Self-Employment Tax in Hungary

Mak5000 wrote:

I work as a freelancer online, I get my money on Paypal and withdraw it to my bank account in Hungary. I deal with American and Australian businesses, so I don't deal with any Hungarian business here.

If you are a legal resident of Hungary, and do your "online" work in Hungary as a resident of Hungary, are typically liable for income tax in Hungary unless there is some relevant tax treaty that modifies this requirement. It does not matter if your clients are in another country, or if you do not work for any Hungarian business. Hungary has the right to tax your income if you live in Hungary (subject to tax treaties).

Mak5000 wrote:

I also heard about an option that I pay 10% tax for self employment, if I choose this one, do I have to pay any other additional taxes or only this 10 %?

There is a corporate flat tax rate of 10%, and a private entrepreneur income tax 10% (plus a dividend tax of 16%). But for self employed people you might be thinking of the 10% expense ratio option to calculate your income tax basis for your business. That is, you can either get official long receipts for all your business expenses and itemize them to get your income after expenses, or you can just state you wish to have you income "assumed" to have a flat rate of 10% in expenses and you do not have to keep any paperwork or do any accounting. In other words, if you use the 10% expense ratio option, and your self employed small business income was 100,000 HUF a moth, you are taxed on just 90,000 HUF as income (10% reduction for "expenses").

Mak5000 wrote:

told me to ask the lawyer of tax office via email (they answer in 30 days).

Good advise. But their answer may be "non-binding". That is, you can not use it to win a court case if NAV (the tax authority) says you did your taxes wrong. To get a "binding" answer, you often have to pay for it.

Mak5000 wrote:

I know that there is a so called family tax allowance that makes it possible for me to decrease the taxes that I pay if I have children. Could you give me further information on this?

see: http://www.doingbusinessinhungary.com/t … ase-credit (and note the limits for this credit for foreign individuals)

Mak5000 wrote:

She also told me, that probably I had to pay 16% personal income + 27% health contribution even if I have a private health insurance, so the total will be 43% from my income.

If you do not use the KATA system or the simplified entrepreneurial tax (EVA - with a tax /!\ I AM A STUPID SPAMMER /!\7 percent if your business matches the requirements), then yes, this may be your tax burden as a self employed sole-proprietor (34% "employee" tax rate and since you are also the business owner, you have to pay the "employers" contribution of the taxes which brings it to about 43%). This is why KATA is so popular with small businesses here.

Some years ago, as explained to me by the tax office, buying into the national health system became mandatory for all residents in Hungary if you are resident in the country past a certain time period (even if you do not work in Hungary).

The city where you run your business may also impose one or more different additional taxes on your business.

But wait, it gets even worse. If you have clients in the US, you may also be liable for US taxes. See IRS publication 515 for details. As a foreign, non-resident individual your US clients may be required to withhold 30% of your income and provide that to the IRS. And you might need to file a 1040NR tax return to get that money back. If your US client is not withholding, and they should have, it may become a problem for them if they get audited (and for you -- getting recorded as not filing US taxes can result in consequences, such as freezing your US assets (i.e. your Paypal account), and denial of visa to enter the US -- not a problem if you have no wish to ever enter the US). However, any US tax can be applied to offset your Hungarian taxes (you can avoid double taxation).

Mak5000 wrote:

Thank you so much for your detailed answer, I appreciate that

I am sorry it is mostly bad news.

Despite recent political rhetoric claiming to want to help small businesses, I do not find Hungary a small business friendly country. The government thinks more in terms of "helping" businesses with grants rather than with really effective tax breaks and benefits. Which means very small businesses and freelancers are, for the most part, left out of their economic and policy thinking. Even just giving small businesses a 100,000 HUF tax free deduction would do a lot for very small businesses, and could jump start a lot of small entrepreneurial thinking which could eventually become real business powerhouses in Hungary. But I know of no such standard deductions in Hungary at this time.

Apple computer, now the worlds largest business by capital, essentially started in a garage. I started a business in the US 20 years ago and could be profitable my first year due to the favorable tax laws there for small businesses. There will never be an Apple computer like business in Hungary (or Europe) until the politicians understand this basic concept: give the micro business thinkers a real tax break.

zif wrote:

What VAT registration and rules would apply in his case?

If the "product" is exported out of the EU, there is no EU VAT collection requirement.

Also in Hungary, small businesses, under a certain yearly income threshold, can declare themselves "VAT exempt", which means they do not have to deal with VAT. But that also means the such businesses can not claim VAT back on businesses expenses, so there are trade offs. If a business buys a lot for that businesses, being VAT exempt may be a bad idea since that business is paying 27% in costs that business need not pay.

Mak5000 wrote:

Last answer from them that they want me to pay 88,5% from my income  as individual business.
88,5% is ( 16% personal income+ 27% social contribution+27% health insurance contribution+ 18,5% pension and unemployment contribution)
About the 27% social contribution, they said your employer pay it and in my situation that my employer outside Hungary so I have to pay everything 88,5% from my income.

If you are a freelancer, you are not an employee. Those who give you payments are your clients, not your employers.

I am not an accountant, or a tax lawyer, and the laws in Hungary change all the time. But....  you should ideally not have to pay unemployment insurance to the state since you are not an employee and can never become unemployed or eligible for unemployment.

For example, never use the words "employee" or "employer" when discussing tax issues if you are freelancer. If the tax office tries to call you an employee, immediately correct them. Else they will assess you as an "employee", even if you are not.

The people in the tax office work for the state. Their job is to get as much tax as legally possible from you, and to try to make everyone an employee for their own reasons (i.e. so the state can claim how many people are "employed" for political reasons).

An accountant works for you. Their job is to save as much of your income as legally possible from the state. For example, you health contribution may be less if you make less than a certain amount a month.

So, rather than talk to the tax authority, you should talk to a competent accountant who understands freelance work law, and with your accountant be very specific about how you work, who pays you and how. International tax treaties may also become an issue. Then the accountant talks to the tax authority on your behalf.

It is complicated. You end up paying the accountant, but in theory, what you pay the accountant should be less than what you would pay the state since the accountant knows all the legal ways to save on your tax bill.