We start with the good news right now: tax optimization is a completely legal activity. This is because the different types of taxes can be determined in several ways, from different points of view: during the optimization we try to choose the solution that is most favorable for us, within the legal framework allowed by the applicable laws.
A good business plan alone is only half the battle: it is not enough to calculate how much revenue we will expect, we also need to know exactly how much of this we will spend on taxes. This can often be the watershed between successful and failing companies.
What does NOT count as tax optimization?
Let’s clarify the basic concepts: if we don’t pay taxes, it’s not optimization, it’s tax fraud or tax evasion, which is severely punished by law. This is practically the equivalent of walking into a bank, taking a successful loan, and then walking away with money. That is why it is very important to know the laws that are currently in force and to act only within them.
What exactly does tax optimization mean?
This is the tax planning activity when we look for what legal options we can take to:
- we have to pay less taxes in total, or
- we can pay the mandatory taxes on a more favorable schedule for us.
We can even carry out the process in our country of residence, but we can also use international company formation to get more favorable tax conditions. In this way, we may even have the opportunity to choose which country’s law and, of course, to which tax authority to pay the mandatory amounts.
In addition, we can often have the opportunity to claim a tax refund, which of course the state is not in a hurry to offer. However, with the help of an expert, it is easy to find such opportunities and even recover extra amounts from taxes already paid.
Tax optimization opportunities for businesses
Whatever activity we do, as an entrepreneur we almost certainly have the opportunity to create the ideal situation. Typically, the following items are worth a thorough review:
VAT optimization
Even in items charged with VAT, you can sometimes find different discounts if you know well what expenses you can account for.
For example, in the case of the purchase of a company car, if we use an open-ended lease, the VAT of the lease can be accounted for in proportion to the company use. What is particularly favorable is that, by default, 50% is presumed to be used for business purposes, so we don’t have to deal with keeping a road register, and we can still reclaim 50% of the VAT content of the lease fee.
Reduction of wage contributions
In cooperation with our employees, we can find, for example, age-related discounts or tax benefits related to post-employment employment. These look like this in detail:
- Family benefits per child, which reduces the tax base:
- In case of a dependent: HUF 66,670
- In case of two dependents: 133,330 HUF
- In case of three dependent children: HUF 220,000
- First couple tax credit
- It can be used from the month after the marriage, for a maximum of 24 months.
- The amount of the discount is HUF 33,335 per month based on the tax base.
- Tax credit for beginners
- The employer can claim the discount for an employee under the age of 25 and previously insured for a maximum of 180 days. The amount is to be paid to SZOCHO for a maximum salary of HUF 100,000. The discount can be used for a maximum of 2 years.
- In the case of an employee under the age of 25 but insured for more than 180 days, the above conditions are modified to the extent that the discount rate is 11% for SZOCHO. Respectively, it does not matter after 2 years have elapsed, but can be validated until the employee reaches the age of 25.
- Tax benefits for illnesses, disabilities and allergies, sensitivities
- The amount of the discount depends on the type of illness and can be applied to the following categories:
- Hearing impaired
- Mental and behavioral disorders
- Visually impaired
- Locomotor impairment
- Pervasive developmental disorders
- Schizophrenia, schizotypal and paranoid disorders
- Certain cancers
- A person with an artificial body orifice
- Suffering from an immune disease with severe organ damage
- Among diseases of the digestive system:
- Rare diseases include:
- Certain endocrine and metabolic diseases
- Congenital enzymopathies
- Patients with end-stage renal disease requiring hemodialysis or peritoneal dialysis
- Suffering from chronic respiratory failure
- Patients with congenital and acquired heart disease in III-IV. NYHA in functional stage
- They were born with other developmental disorders
- Certain non-inflammatory diseases of the female genitalia
- The full list is available here: https://net.jogtar.hu/jogszabaly?docid=A0900335.KOR
- The amount of the discount depends on the type of illness and can be applied to the following categories:
Corporate tax (TAO) optimization
The TAO rate of 9% has been in place since 2017, although it cannot be reduced to completely zero, but significant discounts are available for it. In the case of a development tax credit, the rate can be reduced to a maximum of 80% if one of the specified investments is made. We can enjoy the benefits obtained in this way for a total of 13 tax years.
The list of investments entitling to the discount is available here: https://net.jogtar.hu/jogszabaly?docid=99600081.tv
The remaining amount of TAO can be reduced by an additional maximum of 70%, with the following options:
- Support for a performing arts organization
- Support for film production
- Support for spectacle team sports
- Tax incentive to support the Olympic competition
- Cooperative community basic training
- SME investment loan interest tax credit
- Tax credit for investment in energy efficiency targets
- Live music service tax credit
- Growth tax credit
Business tax optimization
The easiest way to reduce this item is if we are based in a settlement where we are required to pay as little business tax as possible. Moreover, there are settlements where we have no obligation to pay business taxes at all. The full list of such settlements can be found here: http://helyiadozas.hu/
Optimization of KATA (itemized tax for small tax enterprises)
KATA is a very preferential form of taxation in itself, so it is worth examining whether it is worthwhile for our company to choose this, if it can do so.
Optimization of taxes on dividends
In the last year, several changes have affected the area (e.g. the level of SZOCHO), so if we accidentally paid more than we should have, we can even claim back the amount.
Currently, the dividend is charged at 15% PIT and 19.5% SZOCHO. However, SZOCHO has a maximum rate: the total income earned in the base tax year (wages are included!) Is included, but up to 24 times the minimum wage. In practice, this means that it is worth withdrawing dividends as infrequently (once a year) as possible, so that we can minimize the amount of SZOCHO to be paid afterwards.
International tax planning
If we maintain an international corporate structure, we may have even more opportunities to explore more favorable forms of taxation. Of course, it is not enough to set up the organization well once, we also need to constantly monitor the changes in the tax environment so that we can move in time when better conditions are open for us.
Avoiding double taxation is also an important step if we have the opportunity under current international conventions. If these conventions allow us to pay compulsory taxes only once, instead of two, then this must be done clearly.
Basically, it would look like if our company maintained in another country generates revenue, we would have to tax our profits in our country of residence as well as in a foreign country. This, of course, could lead to disproportionately large sums being paid, which is why many countries conclude the above-mentioned convention with each other in order to avoid double taxation.
In the case of dividend payments, for example, this is a particularly important issue. While in Hungary a dividend of up to 40% can be taxed in total, in the case of companies established in the respective country, it can even be completely tax-free.
The level of royalties received for different intellectual property varies greatly from country to country. That is why it may be worthwhile to keep an offshore company solely to keep the various royalties low, where we have to regularly, less tax on the revenue earned in this way.
The most important step in international tax planning is choosing the right headquarters, or even headquarters. If we manage to select the most favorable countries for our business, we can even get rid of most of the taxes to be paid: all this within a completely legal framework.
