Building a hotel and taxes

usafpj wrote:

... see 10-19% but then I have also heard it is closer to 50%.  To start I wouldn't have any employees but perhaps later I will hire one or two.  Can anyone fill me in on how the tax works for a hotel owner?  I am an American and my wife is Hungarian, if that makes any difference...

It depends if you incorporate your business or not. In the former case, presumably you and your other half will be paid a salary from the hotel income (via the corporation), in which case there's employers contribution of the employees tax and then there's individual employees tax. VAT registered businesses can claim their VAT back.  On the other hand, if you do not incorporate, then the entire income of the hotel would be your income and taxable. Basically both are correct numbers - 19% tax for individuals plus all sorts of other deductions employee/employer wise which would regardless of the method whack you for about 50%'ish in total.  In other words, you get to keep 1/2 of what you earn. Sad state of affairs. 

You might want to do something else with the help of a proper advisor.  Such a scheme could be something like  incorporate, lend interest only the corporation money to build the hotel so it can claim VAT for the building costs which you cannot do as an individual.

Yes, please see a seasoned, preferably local accountant.
Another thing you could do is rent a house there for the off-season, and try to rent out a single room as a B&B and see how that goes.

Your numbers almost make sense, but may need interpretation:
"Business taxes" may seem reasonable, it's a rough figure because you pay a dozen different kind of local and state taxes, fees, registrations and contributions, some based on earnings, some based on profit, some based on the number of chimneys. As soon as you start paying yourself a wage, you step into the 50%+ territory with a new set of tax laws.
So what most small business owners do is disguising personal living expenses as company expenses: you'd drive a company car to the store, where you'd only ever buy food for the hotel kitchen, calling your wife on the company phone to ask which brand of company diapers to bring home.
So what the tax agency (NAV, some people may refer to it as APEH) does is classify small business expenses as benefits, and apply the wage taxes on it. They also imply you must be making money all year round, and make you pay some of the taxes even in the off season.

You also can't really compare residential real estate costs to commercial construction: there are different codes, regulations, permits, and bribes. Existing hotels probably have plenty of influence on the local council to bleed you dry of the 40M before you get to break ground. Unless they like what you propose to build because then they'll let you build it and run you out of business with bogus inspections, fines, or establishing a temporary landfill on the plot next to yours, then snatch it for pennies in liquidation.

Just as an experiment, go look at the pricing structure of the thermal spas (the main reason most people go there), and try to find out what it would take for you to get your guests the preferential rate.

Don't get me wrong, it's not impossible. In fact things can and do go fairly swiftly most of the time, as long as you know the right people and return their favors generously. Try to partner with a local accountant or lawyer to help you navigate the bureaucracy. I am sure the town council will not be shy in recommending just the right guy, he might very well be a council member or one of their relatives. Oh, and if you think this is corruption, don't bother reporting it, the worst that can happen is their US visitor visas get revoked which they either shrug off or use as political capital.

Excellent info so far. I'm not too worried about corruption as I've lived and done business in Poland and Saudi Arabia, so bribes are becoming second nature to me. Settled hotels and city councils making life tough for new entrants does bother me a bit, but perhaps I should clarify.  I said hotel but I mean more of a Vendeghaz with 4-8 rooms to rent and an attached flat where my wife and I will also live. Does this make a difference? Would a small bed and breakfast be more welcome in the community than a hotel?
     And taxes everywhere are about as clear as mud, but it seems that szocske and fluffy disagree. Fluffy seems to be saying that whatever is done the taxes will be half of the net income. Szocske, as I understand it, says that the 50% territory is reserved for businesses paying wages. I do not need a pension in the future, so I do not need to pay myself as an employee.
    In the opinion of fellow expats here, would it be a safer and wiser move to purchase a vendeghaz already operating and renovate it(if needed) or build from the ground up?  I had planned to build because for the next year I will be working as a contractor overseas. That way my place is brand new and to my specifications(I would come back every 4 months to check the construction as well as having my wifes father check weekly). Buying property always comes with the risks of costly repairs and other issues, even with a good inspection, which I was hoping to avoid.

usafpj wrote:

....     And taxes everywhere are about as clear as mud, but it seems that szocske and fluffy disagree. Fluffy seems to be saying that whatever is done the taxes will be half of the net income. Szocske, as I understand it, says that the 50% territory is reserved for businesses paying wages. I do not need a pension in the future, so I do not need to pay myself as an employee. ...

