Major tax change bill pushed through parliament in spite of protests

On Monday, Deputy Prime Minister Zsolt Semjén submitted a proposal in the Hungarian parliament to amend a way of taxation which is very popular among Hungarian freelancers and small business owners.

This caused a huge uproar among those affected, and very soon after the announcement, they began organizing a protest via social media.

What is KATA and why the fuss?

KATA is (was) a simplified Hungarian form of taxation for small business owners, and persons whose annual income was no more than HUF 12 million (approximately 29 thousand euros). When it was introduced, its purpose was to whiten the gray and black economy of the micro-enterprises.

The KATA tax is (was) a really simple and great way to reduce the burdens on small business-owners, because with this form of taxation there is (was) very little paperwork, and maintaining it is (was) very easy and affordable: only 50 thousand (120 euros) or 25 thousand forints (60 euros) per month needed to be paid monthly, and this covered all taxes and contributions.

In addition to the monthly KATA fee, small entrepreneurs only had to pay two other taxes: the business tax (which was 50 thousand forints per annum for most of them) and the annual chamber of commerce contribution for the amount of HUF 5,000.

This made it a very attractive option for many people. It is therefore no wonder that according to the Hungarian Central Statistics Office (HCSO-KSH) 450 000 Hungarian entrepreneurs chose this form of taxation in 2021.

One of the proposed modifications would change the tax rate for small entrepreneurs to 50 thousand forints a month, and (most importantly), those paying their taxes via the new KATA system can only receive income from private individuals.

This means that anyone who issues an invoice even to a single company will be immediately excluded from this favorable tax treatment. In principle, it could be said that the village beautician will be able to continue using KATA, but in spite of this it can only be achieved by a substantial reduction in the performance of the Hungarian economy. After all, just think of some real-life cases!

• The village hairdresser can still serve their customers, but if he/she receives an offer to work in a nearby theatre or on a film set, they cannot do so.
• A language teacher can teach his/her students, but they cannot teach a language course to a group of employees in the village's factory.
• The local dishwasher repairman can go to Béla Tóth's private home in the village, but if the dishwasher breaks down in Mr Tóth's five-employee company, the local specialist will not be able to fix the problem.

When putting forth the proposal, Semjén asked the President of the National Assembly on behalf of the government to discuss the new KATA bill under an exceptional procedure.

• According to this, a proposal for amendment can be submitted within three hours of the decision on the approval of the exceptional procedure; (this was on Monday, July 11th)
• The consolidated debate was scheduled to take place in Parliament on 12 July 2022 (Tuesday) as agenda item 1;
• The decision about the proposed general amendment would be made and a final vote held as early as Tuesday 12 July 2022.

As a side note, on 7 July, Gergely Gulyás, Minister at the Prime Minister’s Office pointed out at the government’s press conference that “negotiations with the European Commission on the payment of the recovery fund are going well. And there are four points regarding which the government has given in to the Commission's requests." One of these four points is “To allow time for public consultation before the government initiates legislation. The government will try its utmost to reduce special, fast-track legislation.”

Telex asked Miklós Pálffy, collaborating legal partner at Niveus Consulting Group for a comment on the proposal, and his view is that

"If this bill is adopted, it will minimize the number of entrepreneurs for whom opting for this favorable, low-administration tax regime would continue to be worth it – without having to give up part of their client (or potential client) base. The other thing that might happen is that the current proposal will encourage those concerned not to invoice business customers, which is counterproductive, as reducing the black economy has perhaps been KATA's greatest virtue – up until now."