Date of publication: 16-11-2023 | Author: Lantos, Attila | Tags: private enterprise, private business, sole enterprise, Hungary
Private or, in other words, sole enterprise is a flexible and popular business form in Hungary. It is called "egyéni vállalkozás" in Hungarian and, therefore, abbreviated as "e.v.". It is easy to start, maintain or close one. However, private enterprise has some disadvantages as well, so you will need to balance the pros and cons.
Whether a private enterprise is the best option for you or not, depends on many factors. This post tries to uncover most of those and give you a full picture so you can make a wise decision.
The legal background of a private enterprise
In Hungary, the private enterprise is regulated by the 2009. CXV. (115) law. The private enterprise is not a separate legal person, i.e. the law sees you and your private enterprise as one natural person. This also means that you, as a sole entrepreneur, will be held responsible for all the debts of your business. That is called unlimited financial responsibility. This is one major factor that you have to consider before starting the enterprise.
Who can start a private enterprise in Hungary?
The persons who match the following conditions can establish a private business:
- Hungarian citizens
- EU citizens reside in Hungary
- Non-EU citizens with permanent residency
- Non-EU citizens with a residency permit title "study", "gainful activity", "employment" or "family reunification"
- Asylum seekers
If you have a residency permit with "other reason" that will not entitle you to have a private enterprise in Hungary. This is a typical situation after you finish you university studies and you are writing your thesis. Please be aware of that.
Pre-requirements for a Hungarian private enterprise
You will need to have the items listed below in order to launch or operate a sole enterprise (please note that the items are in a logical order i.e. you should start with the first one and progress through the list):
- A registered Ügyfélkapu (Electronic Clientgate)
- A TAJ number (social security)
- A personal tax number (10 digits)
- A valid address which will serve as your official seat (HQ)
How to register Ügyfékapu (Clientgate) in Hungary?
What is Ügyfélkapu
Ügyfélkapu is very useful and a completely free service provided by the Hungarian government for everybody who wants to contact the state in an electronic way. In essence, Ügyfékapu is not a separate but an auth service which opens a gate to various other government services like Tax Office Portal, Heath Care Portal and Electronic Government Mailing System etc.
Ügyfélkapu may only be registered in person and no proxy is allowed. It is understandable, since Ügyfékapu will identify you and every step you take in that system, will be considered as legally binding. No wonder that the Hungarian state wants to identify you before granting access to that service.
Where can you open the Ügyfélkapu
To open the Clientgate, please visit the nearest Kormányablak (Government Window). You will not need an appointment and you will only need to bring a valid ID or passport with you and you will have to nominate an email address where the government can send notifications.
If you are not staying in Hungary, any Hungarian embassies will create an Ügyfékapu for you, however, embassies require a booked appointment in most of the cases, so please contact them before visiting.
During the registration, a photo will be taken on you and you have to give a specimen of signature as well.
Validation of your registration
After the registration, you should get a confirmation email. Open it and click the link. This will enable you to activate your registration. You will only have a couple of days to do so. After that, you will have revisit the Kormányablak. The best practice is that you do the activation right at the scene before leaving the Kormányablak. Therefore, if there is any error, you may correct it immediately.
How to obtain a Hungarian TAJ number?
For the electronic process, you will need a registered Ügyfélkapu.
Who can have TAJ number in Hungary?
You may have public healthcare service if you are:
- Self-employed (like a private enterprise)
- Work for you own company
If you are an EU-citizen and you do not live in Hungary, however, you are employed in Hungary, you should have a Hungarian TAJ number which will cover you in your home country. For this, you will need a certificate called S07. This, however, is a rather rare case but may happen. Also, this may be the case if you start your Hungarian private enterprise but you will not stay more than 90 days in a row in Hungary, i.e. you will not need to register at the Immigration Office.
As a rule of thumb, you can only have one public health insurance within the EU, so if you launch your business in Hungary which results in a social security insurance, you may be required to stop the one in your home country.
How to obtain a Hungarian personal tax number?
Overview of tax number registration
To get a personal tax number, you will have to visit one of the Tax Office (NAV) Customer Services. Look for the nearest one. You will not need an appointment booked. If You do not have an Ügyfélkapu (Clientgate), start with that one before registering your private tax number. Why is it the logical order? Since when you login to your tax portal, Ügyfélkapu will be used as an auth service. Due to the fact that the Tax Office (NAV) and Government Offices ("Kormányblak") have their own, separate databases, if there is just one misspelling error, you will not be able to access the tax services.
Database mismatch is a common error in Hungary which may result in serious and unfair penalties, so please pay close attention to this issue.
A Hungarian personal tax number, at the first time, may only be registered in person. However, there is a possibility to nominate a proxy who can do that in your name. Your private tax number may be obtained by filling in the tax form T34, however, it is not necessary just eases the job of the tax office clerks.