We don't disagree Grasshopper and I (Szocske) although he's definitely more cynical (realistic?) than me.  But yes, if you look at the OECD country tax rates, they are all about the same in nett effect - the overall rate is about 50%.

You won't have a choice on on taxes you have to pay, including the pension.  Assuming you are a US citizen, you've got the IRS to deal with at well. 

You really need a professional to organise your affairs correctly according to your (unusual by HU standards) circumstances.

I would not necessary trust any builders to get on with the job while you are away. They will pilfer the materials and sit around chatting unless you can keep a daily eye on them.  Typical scam: charge you for 10 bags of cement, use 8, put two back on the van to use elsewhere - you get substandard construction and they get something built for nothing at their country house.

The government in HU is very unpredictable and off the wall, you could find yourself totally oppressed by changes in the tax system at any time.  Case in point, the latest tax disaster:

Internet Taxes

Basically a raid on investment, technology, knowledge and even political opposition.  The psychology of the announcement is pretty obvious too - massive tax imposition, then backpedal a bit to the real position of a couple of dollars a month. People will feel relieved it's not $200 a month.  ISPs will be seriously throttling internet usage if this tax goes ahead under the proposed scheme as we know it currently.  But this is just an example. Others will come.

usafpj wrote:

Excellent info so far. I'm not too worried about corruption as I've lived and done business in Poland and Saudi Arabia, so bribes are becoming second nature to me.

I assume you mean "grease payments", not bribing. Since bribing might run you afoul of the US Foreign Corrupt Practices Act.

usafpj wrote:

szocske and fluffy disagree. Fluffy seems to be saying that whatever is done the taxes will be half of the net income. Szocske, as I understand it, says that the 50% territory is reserved for businesses paying wages. I do not need a pension in the future, so I do not need to pay myself as an employee.

If you do pretty much any type of business in Hungary you need to form some type of company or act as entrepreneur. The basic employee tax for self-employed is 10%, but then you have to also add in the health and pension taxes. The entrepreneur tax is not much less (40%), and could be much worse (93%). See:

http://en.nav.gov.hu/taxation/taxinfo/s … duals.html

Pretty hard to avoid the tax man taking a chunk of your income in Hungary.

And don't forget, since the US and Hungary do not have a social security agreement, you have to still pay US SS taxes on your world wide income if you are self employed.

In short, if you can afford to build a hotel, I can but stress to consult with a good, competent (and thus expensive) tax attorney. I did. I would not rely on any advice here mainly because the laws change here often.

usafpj wrote:

(I would come back every 4 months to check the construction as well as having my wifes father check weekly).

I learned very quickly you have to be here daily to make sure things are not done wrong. Made the mistake to go abroad for *just* 3 days when getting a new roof. Came back to find the crown tiles were put on backwards, vent tiles were too low and the installers apparently smoked while they worked: the water proof under fabric layer had many nice little burn holes in many locations (defeating the entire "water barrier" concept). But, for example, Thankfully, I was here to prevent them installing the ceramic chimney flue upside down. And I actually have a more competent contractor than most.

fluffy2560 wrote:

charge you for 10 bags of cement, use 8, put two back on the van to use elsewhere - you get substandard construction

Yep. Learned that the hard way on the first construction contract I had done here. I had a "concrete" floor poured. It was in fact a "sand" floor. They used so little concrete it started to fall apart almost immediately.

klsallee wrote:

.... first construction contract I had done here. I had a "concrete" floor poured. It was in fact a "sand" floor. They used so little concrete it started to fall apart almost immediately.

I have almost the same experience. I tried to put my satellite dish on a concrete side wall and the surface just crumbled away. It was almost totally made of sand. And it was just a couple of months old. 

I had one bloke accidentally hole an underground waste pipe.  Luckily I saw him shove a bit of cardboard over the hole, then slap on some concrete to hide the damage.  It would have lasted maybe a few months, in which case, he'd have been long gone and I'd have to have the floor up to repair    Plumbers stole some of my tools as well. 

