The group of KIVA taxpayers will be extended further by the proposed change that the cap on the revenue (and balance sheet total) of taxable persons entering or transferring to the KIVA regime will increase from 1 billion to 3 billion forints from 2020. The annual 3 billion forint sales revenue cap for remaining taxable under KIVA will also be doubled to 6 billion forints.
11 percent tax burden instead of 26 percent?
KIVA, as a tax type, being much less complicated than corporate tax, represents a favourable form of taxation, above all, for investment and employment-intensive businesses. The small business tax with a rate of 11 percent replaces the 9 percent corporate tax, the 15.5 percent social contribution tax and the 1.5 percent vocational training contribution without taxing the profit remaining in the company. For this reason, KIVA may be a tax-efficient option for companies with high wage cost ratio (typically in sectors generating high added value such as IT, healthcare, consulting, education etc.) and business with growth potential that re-invest their profit.
It is interesting that another important entry/exit condition of KIVA, the one relating to the number of employees does not change. This will represent a limit for many companies, which would benefit from KIVA but will still not be eligible to choose it. Taxation under the KIVA regime can be chosen under a headcount of 50 persons and eligibility ends automatically if a headcount of 100 persons is reached.
Tax base allowances and simplified local business tax
Fast-growing, innovative companies engaged in R&D&I activities for which KIVA is an option may be forced to reconsider due to the condition that they would lose eligibility for corporate tax and local business tax allowances. However, on the other side of the scale, we still find that small business tax also favours employees generating high added value in tax base assessment. Not to mention that unpaid profit practically becomes exempt from tax.
For the companies choosing small business tax, the Act on Local Taxes provides an opportunity for the assessment of their local business tax base in a non-standard and much simpler way: KIVA taxpayers may determine their local business tax base in the amount of their small business tax increased by 20 percent. This option of simplified local business tax base assessment is another substantial advantage, which may already in itself serve as an argument for KIVA for service companies with significant sales revenue and own capacities.
Differences between KIVA and corporate tax – the choice is not always easy!
However, small business tax is not more favourable than the corporate tax for all companies even with the 11 percent small business tax burden replacing the 9 percent income tax, the 15.5 percent social contribution tax and the 1.5 percent vocational training contribution in addition to offering investment benefit and simplified local business tax assessment options. By default, the choice between KIVA and corporate tax is determined to a great extent by the cost structure of the company as well as its profit-generating capacity and the amount of dividend payable.
The taxation of dividend payment is an especially important aspect as, when the profit generated in a company taxed under KIVA is paid in the form of a dividend, 11 percent small business tax will be payable on it instead of the 9 percent corporate tax, while in the case of companies in private person ownership, 15 percent personal income tax will apply as in the case of companies paying corporate tax and social contribution tax payment obligation will also arise. Highly simplified, it is basically this 2 percent extra tax burden which has to be compensated for by the 6 percent tax advantage that can be realized on personnel expenditures.
In KIVA favourable tax judgment may apply if a company plans to carry out a high-value investment from its profit for a longer term in the near future from. In this case, the profit generated will be used for the investment and no taxable dividend payment will take place. However, if the company would be eligible for other tax base or tax allowances (SME, R&D, energy efficiency, development tax allowance etc.) under corporate taxation, choosing KIVA may even be disadvantageous.
Due to the differences presented above, companies should make calculations before choosing small business tax and compare the tax burden arising under the two different tax regimes.
Which companies should choose KIVA?
In addition to the above-mentioned conditions, small business tax can be chosen by a wide group of businesses from sole traders, companies operating as limited partnerships, limited liability companies or private limited companies as well as law firms or cooperatives.
For small business tax, it is important that the limit values have to be considered at group level on an aggregate basis in the case of related parties! For this reason, domestic subsidiaries with a foreign parent company will typically remain outside the KIVA regime. However, KIVA may be an alternative for the businesses currently employing subcontractors paying tax under the small taxpayers' itemized lump-sum tax (KATA) system, especially if we consider the changes to KATA entering into force from 2021.
Companies may register for KIVA at any time during the year
Already operating companies and taxpayers may start to apply KIVA at any time during the year paying tax under the KIVA regime from the first day of the month following this choice. The companies starting operating during the year must apply for KIVA taxability at the time of registration of the company. If a company would like to apply KIVA from the next year, it must announce this to the tax authority in December. If the company changes their mind, they may withdraw their announcement within 30 days.