourism: Accommodation services, such as hotel stays, are taxed at the reduced rate of 18%, making Hungary an attractive destination for international tourists.
• Healthcare and Education: These sectors are generally VAT-exempt, reducing the financial burden on consumers accessing essential services.

3. Taxation for Entrepreneurs

a) Simplified Tax Regimes

• • Hungary offers simplified tax regimes for small businesses and entrepreneurs, reducing administrative burdens while maintaining compliance.

b) KATA (Small Taxpayer Enterprise Tax)

• • KATA is a flat-rate tax designed for small businesses and self-employed individuals. Entrepreneurs pay a fixed monthly amount of HUF 50,000 (~EUR 140) if their annual revenue does not exceed HUF 18 million (~EUR 50,000).
  • KATA covers both personal income tax and social security contributions, making it a popular choice for freelancers and small-scale service providers.

c) KIVA (Small Business Tax)

• • KIVA is an alternative to corporate tax for small and medium-sized enterprises. It is calculated at a rate of 10% on the business’s modified cash-flow-based income.
  • KIVA simplifies taxation for businesses with fewer employees and lower revenues, making it an attractive option for startups.

d) Personal Income Tax (PIT)

1. • Entrepreneurs operating as sole proprietors are subject to personal income tax on their earnings. Hungary applies a flat PIT rate of 15%.
   • Deductible expenses, such as business-related costs, can reduce taxable income, offering relief to individual entrepreneurs.

4. Social Contributions and Payroll Taxes

Employer Contributions

• • Employers in Hungary are required to pay social contributions on behalf of their employees. The primary contributions include:
    • Social Contribution Tax: 13% of gross wages
    • Vocational Training Contribution: 1.5% of gross wages

Employee Contributions

• • Employees contribute the following from their gross salary:
    • Pension Contribution: 10%
    • Health Insurance and Labor Market Contribution: 8.5%
  • These contributions are deducted directly from employees’ wages.

Self-Employed Contributions

• • Entrepreneurs under KATA or other regimes must make fixed or percentage-based contributions, covering their social security and healthcare obligations.

5. Tax Administration and Compliance

National Tax and Customs Administration (NAV)

• • Hungary’s NAV oversees tax collection and enforcement. Companies and entrepreneurs must interact with NAV for registration, filing, and audits.

Electronic Tax System

• • Hungary has a robust e-taxation system that facilitates online tax filing and payment. The system improves efficiency and reduces paperwork for businesses.

Penalties for Non-Compliance

• • Failure to comply with tax regulations can result in fines, interest charges, or even legal action. Timely filing and accurate reporting are essential to avoid penalties.

6. Double Taxation Treaties

Hungary has signed double taxation agreements (DTAs) with numerous countries to prevent businesses and individuals from being taxed twice on the same income. These treaties are particularly beneficial for multinational corporations and expatriates.

Key Povisions:

• Allocation of taxing rights between Hungary and the other country
• Reduced withholding tax rates on dividends, interest, and royalties
• Relief methods, such as tax credits or exemptions

7. Tax Incentives and Grants

Investment Incentives

• • Hungary offers tax relief for businesses investing in priority sectors, including R&D, renewable energy, and manufacturing. These incentives may include CIT reductions or exemptions.

EU Funding

• • As an EU member state, Hungary benefits from access to European Union grants and funding programs. Companies undertaking projects aligned with EU priorities can apply for financial support.

Startup Support

• • The government encourages entrepreneurship through programs offering financial aid, tax benefits, and business development resources.

8. Future Trends in Hungarian Taxation

Digitalization

• • Hungary is expanding its digital tax infrastructure to streamline compliance and enhance transparency. Systems like online invoicing and real-time VAT reporting are becoming mandatory for businesses.

Green Taxation

• • Environmental taxes are gaining traction to align with EU climate goals. Companies operating in sectors such as energy and transportation may face new obligations and opportunities for green investments.

Global Tax Reforms

• • Hungary is adapting to global initiatives, such as the OECD’s Base Erosion and Profit Shifting (BEPS) framework, ensuring fair taxation and reducing tax avoidance.

Conclusion

Hungary’s taxation system is a blend of competitive rates, streamlined regimes, and sector-specific obligations. For companies and entrepreneurs, understanding the nuances of corporate tax, VAT, and social contributions is essential to navigate the regulatory landscape effectively. With its favorable tax policies and strategic location in Europe, Hungary remains an attractive destination for business growth and innovation. As the country embraces digitalization and sustainability, its taxation framework is poised to evolve, offering new opportunities and challenges for the business community.

Would you like to know more about taxation in Hungary, please visit:

https://firmaxhungary.com/services/tax-advisory-in-hungary/