All the builders here are "kontars".  I learnt this word quickly here. UK English translation is "bodgers". 

Best way of fixing things here. Do It Yourself. At least you'll know you will get a quality job with care and attention.

fluffy2560 wrote:

All the builders here are "kontars".  I learnt this word quickly here. UK English translation is "bodgers".

I have my own terms for those type of workers: fired, sacked, discharged, terminated, dismissed, bounced and booted.

klsallee wrote:

fluffy2560 wrote:

All the builders here are "kontars".  I learnt this word quickly here. UK English translation is "bodgers".

I have my own terms for those type of workers: fired, sacked, discharged, terminated, dismissed, bounced and booted.

Indeed.

I was working on renovating my shed this afternoon (outbuilding really) and I welded some bars on the outside of a heavy steel window frame  to secure it somewhat from opportunistic burglars.  Having satisfied myself my welding was good, I opened the window to check it from the other side and it promptly fell off breaking the glass.  The moron who installed it had put the frame in upside down and the opening part slid off the hinges. 

Unfortunately the complete idiot who did that died a couple of years ago and therefore definitely terminated. Having found some of his papers in the house, it seems he was a "building technician". Laughable if not dangerous.

I can only think it must be my fault for assuming that people would install window frames the correct way up. They installed another one correctly but screwed that one up and couldn't be bothered fixing it.  So the upshot is that rather than doing what I wanted to do, I wasted the afternoon taking the frame out and cementing it back in the right way around.  And now I have to replace the glass too! 

I also noticed the moron had banged nails into the electric cables to secure them to the wall.

I could say WTF! but the reality is that this is just normal incompetence around here. Two steps forward, one step back.  Further East (like Central Asia) it's far far worse.

fluffy2560 wrote:

Having satisfied myself my welding was good, I opened the window to check it from the other side and it promptly fell off breaking the glass.  The moron who installed it had put the frame in upside down and the opening part slid off the hinges.

You win best renovation disaster story of the week.

klsallee wrote:

You win best renovation disaster story of the week.

I don't know about that.  I'm not sure if I should say thanks.

klsallee wrote:

...Thankfully, I was here to prevent them installing the ceramic chimney flue upside down.

I quite like that one.  How the hell could they get that wrong?!  If it's one of those ready made types, it's blinking obvious how it fits together.

Maybe we ought to have an Eastern ongoing building disaster thread. I'll start one with a photo.

fluffy2560 wrote:

Maybe we ought to have an Eastern ongoing building disaster thread. I'll start one with a photo.

I tried to upload an Eastern European building disaster photo to this forum but it was rejected with a formula/robot response, none of which apply.  While I am sure we mostly appreciate the work of the moderators generally, it can be a bit frustrating.  There's no way to insert photos inline either. So I give up.  I can only think the way to do it is to to put in links to a public forum on Facebook or similar.

Explanation:

"Sorry, your picture hasn't been validated

Dear fluffy2560,

The picture you have uploaded does not fit Expat.com's criteria.
Therefore, we regret we can't accept it in the shared album.

Please note that we do not accept:

    photos on which people are recognizable or which would not respect privacy
    logos
    photos which are not owned by yourself
    photos with no apparent link with the selected country or life abroad

Thank you for your interest,

Victoria
Share your expatriate experience!
https://www.expat.com"

fluffy2560 wrote:

If it's one of those ready made types, it's blinking obvious how it fits together.

Yes, it was a pre-fab chimney "kit".

fluffy2560 wrote:

How the hell could they get that wrong?!

As you know opinion is commonly stronger than fact here. Or as John Galsworthy more eloquently wrote: "The fixed idea, which has outrun more constables than any other form of human disorder."  Mix in not reading the instructions (which I alone "read" since it was all pictorial and indeed rather clear) and "comedy" ensues.

fluffy2560 wrote:

I tried to upload an Eastern European building disaster photo to this forum but it was rejected

A pity. Certainly would help expats having to deal with and avoid building and renovation "gotchas" better than long text descriptions.

klsallee wrote:

......Mix in not reading the instructions (which I alone "read" since it was all pictorial and indeed rather clear) and "comedy" ensues.

Hmmmm...sounds like they were trained by IT professionals, not by experienced construction workers or chimney erectors. RTFM is counter intuitive to IT personnel.  They only read the manual when they've tried to plug it in and wondered why it doesn't work. .

