Hungary – Are you sure your company is not affected by the FTST reform?

An amendment to the Fixed-rate Tax for Small Taxpayers (“FTST”) has brought great turbulence to the lives of companies.

With the introduction of the FTST tax regime, the intention of the government was to create a new and simple taxation method to increase legitimate employment and reduce the administrative and tax burden on small businesses. This favourable tax regime targeted the smallest group of entrepreneurs who had previously been “working in the black economy” and selling directly to private individuals. In numerical terms, this meant that, for the greater part of the lifetime of the FTST, a small full-time taxpayer with an annual income of HUF 12 million was able to offset compulsory charges by only HUF 50,000 per month. So the burden of taxes and contributions on income could be reduced from 33.5% to 2.9% by opting for the FTST.

In the first few years, the legislative intention was realized, and most of the target group switched to taxation under FTST, and the small business sector started to whiten.

However, employment data and feedback from the relevant associations showed that, increasingly, employers were forcing their employees into the FTST tax regime.

According to a communication from the Ministry of Finance, 40% of new FTST start-ups in 2019 were in reality employees prior to the new taxation method. In addition, the 14 largest employers had 4,700 former employees as FTSTs, mostly in the health and IT sectors.

Due to the large number of taxpayers involved, it was not possible for the tax authority to check and identify hidden employment relationships and serious abuses at taxpayer level, so the problem needed to be addressed at legislative level.

As a result of the amendment, the scope of those opting for taxation under the FTST has been significantly narrowed: from 1 September 2022, only self-employed persons can opt for taxation under the FTST if they invoice only to individuals.

As a result, tax law and labour law related issues may arise for many companies who previously worked with FTST contractors in order to continue their collaboration.

For example, there may be a question as to whether your company allows its ex FTST business partners to choose the legal relationship in which further cooperation takes place.

If a decision is taken to continue cooperation in an employer- employee relationship, the employer should be aware that the wide range of benefit packages and payment options may result in a breach of the principle of equal treatment and should prepare for possible employment litigation.

Act CXLVII of 2012 on the Fixed-Rate Tax for Low Tax-Bracket Enterprises and on Small Business Tax

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