Steps of obtaining the tax number
Steps of obtaining the Hungarian personal tax number:
- Register Ügyfélkapu (if you do not have one already)
- Optional: fill in the T34 form
- Visit one of the Tax Office (NAV) Customer Services
- Bring a valid ID with you (passport and/or ID card)
- Once you have your tax number, try to validate it by logging in to www.ebev.nav.gov.hu
Final step: the validation of your tax number registration
If your login to eBev (Tax Office Customer Portal) is successful, you have nothing else to do, your tax profile works just fine. However, if you cannot login, that is an indication of a possible data mismatch which should be corrected. Therefore, if you do not want to revisit the Tax Office, validate your registration with the login. If there is an error, go back and let it fixed. Look for any typos, mismatches or misspelling of your name. Especially, a switch of your surname and first name(s) is a common source of error.
How to get a valid HQ (seat) for your private enterprise?
Your sole enterprise will need a legal (official) seat address. It may be:
- Your own address
- Your rented address (if the landlord accepts it)
- An official (Tax Office registered) seat provider's address
If you own the property or you are the beneficiary user ("haszonélvezet") of the property, you will need no permission to use it a seat.
On the other hand, if you just rend the property, the landlord should be informed and he or she should give a written permission as well. That permission is called the declaration of acceptance. A template may be downloaded from my website.
If you want to obtain a seat service provider's service, make sure that that person is a registered provider. You may download the PDF or XLS versions of the list of official seat service providers from the Tax Office's website. Before paying any fees, check the tax number of the vendor.
Seat service is strictly regulated in Hungary. You will need to have a written contract at least for 1-year and go through an identification an monitoring process required by anti-terrorism and anti-money laundering law.
Taxation considerations of a Hungarian private enterprise
As a sole business, you may face the following taxes in Hungary:
- Personal income tax
- Social security taxes and fees
- Local turnover tax
- Tourism contribution tax (if you do restaurant or short-term rental services)
- Local tourist tax (if you do short-term rental services)
- Local property tax (If you own a land or flat)
- Stamp duty fee (if you buy a car or property)
- Car tax (if you own a car or van)
Income taxation of a Hungarian private enterprise
By default, the sole enterprise is subject to the personal income taxation ("SZJA") in Hungary. This system lets you to choose from two different approaches:
- Default taxation
- Average taxation ("átalányadó")
The default taxation of the private enterprise
The default taxation ("jövedelem szerinti adózás") is pretty bad is almost all of the cases, so I will only address this shortly. The income tax is 15% of the profit. In addition, a so-called dividend tax should be paid as well which is 15% + 13% of the already taxed profit. All in all, this system may result up to 50% tax compared to your incomes.
The average taxation of the sole enterprise
The average tax ("átalányadó"), also referred to as flat rate tax, usually has a better outcome compared to the default system. Please be aware that this is a non-linear system which means it behaves differently at different income levels.
The core concept of the flat rate tax is that your costs, in a certain percentage, are recognized without any documentation. The default cost level is 40%. It may go up to 80% if you work in the construction sector or even to 90% if you do retailing.
This means e.g. that 60% of your income is taxable independently of your actual costs. You will also have a tax free bracket which is 6 times the current minimum wage. The minimum wage is 232.000 HUF in 2023 and, definitely, will rise in the next year.
The tax free bracket refers to your decreased and not to your full incomes, to put it simple, to the 60% (or 20% or 10%).
There is no separate dividend tax in the average taxation system, however, the average tax basis increases the social security taxes as well. That is a major downside of the flat rate tax method.
KATA, or to be more precise the new KATA law, is only for those sole businesses who serve private person clients only (i.e. do not invoice companies, organizations or legal persons) and do their activities as full-time entrepreneurs. The old KATA was a charmingly simple and easy system. Everybody could do it up to a certain income limit. The Ukrainian situation, however, made it necessary to terminate this system which resulted a dramatic increase in the taxes. The alternative that is suggested by the government is the average taxation.
Value added tax ("ÁFA")
The VAT free system
VAT is the most important source of income of the Hungarian government. No wonder that the state places a huge emphasis on this tax. Hungary offers a VAT free system ("alanyi adómentes") up to 12 million HUF/year income. This limit is proportional meaning that if you start in the middle of the year, this threshold will fall. The calculation is the following: 12 million HUF divided by the number of days in the year (365 or 366) and multiplied by the days remaining from the year.
My suggestion is to be in the VAT free system as long as possible. What if you exceed the limit? If that happens, the full sum of the invoice that overshot the limit will be the subject of the VAT already. In addition, for two tax years (a tax year is a calendar year), you will not be allowed to reenter in the VAT free system. This may disadvantage you during your pricing.
Good news is that some incomes are not counted in this limit like selling fixed assets or invoicing foreign (non-resident) persons or companies.
The default VAT system
The default VAT in Hungary is 27%. In the case of some services and products it is 18% or 5%. The most important among those is the short-term rental activity which falls under the 5% rate. If you are in the default system, you have to VAT on your sales but can deduct the VAT on your purchases on the other hand.
If you are a normal VAT payer, you will have to send VAT returns regularly which is a quite complicated form. Besides, you will have to keep your books and start to collect all your costs invoices as well. Even if you are in the average tax system, for VAT law and deduction purposes, you will need those vendor invoices.