Just some information to pass onto the board. Talked to two contractors today and both quoted 300.000ft/meter for masonry construction of a vendeghaz, which is about 100.000 more than I was expecting. Amazingly they both said that it doesn't matter if the construction is all one floor of 3 stories. Building up is always cheaper than building out as everything just repeats itself(i.e. plumbing) and the walls and roof are shared. But no point arguing.  Now looking into prefabricated buildings from Austria which advertise 150.000ft/meter.  I have no experience with pre-fabricated buildings but what I've heard are positive.  Construction almost all completed in a factory, low chance of cost overruns, can be made to look good with a facade, and can be insulated well and sound proofed.
Maybe not as good as a masonry building but it would seem to avoid the problems with lousy construction workers. I am waiting for a price quote for the plans I sent them. I will update after I receive it.

Yes, I was rather cynical in my previous post. Sorry. Should have called it lobbying and campaign contributions :-)

Maybe you could start a "There, I fixed it" blog. It in fact tells you a lot about a country, I think it really is relevant.

Prefab is indeed a good deal, the colloquial translation is "könnyűszerkezetes". Many continental Europeans however have lived in solid brick houses all their lives, and feel weird the first time they set foot in an American-style wobbly-creaky  house, especially if multistory. I know I do. Make sure the floors and stairs feel firm, and internal walls have some soundproofing too. If you are building at a scenic part of town, you might rightfully be requested to use a building style that fits in.

usafpj wrote:

Just some information to pass onto the board. Talked to two contractors today and both quoted 300.000ft/meter for masonry construction of a vendeghaz, which is about 100.000 more than I was expecting.

You could think about renovating an existing building.  There are standardised models for renovation costs used at the planning stages in Hungary.  Admittedly you'll find weird construction techniques will have been used but if it ain't broke, don't fix it (much).  The other thing is with plots with established buildings is that it's unlikely someone will build a monstrosity in front of you.  So long as you don't exceed the dimensions, density and general structure of the existing building, the planning process should be quite fast - allow 2 months.

When I first started messing around with construction things, the rule of thumb was 1/3 materials, 1/3 labour, 1/3 profit. I expect it's still the same now.  Definitely shop around for materials. Example: A lintel (athidalo in HU) in Praktiker costs about 2300 Ft but in say, Platform (another more "profi" store), it costs Ft. 1850.  Every little helps.

usafpj wrote:

prefabricated buildings from Austria which advertise 150.000ft/meter

In addition to traditional masonry and prefab, also consider getting a price for ICF construction:

https://en.wikipedia.org/wiki/Insulating_concrete_form

I am talking to contractors about ICF and prefab wood but I have also found a small Vendeghaz for sale. It is 170 square meters with 1.000 meters land and has 4 rooms with 3 bathrooms, none are ensuite.  I have been to look and it is clean and appears well maintained. The roof is hullampala and will need to be replaces within 5 years but that is the only major issue I could find. It is in a special tax bracket where taxes are only 200.000 a year.  There is 200 more square meters of building area available. The location is good and in a nice neighborhood. The owners are old and retiring. They have been running the place for 15 years.  It is for sale for 18 million.
I have a few questions for the board beyond the usual what do people think. If I build extra rooms on the property will it lose its special tax bracket(which seems to be reserved for homes being used as Vendeghaz's in tourist areas)? Is that 200 square meters building area just ground area or is it total building area(i.e. Can I build 400 square meters over 2 floors?)  The price seems to be a little too good so would people please point out possible issues with this place. I was going to look over their income/expense reports but they say they don't have to file any taxes or keep records since they are in that special tax bracket.  It sounds like a lie to me since governments always want to know what business is up to.  Also, are building inspectors reliable? I mean as in a pre-purchase inspection.

usafpj wrote:

It is for sale for 18 million.

How old is the house?

If it is a new house, could be a very good price or overpriced depending on how well it was built and if there are extra titles or leans on the property or not (these should be in the property paper -- your lawyer should tell you if there are any issues about ownership).

I have seen some new (less than 20 years old) houses falling apart because the concrete was cheaply done. And a lot can be hidden by a few layers of new plaster and paint.

