All Collections
Cristo Share
Taxation of Income from Car Rental
Taxation of Income from Car Rental
Updated over a week ago

In this post, we have attempted to summarize the tax forms and rules related to car rental. The information provided here is for informational purposes only. If someone plans to rent out their vehicle regularly, we recommend consulting with an accountant or tax advisor to choose the optimal form.

Renting out as an individual to another individual

Tax rules for occasional rental

If the rental occurs a few times within a year, there is no need to apply for a tax number, and there is no obligation to issue invoices. In this case, an accounting document must be issued for the rental fee.

Tax obligations for monthly or more frequent rental

If the car rental is not just a one-time or occasional activity but is relatively regular (for example, weekly or more frequently), then we can consider it as a business activity. In such cases, the rental must be conducted as a tax-registered individual (with the obligation to issue invoices or receipts). During the invoicing process, it is also possible to opt for subjective tax exemption, meaning it is not necessary to pay VAT. According to Section 3, Paragraph 46 of the Personal Income Tax Act, an activity is considered a business activity if it is aimed at or results in obtaining consideration and is conducted in an independent form.

Therefore, for regular activities, it is necessary to examine whether there is a kind of repetition, permanence, continuity in the activity.

Car rental must be treated as renting out movable property, and the rules applicable to income from independent activities (the difference between revenue and expenses is the income) must be applied to determine income.

This means that the basis for income is the difference between revenue and expenses (itemized cost accounting or applying a 10% cost ratio).

The individual must pay 15% personal income tax and 13% social contribution tax on the income, and the advance income tax must be paid quarterly to the tax authority by the 12th day of the month following the quarter, if the tax amount reaches or exceeds

10,000 HUF.

☝🏻 It's important to note that the obligation to pay tax on income from rental remains regardless of the frequency of the rental. The only difference is that occasional rental does not require a tax number and the issuance of an invoice or receipt, but regular rental requires.

Renting out as an individual to a company

In this case, the rental fee must be considered income from independent activity.

If the income from the rental comes from a company (payer), according to the law on the order of taxation, paying the tax advance is not the individual's responsibility but the payer's, regardless of whether the rental is occasional or regular.

In this case, the basis for the tax advance will be the income determined by the individual in a declaration (calculated based on itemized costs or a 10% cost ratio). If there is no such declaration, the payer calculates the tax advance based on a 10% cost ratio and, after deducting it, transfers the remaining income to the landlord.

15% personal income tax and 13% social contribution tax must be paid on the income, and the payer must deduct, declare, and pay the income tax advance to the tax authority by the 12th of the following month.

☝🏻 It's important to note, in this case, the tenant company has significant administrative tasks, including declaring, deducting, and filing taxes on the rental fee, as well as issuing the M30 certificate at the end of the year.

Renting out as a sole proprietor to an individual/company

An individual can be a full-time or part-time sole proprietor. The entrepreneur must include the rental in their scope of activities and decide whether to opt for VAT exemption at the start of their business. Let's see what this means.

VAT - exempt or liable πŸ€”

The VAT exemption threshold is HUF 12 million per year. If a sole proprietorship's sales do not exceed this threshold in a given tax year, it can opt for VAT exemption, thus being relieved from the obligation to pay and file VAT. However, it is important to note that in this case, they are not entitled to deduct VAT on their expense invoices, meaning there is no opportunity to reclaim VAT.

If the business starts or pauses during the year, the threshold is not set at HUF 12 million but must be prorated for the first year of business activity. If the revenue exceeds the threshold, the invoice for the excess amount must be issued with VAT added, and a VAT return must also be filed.

Taxation forms for sole proprietors:

The income earned by the sole proprietor, regardless of whether the rental is to an individual or a company, can be determined in the following ways based on the sole proprietor's decision:

1) Flat-rate taxation

The flat-rate taxation system comes with numerous conditions. Firstly, it can be chosen for any activity, and an individual entrepreneur can pay taxes according to the flat-rate as long as their revenue does not exceed ten times the annual minimum wage.

This is a taxation method that is simple in terms of administration because it does not require separate expense accounting, although the collection of expenses is necessary. The tax form can be advantageous if your expenses do not, or only minimally, exceed the cost ratio applicable to you, or if you are self-employed alongside your main job or as a retiree. Regarding expenses, there is no cost settlement, meaning you do not need to reduce the tax base based on expense invoices but rather through the application of legally determined cost ratios, which depend on the activity. The revenue must be reduced by the determined cost ratio, resulting in the income - the tax base -, upon which tax must be paid. Generally, a 40% cost ratio is applied, meaning the income is 60% of the revenue.

