Hungary for business
Hungary’s legal system is based on German-Austrian principles. It is divided into three areas: civil, criminal and administrative. Hungary recognises the universal rules and regulations of international law and harmonises its domestic laws by being signatory to several international conventions, and multilateral and bilateral treaties.
Under the principle of the separation of powers, the legislature, executive and judiciary are separate and independent. The courts’ activity is restricted to judicature, but the Supreme Court sets guidelines for interpretation and operation of the law.
Fundamental changes to the civil-law system were introduced with the adoption of the new Civil Code, which entered into force on 15 March 2014, integrating provisions governing business associations.
Business activities: the basics
Foreigners may carry out continuous business activities in Hungary, if they establish a Hungarian company or register a branch or representative office.
In accordance with the EU Disclosure Directive, certain rights, facts and data must be set out in the company registration records. Information on shareholders or members and executive officers of companies is public information, and must be published in the official company journal.
Foreign investors usually conduct business in Hungary through a private company limited by shares, or a limited liability company.
Principal company forms
The limited liability company (in Hungarian, ‘Kft’) and private company limited by shares (‘Zrt’) are the most common company forms. Both may be established with either cash or in-kind contributions, or a combination.
The statutory minimum capital requirement of a limited liability company is HUF3 million (EUR 10,000). If the value of the in-kind contribution reaches half of the registered capital, the in-kind contribution must be provided upon the application of registration in full. In any other case, the in-kind contribution must be provided in accordance with the provisions agreed in the deed of foundation, but not later than three years from the registration of the company. The deed of foundation may state that less than half of the cash capital contribution is provided on the incorporation application, and that the outstanding cash contribution will be provided within a determined period. If this period is over one year, the company must not pay dividends unless the dividend and paid cash contribution of members reaches the capital; furthermore, the members are liable for company debts up to the value of the non-paid cash contribution.
The statutory minimum capital of a private company limited by shares is HUF5 million (EUR16,000), and the cash contribution must be at least 30 per cent of the share capital. Bearer shares are not permitted, and all shares must be registered. Shares may be dematerialised or printed. The transfer of shares may be limited or require the consent of the company if required by the deed of foundation. However, the limitation shall apply for third parties only by being indicated on the printed share or shown in the data of security accounts. Besides regular shares, other permissible types of shares include voting or divided-reference shares, shares with management appointment rights, employee shares, interest-bearing shares and convertible shares.
A simple majority vote is sufficient for most decisions. However, a majority of at least 75 per cent is necessary for major decisions. There are no restrictions on the number of shareholders or founders, or on their nationality or residence. If the shareholder’s official address is outside Hungary, a delivery agency is required.
A company director must be an individual, a natural person, irrespective of nationality or residence. The limited liability company must appoint at least one managing director, and the private company limited by shares must appoint a board of directors with at least three members or a CEO.
A supervisory board is required if the annual average number of full-time employees exceeds 200. The supervisory board has a least three supervisors. One-third of the supervisors will be delegated by the employees. The supervisory board will be established if shareholders with 5 per cent of the voting rights of a private company limited by shares require that to be done.
All companies shall appoint at least one certified auditor. The auditor must be a legal person or an individual registered with the Chamber of Hungarian Auditors.
Every Hungarian company must have a registered office and address in Hungary.
The incorporation of a company is an electronic process that requires the assistance of a Hungarian attorney at law. The attorney will countersign the incorporation documents and submit the application electronically. The application for registration must be submitted within 30 days of signing the founding documents.
New entities may begin business as a ‘pre-company’ on signing the foundation documents. Any documentation or contract produced in this period must identify the company as ‘under registration’.
The court of registry will examine all registration applications for compliance with formal requirements within three working days from the date of receipt. The competent court of registry will determine within eight working days after the date of receipt whether the data prescribed as mandatory by the law for the type of company, and the documents required to be enclosed in support of the instrument of constitution and the application for registration, or other documents that need to be enclosed where applicable, comply with the relevant statutory provisions.
The incorporation process usually takes eight to 15 days, but the statutory period for incorporation is 30 days after submission.
Each company receives its VAT number by the time of incorporation automatically. No further process is needed besides the company registration process.
The Hungarian taxation system is close to the level of complexity found in western Europe, and harmonised with EU directives. Moreover, it provides a secure legal framework for the conduct of business. Tax laws in Hungary are enacted by Parliament. The tax authority only provides guidelines for interpretation and administration. Court decisions currently play an increasing role in interpretation of tax law. European Court of Justice case law is also applicable.
The tax year is the calendar year for individuals and the calendar year or the business year for companies. In general, tax returns must be filed annually. However, for VAT and payroll, quarterly or monthly filing may be required.
Since 2010, enterprises can keep their books and prepare their financial statements in euros (without any restriction).
Hungary’s corporate tax rate is regionally competitive. If a company is Hungary-resident, it is taxed on its worldwide income. The taxable income of both resident and non-resident corporate taxpayers is based on pre-tax profits, calculated in the profit-and-loss statement prepared in accordance with the accounting rules.
Hungarian-registered subsidiaries of foreign companies are taxable under ordinary domestic rules. Foreign companies are deemed to be resident in Hungary if their effective place of management is in Hungary.
Registered branch offices and non-registered permanent establishments are taxed under the same regime applicable to Hungarian-registered companies.
The corporate income tax rate is 10 per cent of net income, up to HUF500 million (EUR1.6 million), and 19 per cent on the amount of profits above that margin.
For transfer pricing, the transactional-net-margin and the profit-split methods have been added to the existing comparable-uncontrolled-price, resale-price and cost-plus methods, as being generally applicable in related-party transactions.
In Hungary, there is no withholding tax on dividend, royalties and interest payments made between corporate entities from a Hungarian source.
Dividends paid to corporate entities are not subject to withholding tax, irrespective of the residence of the corporate recipient. Dividends received, except for dividends received from controlled foreign companies, are tax-base-decreasing items.
Capital gains realised by Hungarian taxpayers are normally treated as ordinary business income. A participation exemption regime exists; therefore, the disposal of reported participations is exempt from corporate income tax under the participation exemption rules. This exemption is available if the participation represents 10 per cent of the capital and has been held for at least one year. Capital gains of foreign companies are generally tax-exempt.
Local taxes are levied by the local municipalities. The tax rate is decided by the local municipality in some cases. The maximum local tax rate is set by Parliament.
The most relevant local tax is the local business tax, which is levied up to 2 per cent on gross sales revenue, where deduction of the cost of goods acquired for resale, subcontractors’ fees, and cost of materials and direct R&D costs incurred in the tax year is applicable. Companies may exclude royalty and interest income from the local business tax base.
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