It exceeded the wildest dreams of Agnes Foldi, head of the Hungarian Prostitutes' Interest Group (MPEE), whose members have started attending courses in accountancy and business law. In April, the MPEE's website was telling visitors it had received Ft15.2m in subsidies for providing commercial training for budding businesswomen. The 110 places available were several times oversubscribed.

One part of the story goes back to summer 2005 and an event in Pecs. Police asked several prostitutes for identity papers and, finding they had no official documents on them at all, reported them to the tax authorities - who then fined them for concealing earnings. The MPEE appealed this ruling in court, saying the New York Convention, which Hungary ratified in 1955, prohibits compiling a register of sex workers. Last year, however, Baranya County Court rejected the MPEE's appeal, saying taxation did not constitute a formal list.

This ban on listing prostitutes prevented Agnes Foldi from giving HVG a precise idea of the number of sex workers in Hungary. She estimates that there are some 35-40,000, including male, female, gay and transvestite sex workers. Many drift in and out of the business, while others spend some of the year working abroad. In Hungary, some 20,000 actively live off the sex industry. The MPEE has 7,000 members, which includes supporters as well as active prostitutes. There is no membership fee: the association survives on donations and subsidies. It received Ft12.5m in 2005, and made losses of some Ft4m in each of the past two years.

The New York Convention does not ban prostitution, and nor has Hungarian criminal law since 1993. Both the Agreement and Hungarian law nonetheless prohibit pimping as well as providing premises for paid sexual activity.

Criminal law makes it impossible to have sex for money legally, since either the employer or the business would be criminally liable. A contractual relationship might work (if the service consumer were tendering), but this is unrealistic, since it would require extensive paperwork before the sexual act could take place.

As far as taxes are concerned, service providers have a range of options on offer. They can work as individual entrepreneurs or as freelancers. If they choose the latter, they need to obtain a tax code. There are no specific tax rules on prostitution. Tax experts argue there is no need for a tax code if the provider offers the services on a non-market basis, offering different clients different conditions. For instance, a plumber does not need a tax code if he sorts out his neighbours' burst pipe and pockets some cash in return. In the same way, an occasional prostitute who does not always demand money and accepts a wide range of forms of payment - if a grateful friend occasionally gives her a car in exchange for the service, for instance. However, if somebody provides a service that is available to all and advertises this fact, then a tax code is needed.

Prostitutes can also register as individual entrepreneurs. Indeed, the Central Statistical Office has a specific code for sexual services. This has both advantages and drawbacks from a tax point of view. It makes no difference to VAT. Prostitutes must, however, provide a VAT receipt if a client asks for it. Of course, regardless of its line of business, no company can reclaim that VAT, since the service in question cannot be counted a business expense.

If somebody provides sexual services as an independent activity, he cannot necessarily claim for his business expenses. It is not clear, for example, that he can claim for the depreciation of a car he uses during the course of his business activity. An individual entrepreneur can do this, however, even if the car is registered under his wife's name. This, at least, is the position of the tax authorities, outlined in their letter to the MPEE.

If the sexual service provider carries out his business in his own flat, a proportion of his accommodation expenses can be claimed against tax. However, the cost of renting a room specifically for providing sexual services cannot be claimed, since providing a place for offering sexual services in is illegal. Nor can expenditure on haircuts and cosmetic materials be offset - even though the cost of condoms and sexual health tests can be fully offset.

The level of social security contributions depends on the prostitute's incorporation status and income level. If somebody works part-time as a prostitute and is registered as an individual entrepreneur while earning her social security benefits by working at least 36 hours a week in another job, then she must pay 29 per cent in social security contributions, 8.5 per cent in pension contributions and 4 per cent for health insurance. If she has no other job and no insurance as an individual entrepreneur, then she pays 9 per cent health insurance, so long as she has a tax number. If this same job is her main source of income, then she has to pay the full range of social security contributions - 29 + 15.5 per cent - or a minimum of Ft131,000 a month. In return, she has access to unemployment benefit and, like everyone else, gains the right to receive a pension when she turns 62.

Patrícia Molnár