For full-time individual entrepreneurs, the minimum rule must be considered for monthly contributions. For part-time entrepreneurs, the 15% personal income tax, the 18.5% social security contribution, and the 13% social contribution tax must be paid on the actual income. If an individual entrepreneur has no income in a month, they have no obligation to pay personal income tax.

Finally, according to a rule introduced in January 2022, the portion of an individual entrepreneur's revenue up to half of the minimum wage is tax-exempt. Therefore, you do not have to pay personal income tax on the part of your income that does not exceed half of the annual minimum wage (which was 1,392,000 HUF in 2023). If the tax advance base exceeds half of the annual minimum wage, tax advance is only due on the exceeding amount. Proportionation is not necessary for businesses starting during the year.

πŸ‘† Although lump sum taxation simplifies administration, it is advisable to involve an accountant for the preparation and submission of declarations.

2) KATA (Fixed Tax of Small Enterprises) - Only for renting to private individuals!

πŸ‘† As a zero step, it is important to note that due to the changes in KATA during 2022, KATA individual entrepreneurs can only issue invoices to private individuals, not to companies! If an invoice is issued to a company, the KATA tax status is terminated!

The fixed taxation fundamentally means that the entrepreneur pays a fixed amount every month. The monthly revenue limit for small taxation is 1.5 million HUF, while for a full year's operation, it is 18 million HUF. If the entrepreneur operates for less than a year, the value must be prorated. If the revenue exceeds this limit, 40% of the excess amount must be paid as a special tax.

A small taxpayer can only conduct their activity as a full-time employee, paying 50,000 HUF monthly.

This form of taxation offers simple administration and can be suspended for a minimum of 1 month to a maximum of 3 years for whole months when there is no revenue. The KATA declaration must be submitted by February 25th of the year following the tax year, based on the revenues realized in that tax year.

πŸ‘† It is also important that the revenue limit for KATA is 18 million HUF, but the VAT exemption limit remains at 12 million HUF annually.

3) Taxation According to Entrepreneurial Income

Individual entrepreneurs who tax according to the Entrepreneurial Personal Income Tax (EPIT) ("main rule") determine their income according to the Personal Income Tax Act as revenue from their independent activity.

This entrepreneurial income simply represents the difference between the entrepreneur's revenues (i.e., sales revenue) and expenses, determined based on invoices and, as per the law, expenses without invoices.

If an entrepreneur chooses entrepreneurial income taxation, unlike the KATA and lump sum taxation rules, it is necessary to maintain an expense ledger. The basic record form can be a journal ledger or cash book, the content of which should be determined based on the accounting law provisions applicable to entrepreneurs maintaining single-entry bookkeeping.

Main rule taxpayers must submit tax and contribution declarations monthly ('58 tax declaration'), where they must declare taxes and contributions based on the "entrepreneurial withdrawal." For full-time individual entrepreneurs, the minimum rules must be considered during monthly contributions, while part-time entrepreneurs only need to pay the 15% personal income tax (they have no contribution payment obligation). The personal income tax advance calculated based on the entrepreneurial withdrawal must be paid quarterly, by the 12th day of the month following the quarter. This does not need to be declared separately, only to be reported and accounted for in the personal income tax declaration.

The difference between year-end revenues and expenses, as separate taxable income, is subject to taxation. Taxes on the business result include the following: 9% entrepreneurial income tax (on the difference between revenues and expenses, i.e., profit, considering increasing and decreasing items), 15% dividend tax on the personal income tax on the dividend base (considering increasing and decreasing items for the dividend base), 13% social contribution tax on the dividend base (up to the social contribution tax payment ceiling).

The entrepreneur's revenues, expenses, and income based on the basic record must be accounted for by May 20th of the year following the tax year in the '53 (currently '2353) personal income tax declaration. In this declaration, revenues, expenses, income, tax base modifying factors, amounts, and other data must be provided. The determined entrepreneurial income for the tax year and the taxes on the dividend must be paid simultaneously with the declaration.

πŸ‘† Compared to KATA and lump sum taxation, maintaining records according to entrepreneurial income taxation requires more expertise for individual entrepreneurs, so involving an accountant is definitely recommended!

Company Renting to a Private Individual

The rental activity must be added to the company's activity scope with the TEÁOR code (29.10.21-30) provided by the KSH.

The company must issue an invoice or receipt for the rental fee, regardless of the tenant's identity, which includes the 27% VAT (unless the company has chosen subjective exemption based on the previously mentioned conditions).

Did this answer your question?