The cash accounting VAT method
This is a special subcategory in the normal VAT paying system. The goal of this is to protect you for not being paid by your customers. In the normal VAT system, if you issue an invoice, you pay VAT no matter what. The cash account method, however, allows you to pay VAT only if you were paid. On the other side, you can only deduct the VAT on supplier invoices if you paid your partners.
Cash accounting method requires a constant cash-flow record in order to determine your current VAT obligations. All in all, it is a tradeoff: more administration in return for more security.
Social security taxes and fees
Basically, there two obligations here: the health contribution tax ("SZOCHO"), which is 13%, and the social security contribution which is 18.5%. Social security fee should be paid in each month. The bad news is that there is a minimum for each of these fees. The basis of that minimum is the current minimum wage and guaranteed minimum salary. The latter one applies if the main activity of your private enterprise requires the application of a secondary school education of above. To be honest, in a 21st century society, almost all jobs require the application of intermediate knowledge levels.
The minimum social security fee is independent of your income and is ca. 100k HUF in each month. In addition, if you are in the average tax system, your actual tax basis may raise these fees even further. So be aware of this.
Fixed minimum social security fees make your taxation system non-linear meaning that your system will have "breakpoints" where the tax starts to increase dramatically and, from the opposite direction, it cannot decrease below a certain level.
However, in the following cases, you do not have to pay the minimum social security:
- If you have a reported job >= 36 hours a week
- If you are participating in your own company and you pay your minimums there
- If you are studying at a university as a daytime student
The most important tax is the local turnover tax which is 2% in Budapest. In fact, 2% is the maximum that the local tax law allows to introduce by municipalities. The tax basis, however, is special and, therefore, it represents a heavier load for service providers compared to manufacturers.
You may pay property tax if you have a flat that you use for business or renting purposes. The property tax is ca. 2.100 HUF/sqm (m2) in most of the towns and districts. As a rule of thumb, the property in which you or your close relatives live, are exempted from property tax
Car tax is a yearly local tax which is collected by NAV.
Tourism tax is paid only if you carry out shot-term rental activity. The rate is 4% of your incomes in the Budapest districts.
Stamp duty fee is something you pay if you buy a car or a property. It may be called as wealth increase tax as well due to its nature. In the case of a property, you will have to pay 4% stamp duty, while if you purchase a car, it is calculated based on the performance of the car.
Tourism development contribution tax (4%) is paid on restaurant and short-term rental activity. Both operations belong to the tourism sector according to the Hungarian logic.
You may find useful additional information on the Tax Office website. Unfortunately, those documents are only in Hungarian.
How to register the private enterprise?
After you have all the pre-requirements and you made a decision on the income taxation and VAT method, you may proceed with the actual registration of your sole enterprise. This may be done in two ways:
- In person at the Government Windows
- Electronically, using Webes Ügysegéd
In fact, if you contact the Government Window, those clerks will use Webes Ügysegéd as well. The downside of that is that the personnel is not trained for taxation so you may end up a pretty bad situation as tax choices cannot be undone after the registration.
After you have your tax and enterprise registration number, you will be indicated at the official private enterprise registry where you can query yourself and other of course.
Once the government registration is finished, you may proceed with the following administrative tasks as well:
- Local tax office registration
- Chamber of Commerce registration
- Invoicing Cloud registration
- Invoicing application registration
Local tax office registration
All private enterprise is subject to the local turnover tax and, therefore, must register him- or herself through the municipality portal (e-onkormanyzat). Registration is 100% electronic. During local taxation registration, the enterprise should decide whether to apply the simplified local tax calculation method. This is available for private enterprises which do not exceed 25 million HUF income in a year. This limit is proportional meaning that it decreases if the enterprise is started later in the given year.
The simplified tax calculation usually results in lower taxes for service providers or for those who picked the average taxation system.
Chamber of Commerce registration
Chamber of Commerce registration is mandatory for every enterprise. It may be done by filling in an electronic form on their website. The form may be sent electronically via Ügyfélkapu or manually as an email attachment.
Invoicing Cloud and invoicing application registration
The invoicing cloud is a tax office operated system and the registration is mandatory for every taxpayers. Each invoice that is issued in Hungary will and should be sent to the cloud. This may be done manually in case of paper-based invoice (not recommended at all) and automatically. The latter is done automatically by the invoicing application. This leads us to the topic of the invoicing application. This is crucial if you want to avoid penalties. As a rule of thumb, a Hungarian invoicing software should be used. Zoho, Word, QuickBooks, Booking.com etc. invoices are not considered as legal Hungarian invoices. However, you may use them for requesting transfers. Those are considered as pro forma invoices.
At the end of this article, I would like to summarize the essence of what you should know about starting a private enterprise in Hungary.
The steps of the registration of the private enterprise:
A summary table on the private enterprise properties:
|Private enterprise, natural person, not a legal person
|Unlimited. I.e. you are liable with your private possessions as well.
|Private enterprises have no official capital
|Singe entry: cash flow oriented
|Method of registration
|Via Ügyfélkapu or in person at the Government Windows
|Personal income tax 15%,average tax or KATA
|Normal VAT, VAT free or cash-accounting approach
|13% social contribution tax and 18.5% social security fee
|Subjec to local turnover tax. Either the profit based or the simplified system