If it is was built during the Communist period, it may be overpriced.

If the house is very old, and under special historical protection you will be limited with what you can do with it construction wise.

usafpj wrote:

Is that 200 square meters building area just ground area or is it total building area(i.e. Can I build 400 square meters over 2 floors?)

This usually describes the total living area, not the building footprint. So, often, if you are allowed an additional 200 meters, you can only add one 200 meter floor or two 100 meter floors. But check local codes.

usafpj wrote:

I was going to look over their income/expense reports but they say they don't have to file any taxes or keep records since they are in that special tax bracket.  It sounds like a lie to me since governments always want to know what business is up to.

There is an income tax rate for Fixed-Rate Tax of Low Tax-Bracket Enterprises and on Small Business Tax (called KATA in Hungarian). If you fall within the program"s maximum annual income range, you "just" pay 75,000 HUF a month as your combined income and health taxes, and then you do not have file a tax return, or keep any expense report since there is no concept of deductions under this tax rate. So that part is correct. However, all businesses in Hungary ARE suppose to issue receipts for all income transactions (and that receipt book is a record you should be able to look at). This is so the tax man can, if they are audited, verify they fall within the KATA income bracket or not. And also, if they are running a hotel/B&B/pension they have to record everyone who stays there as there are nightly per person hotel taxes that are extras one must usually pay to the local government. So there should be some record of some type, even if it is somewhat fictitious. Saying there is *no* income record at all is very suspicious.

usafpj wrote:

Also, are building inspectors reliable? I mean as in a pre-purchase inspection.

Depends on who you hire. Some are, some are not.

usafpj wrote:

..... There is 200 more square meters of building area available. The location is good and in a nice neighborhood. The owners are old and retiring. They have been running the place for 15 years.  It is for sale for 18 million. ... Is that 200 square meters building area just ground area or is it total building area(i.e. Can I build 400 square meters over 2 floors?)  The price seems to be a little too good so would people please point out possible issues with this place. .... It sounds like a lie to me since governments always want to know what business is up to.  Also, are building inspectors reliable? I mean as in a pre-purchase inspection.

Here's what I know:

I don't know about that specific location but definitely, regardless of their "tax regime", they have to keep records. If I remember correctly, the KATA tax rule has to be "earned" from the previous 2 years accounting and can be withdrawn anytime.

Don't believe that the lawyer will get the entire thing correct.  They can only work with what they have and even the land registries can actually be wrong too. 

You can get the property number of the building, then get a copy of the land registry entry.   This is public information but will cost you a small amount of money (your other half can apply as one needs an ID card to get the entries online).   Then you see if there are any liens on the property.  My own experience is that this is not really sufficient.  Really, check very carefully the boundaries of the property. The land registry info is not always to be trusted or the boundaries might be different at the actual location.  If you can, take GPS coordinate readings, then use Google Earth to plot them and see if they line up.

If you check the local planning with the local government you can see the land density rules for the property - this is like 20%, 25%, 40% etc.  This means, of the land area, you can only have built property (in total) to that area, i.e. in a 20% zone, with 1000 m2, you can only have a built in property (all buildings) of 200m2 land area.  There is always a vertical height limit as well to stop over development - in my neighbourhood, it's 5m to the eaves BUT the 5m is the average (i.e. if you lower some parts, or raise the ground, you can have designs which meet the rules by working the average height). You could have 2 x 200m2 if you "flatten" the roof angle but you still need to get planning permission.  BTW, anything with a roof on is a building, even if it's just a covered but open area.

Sometimes the planners add weird twists or other things which are not bad ideas.  Our local government insists we have a gazebo. Why? We don't know but they drew it on the plans and said it'd look better.  I thought that was a bit of over the top interference.  We decided we could always change it later. 

If there is a higher density of buildings on the plot, with "illegal" buildings, if they are there more than 10 years, then you do not need to demolish, permission for the building is granted by default.

There's also a "green rule" about not excessively paving over your land/garden but I have not fully understood that one.  I know we have to have more "green".

Regarding inspectors, yes, you can get some reliable ones.  In Budapest, we've used a couple including one that spoke quite OK English.  You can ask them to make you a cost model for building renovations to give you a good idea of what the usual sorts of costs would be.