Individuals starting a business in Hungary may choose from several taxation methods. The most suitable option depends on several factors, including the type of activity, expected annual revenue, actual business expenses, the customer base and whether the entrepreneur carries out the activity on a full-time or part-time basis.
The three main taxation methods available to sole proprietors are:
- the Itemised Tax for Small Taxpayers (KATA);
- flat-rate taxation; and
- entrepreneurial personal income taxation.
Itemised Tax for Small Taxpayers – KATA
KATA is a simplified taxation method available only to full-time sole proprietors who meet the statutory conditions.
As a general rule, a KATA taxpayer may earn business revenue only from private individuals. Receiving income from a company, another organisation or another qualifying payer – including a foreign business – normally terminates KATA status. A specific exception applies to taxi services.
The monthly itemised tax is HUF 50,000 and must be paid for every commenced month in which the KATA status is active. It replaces the entrepreneur’s personal income tax, social security contribution and social contribution tax connected with the business activity.
The annual KATA revenue threshold is HUF 18 million. If KATA applies for only part of the year, the threshold is calculated at HUF 1.5 million for each month subject to the itemised tax. Revenue exceeding the applicable threshold is subject to an additional 40% tax.
KATA can be an attractive option for entrepreneurs who:
- work mainly or exclusively for private individuals;
- have relatively low business expenses;
- prefer a simple and predictable tax system; and
- qualify as full-time sole proprietors.
KATA is not available, for example, to entrepreneurs who are employed for at least 36 hours per week, are full-time students, are pensioners or are otherwise classified as non-full-time entrepreneurs.
The KATA revenue threshold and the VAT exemption threshold are separate limits and should not be confused.
Flat-Rate Taxation
Under flat-rate taxation, taxable income is calculated by deducting a statutory expense ratio from the entrepreneur’s revenue. Actual business expenses cannot be deducted separately.
The applicable expense ratio depends on the activity from which the revenue is earned:
- 45% for most activities;
- 80% for certain industrial, agricultural and service activities specified by law; and
- 90% for qualifying retail activities.
The classification is based on the activity that actually generated the revenue, not merely on the activities registered by the entrepreneur.
In 2026, flat-rate taxation may generally be applied up to annual revenue of HUF 38,736,000. For qualifying retail businesses, the annual threshold is HUF 193,680,000. These limits must be calculated proportionately if the business is started, suspended or terminated during the year.
The first HUF 1,936,800 of flat-rate income is exempt from personal income tax in 2026. For an entrepreneur applying the standard 45% expense ratio, this corresponds to HUF 3,521,455 of annual revenue.
The taxable portion of the income is generally subject to:
- 15% personal income tax;
- 18.5% social security contribution; and
- 13% social contribution tax.
However, the exact contribution liability depends on whether the entrepreneur is full-time, has employment of at least 36 hours per week, is insured in another country, is a student or is a pensioner.
Full-time entrepreneurs are generally required to pay minimum social security contributions even if their actual or taxable income is low. Therefore, the personal income tax exemption does not necessarily mean that the entrepreneur has no monthly or quarterly tax liability.
Flat-rate taxation is often suitable for entrepreneurs who:
- invoice companies or foreign customers and therefore cannot use KATA;
- have limited actual business expenses;
- carry out an activity qualifying for the 80% or 90% expense ratio; or
- prefer simpler administration than under entrepreneurial personal income taxation.
Entrepreneurial Personal Income Taxation
Under entrepreneurial personal income taxation, the entrepreneur determines the business result based on actual revenue and deductible business expenses.
Unlike flat-rate taxation, this method allows the deduction of properly documented expenses directly connected with the business activity. Depreciation, investments, employment costs and certain other tax allowances may also be taken into account.
The entrepreneur may account for an entrepreneurial withdrawal as remuneration for their personal work. The withdrawal is generally subject to:
- 15% personal income tax;
- 18.5% social security contribution; and
- 13% social contribution tax.
The adjusted entrepreneurial tax base is subject to 9% entrepreneurial personal income tax. The remaining entrepreneurial dividend base is generally subject to 15% personal income tax and 13% social contribution tax, with the latter applying up to the statutory annual contribution cap.
This taxation method may be advantageous where:
- the business has significant actual expenses;
- substantial investments or asset purchases are planned;
- the entrepreneur employs staff;
- depreciation or loss carry-forward is relevant; or
- the statutory expense ratio available under flat-rate taxation would be lower than the actual costs of the business.
Entrepreneurial personal income taxation requires more detailed accounting records and usually involves more complex tax calculations.
VAT and Local Business Tax
The selected income taxation method does not automatically determine the entrepreneur’s VAT status.
In 2026, Hungarian VAT exemption may generally be chosen if the relevant annual revenue does not exceed HUF 20 million and the other statutory conditions are met. A VAT-exempt entrepreneur normally does not charge Hungarian VAT but is generally unable to deduct input VAT.
Cross-border services, intra-Community transactions and purchases from foreign suppliers may create VAT registration, reporting or payment obligations even if the entrepreneur otherwise applies VAT exemption.
Sole proprietors may also be liable for local business tax. Subject to the relevant conditions, small businesses may choose a simplified, revenue-band-based local business tax base instead of the standard calculation method.
Which Taxation Method Should You Choose?
The most tax-efficient option cannot be selected based on revenue alone. The following factors should also be considered:
- whether your customers are private individuals or businesses;
- whether your customers are located in Hungary or abroad;
- your expected annual revenue;
- your actual business expenses;
- your main or secondary occupation status;
- your social security position;
- your VAT status; and
- your expected investments and future business plans.
A personalised tax calculation before starting the business can help identify the most suitable structure and prevent unexpected tax liabilities.
This summary provides general information based on the Hungarian tax rules applicable in 2026. Individual circumstances may significantly affect the final tax and contribution liability.
