One of the most important elements of the planned 2027 tax changes in Hungary, namely the restructuring of the itemised tax regime for sole proprietors, would be the introduction of the new low tax scheme (or itemised tax regime, in Hungarian: KATA), which would once again allow sole proprietors subject to this regime to issue invoices to companies and other organisations. This could make it easier for businesses to once again purchase products and services from smaller suppliers, freelancers and external experts. However, it is important to note that the new low tax scheme would not represent the unrestricted reinstatement of the pre-2022 system.
Who would fall under the scope of the new low tax scheme?
The change could affect numerous clients and even more sole proprietors. Many sole proprietors currently subject to flat-rate taxation are already considering switching to the new low tax scheme. According to the draft legislation, both full-time and part-time sole proprietors would be eligible to choose this new tax regime.
As a result, eligible taxpayers could include, among others:
- entrepreneurs who maintain employment of at least 36 hours per week,
- pensioners,
- full-time students.
At the same time, switching to the new low tax scheme would require a complex assessment of numerous factors on the part of sole proprietors. These factors include, among others:
- eligibility conditions for the low tax scheme,
- expected client structure,
- the 15% supplementary tax linked to income received from payers,
- the impact of expense ratios applicable under flat-rate taxation.
What does this mean for companies?
For the corporate sector, the most significant change would be that taxpayers under the new low tax scheme could receive income from domestic or foreign payers, such as business associations, other organisations or foreign business clients acting in a commercial capacity. This could once again create an opportunity for businesses to purchase products and services from sole proprietors taxed under the low tax scheme, although not all previous forms of cooperation would be able to continue unchanged.
What are the risk factors of the new low tax scheme?
Under the draft legislation, the legislator would continue to treat the outsourcing of employment relationships into entrepreneurial arrangements, as well as situations in which a low-tax taxpayer is economically dependent on essentially one client, as high-risk areas. Therefore, corporate clients should assess not only the taxpayer’s low tax status but also the actual substance of the legal relationship and the expected income ratios.
The applicability of the low tax scheme alone does not determine whether the relationship between the client and the sole proprietor genuinely qualifies as a business relationship. During an official assessment, the actual substance of the relationship would continue to be decisive, rather than the title of the contract.
Reclassification risk may arise, for example, if the sole proprietor:
- works on a long-term basis almost exclusively for a single company,
- carries out activities during working hours and at a workplace specified by the client,
- is integrated into the client’s organisation,
- regularly receives instructions from the client,
- uses the client’s equipment,
- receives fixed monthly remuneration,
- bears no meaningful entrepreneurial risk,
- has no possibility to engage contributors or substitutes.
A single circumstance alone would generally not result in the reclassification of the relationship; however, the simultaneous presence of several employment-like characteristics may significantly increase this risk. Therefore, both the contractual provisions and the day-to-day cooperation must reflect a genuine and independent business relationship.
Sanctions
In the event of reclassification, unwithheld and unpaid taxes and social contributions, late payment interest and penalties may subsequently arise for the client, while employment law claims may also emerge.
What happens if employment is replaced by the new low tax scheme for more favourable taxation?
The draft legislation would introduce an explicit restriction preventing employment relationships from being directly replaced by entrepreneurial arrangements.
This restriction could not be circumvented by involving an intermediary company or another contractual party either, if the service is in fact provided to the current or former employer. The restriction would also extend to legal successors and affiliated companies of the employer.
Therefore, clients should verify already at the supplier selection stage whether the sole proprietor has had an employment relationship with the company or another member of the corporate group during the previous 24 months. For this purpose, entrepreneur declarations and contractual notification obligations may also be required.
Sanctions
The low-tax taxpayer status would terminate retroactively on the day preceding the receipt of income if the sole proprietor earned income from their current employer or from a former employer within 24 months following the termination of employment.
Revenue concentration: focus on the significant client
Income received from the same payer and its affiliated companies by a taxpayer subject to the new low tax scheme may not reach 50% of the taxpayer’s total annual income.
Therefore, within a corporate group, allocating contracts or invoicing among several group companies would not in itself solve the revenue concentration issue. Indirect transactions would also need to be assessed based on the actual recipient of the service.
Sanctions
Reaching the 50% threshold would not trigger a special tax liability but would instead result in the termination of low tax scheme status at year-end.
Although the direct tax consequences would affect the low-tax taxpayer, this may also pose a business risk for the client, since changes in the supplier’s tax status could affect remuneration, the sustainability of the contractual relationship and service continuity.
Higher fixed tax and revenue threshold
According to the draft legislation, in 2027 the monthly fixed tax for full-time low-tax taxpayers would be HUF 100,000, while part-time low-tax taxpayers would pay HUF 50,000 per month, in return for a higher social security benefit base.
The annual revenue threshold would increase from HUF 18 million to HUF 22 million, while a 40% special tax would apply to revenue exceeding this amount. In the case of commencing activities during the year or during months for which no fixed-tax payment obligation exists, the threshold would need to be calculated on a proportional basis.
The supplementary tax linked to income received from payers, the 50% revenue concentration limit and the HUF 22 million annual revenue threshold are separate rules, each associated with different legal consequences.
Invoicing companies may result in additional tax
For invoicing businesses, the draft legislation would introduce a 15% supplementary tax.
Such an obligation would arise if 15% of the taxpayer’s total income received from payers during the tax year exceeded the amount of fixed tax payable for that year. The supplementary tax would equal the difference between the two amounts.
For the calculation, all income received from domestic and foreign payers would need to be taken into account. Although the tax liability would be borne directly by the low-tax taxpayer rather than the company receiving the invoice, this additional burden may eventually be reflected in entrepreneurial fees as well.
Based on the above rules, a full-time low-tax taxpayer operating throughout the entire year under the new low tax scheme would pay a total of HUF 1.2 million in fixed tax in 2027. If annual income received from payers amounted to HUF 10 million, 15% of this would equal HUF 1.5 million, resulting in an additional HUF 300,000 supplementary tax liability.
Practical actions for clients
Businesses should review their existing relationships with sole proprietors already subject to the low tax scheme or planning to opt for the new low tax scheme. In this process, it may be advisable to:
- examine the actual substance of the legal relationship,
- review previous employment relationships,
- assess intra-group relationships,
- include entrepreneur declarations and notification obligations in contracts,
- evaluate the impact that changes in the low-tax taxpayer’s status may have on remuneration and the continuation of cooperation.
The new low tax scheme could once again make it more flexible to engage sole proprietors in Hungary; however, this flexibility would be accompanied by strict limitations. Therefore, for corporate clients the key question will not only be whether the sole proprietor is eligible for the low tax scheme, but also whether the structure can be maintained safely in the long term based on the actual substance of the cooperation, previous legal relationships and revenue concentration.
The tax advisers of WTS Klient Hungary provide support to companies contracting or planning to contract with taxpayers already subject to the low tax scheme or considering a transition to it. We assist with reviewing low tax scheme arrangements, analysing contracts and assessing reclassification risks. We also support the preparation of entrepreneur declarations, perform revenue concentration analyses within corporate groups and prepare our clients for tax authority audits. Feel free to contact us!
This article is for general information purposes only and should not be considered as advice.
