To start a business, you need to look at a number of aspects in order to choose the most appropriate form of company, the most optimal form of taxation, and the best location. In addition, the type of the service to be provided by the prospective company must be taken into account, as in today’s digital world there are different VAT consequences for a distance sale, a distance service over the internet or a standard supply of goods within the European Union or to a third country (not to mention that it does matter whether our company sells them to an individual or a legal entity). In addition, we must examine whether our particular activity does not create an establishment in Hungary (if we provide services on behalf of a foreign company or operate in Hungary) or abroad, and we must pay attention to double taxation conventions if our income comes from abroad.
This summary provides guidance on the above-mentioned topics, drawing your attention to the points and issues that are worth taking into account. They provide a point of reference by highlighting an example, but it is important to emphasize that each transaction / structure needs to be examined individually.
Value added tax – VAT
From the point of view of the VAT, there are a number of cases that could be mentioned, the most common of which, which are not generally taxable, are as follows. A Community tax number is required in all cases if our company wishes to establish a business relationship with a company (taxable person) in another Member State of the European Union (Community). In case of intra-Community acquisitions or sales of goods, it is therefore necessary to have a Community tax number if the business partner is a taxable person. There are, of course, exempt intra-Community sales (for example, in the case of a material exemption), but in most cases such transactions are taxed under the reverse charge rules.
One special case of multi-player sales is the so-called triangular transaction involving taxable persons in different Member States of the Community, the essence of which is that company A sells to company B, which sells the product to company C, so that the product is sold directly from company A’s country to company C’s country, without affecting the country of the intermediate buyer. In order to avoid the intermediate buyer having to register for the countries of companies “A” and “C” as a VAT subject in such cases, company “C” fulfills the VAT obligation in its own Member State according to the rules of the triangular transaction. To do this, Company B must include the transaction in the recapitulative statement as a triangular transaction and refer to the fact of the triangular transaction on the invoice.
Another special case is when our company supplies a product to another non-taxable person (typically an individual) in another Member State within the European Union (Community). This is the so-called distance selling. In this case, as opposed to a sale to a taxable person (typically a company), the tax liability arises at the seller, i.e. it is not the rules of reverse VAT but the rules of direct (normal) VAT. This VAT obligation can be fulfilled by our company in our own Member State as long as the sales of the products concerned have not exceeded the value limit set by the receiving Member State for this case, neither in the current year nor in the previous year. This threshold is typically around € 35,000. That is, if a Hungarian company makes a distance sale and the total value of this round without VAT in the given Member States is less than EUR 35,000, then the invoice must be issued with a Hungarian domestic rate, i.e. 27% VAT rate (if it is a product with general tax rate). If you have exceeded the amount limit, then our company must register as a VAT subject in the given country, and the invoice must be issued under the tax number thus obtained and paid to the tax authority of the given Member State. Anyway, this is possible even if the total value of sales does not exceed the mentioned amount (for example, a company may be better off if the VAT rate in the other Member State is lower than the Hungarian 27%, as it can sell its products at a lower gross price).
There are also a number of exceptions for the provision of services. As a general rule, if we provide a service to a taxable person, the rules of reverse charge apply, and if we do not supply to a taxable person (individual), the place of supply is the place where the service provider is established for economic purposes, i.e. where the seat is. Special rules apply to certain services, such as: real estate services, restaurant and other catering services or, if the user is an individual, agency services, transport of goods, telecommunications services, electronically supplied services (website storage, operation, provision of software, making a database available, making music, film and games available, distance learning). In case of the latter ones, the place of performance is the place where the recipient of the service is established, i.e. the country of residence or habitual residence of the individual. In this case, too, the Hungarian company has to register in each country as a VAT subject, which can be a significant administrative burden. Within the European Union, the so-called MOSS system is a real relief for the companies involved in this administrative burden.
Location/Seat or branch
It is important to examine whether or not a particular activity carried out by a company in a given country creates a seat or branch. After all, if so, the income from that activity must be attributed to the establishment and the Member State in question must be entitled to tax that income. In Hungary, the corporate tax law regulates the concept of seat, which is based on the principles of the OECD Model Convention. In Hungary, a permanent business facility, equipment, facilities, with which someone carries out entrepreneurial (profit-oriented) activities, especially a representation, office, factory, plant, workshop, etc., typically creates a site. However, a warehouse used by a foreign person exclusively for the storage and presentation of his / her goods does not qualify as a premise.
For example, if a foreigner stays in Hungary most of the time and manages his or her foreign company from a property in Budapest, he or she will create a seat in Hungary.
If, on the other hand, a foreign person sometimes travels to Hungary to sell a product or arrives on a business trip, it does not yet create a location. In contrast, if you use a dealer for a continuous order (as part of a normal business activity) to sell your products, whether or not you have the right to enter into a contract in your own name, this activity already establishes a seat in Hungary.
Conventions for the avoidance of double taxation
If an individual is tax resident in more than one country (e.g. due to nationality, or has a permanent and / or correspondent address in more than one country, etc.), it is necessary to examine whether there is a double taxation convention between the two countries concerned and, if so, how the parties cooperate. In such cases, the purpose of the conventions is not to tax the same income in both countries (double taxation), but to pay tax to the individual in only one country. Conventions may contain different rules for different types of income, for which the parties may even apply a withholding tax.
Income tax (corporate income tax, local business tax, KIVA and / or KATA)
In connection with income taxation, depending on the corporate form, but typically, corporate tax is payable as an income tax.
In Hungary, KIVA is a discounted profit tax, which can be used best in case of providing services. In connection with this, ask us for a consultation in order to find the most optimal solution for your business.
In addition, the local business tax, which is still a significant item.
With regard to the local business tax, it is expedient to highlight the items reducing the tax base, which in each operating model can be significant items, such as: the purchase value of goods sold (COGS) for a company selling goods, or the value of intermediated services provided, or the material costs for a manufacturing company.
For the purposes of corporation tax, the part of the costs that has been incurred in the interest of the company can be accounted for. If the owners of the company are private individuals with Hungarian residence, they are even liable to pay personal income tax (dividend tax) on the approved dividend after corporate tax, so that the income so withdrawn from the company can be considered as personal income.
Provided that certain income limit conditions are met, in addition to a specific form of operation (limited partnership and sole proprietor as the most typical), it is also possible to opt for simplified taxation methods, such as the KATA type of tax. In this case, instead of the corporate tax and dividend tax, a flat tax must be paid, the general rate of which is HUF 50,000 per month.
If you plan to start a business in Hungary and wish to form a company, do not hesitate to contact the team of ProacTeam, we are ready to help you navigate the sea of regulations, in addition helping you find the most optimal solution with our personalized advice.