Company Formations in Hungary

By Ádám Illés and Veronika Francis

Posted: 21st March 2016 09:50

Hungary is an EU member state since 2004 having a strong interest in foreign investment, hence the country aims to maintain an open economy in the heart of Eastern and Central Europe.  During the recent years leading up to the horizon of 2016, investments through new or existing company formations uplifted significantly such sectors like e.g. the automotive, information technology, life sciences, logistics, on the other hand, sectors such as e.g. research and development, manufacturers and service providers, biotechnology could also highly benefit from incoming capital. Hungary is a very appealing destination for company formations, because of its well-developed infrastructure, affordable and very well educated labour force and it is located centrally and since 2010 the government has implemented several tax changes e.g. reductions in personal income and business tax rates. In the country there is a strong presence of German, Austrian, Dutch capital and US originated, non-European investment is also relatively high.
 
The legal system ensures a high level of legal protection forinvestments and company formations in the country based on the Hungarian Constitution, Foreign Investment Act of 1988 and a substantial body of corporate laws.Foreign and domestic private entities may establish and own company formations and engage in all forms of remunerative activity. The law guarantees the right to establish, acquire and dispose of interests in business enterprises irrespective of nationality.
 
The official registration of business associations is obligatory in Hungary in the fully computerized, electronic public registry under the competent Court of Registration’s legal authority. The task of the Court of Registration is also to enforce compliance with the laws.  There are two types of registration procedures: a) the general procedure where decision is made on the incorporation in 15 days; and an b) accelerated registration procedure which takes ideally only 1 day. The company shall also (1) file a separate report on its foundation with the national tax authority (NAV), (2) provide data to the National Statistical Office, (3) notify the Chamber of Commerce and the local municipality on the foundation and (4) a bank account will have to be opened.
 
Before the actual decision is passed on the incorporation by the Court of Registry, company formations are allowed to operate from the date of execution of the deed of foundation as a “pre-company”, meaning that it can start the economic business activities from the date of submission of the registration application or after it obtained the necessary permits (if required).
 
The selected type of the formation highly depends on the preferred liability structure, as well as the amount of the equity capital that the founder(s) intends to pay. The equity share capital may be paid up in case of all types by in-cash contributions or in-kind contributions which can be combined. As for the founding documents, in case of a single shareholder a deed of foundation is applicable, otherwise an articles of association along with additional corporate documents prepared and submitted by an attorney.  
 
The company name shall contain a catchword which can be any word suitable to differentiate the company from other companies. This can be followed by optional further words and lastly with the reference to the legal type of the formation.  Company formations shall choose a main activity and any additional activities based on the European classification system (NACE Codes). The seat shall be either in a leased/owned property by the company formation, or based on courtesy use allowed by the owner free of charge.
 
The business sector shows that the most popular among investors is the limited liability company in Hungary, but there are other legal forms of business associations too with their unique drawbacks and benefits. 
 
A look is worth to be given at thegeneral partnership (Közkereseti Társaság – “Kkt.”), which can be established with optional share capital by at least two founders for common economic activities. The founders and new members bear full and joint liability for obligations not covered by the assets of the partnership irrespective whether such liabilities have occurred previously or will emerge in the future. The Limited partnership (Betéti Társaság – “Bt.”) is somewhat similar as at least two founders enter into alliance with optional share capital. The major distinctive feature of the Bt. from the Kkt. is that at least one of the founders (general partner) undertakes to bear joint and full liability with the company for the debts and obligations which are not covered by the assets of the limited partnership, meanwhile at least one of the other founders (limited partner) bears no liability for debts and obligations at all.
 
As referred previously, the most popular company formation type, theLimited liability company (Korlátolt Felelősségű Társaság – “Kft.”)  could be established as a one-man company or by more quotaholders. The quotaholder(s) is (are) responsible vis-à-vis the company only for paying up the in-cash or in-kind contributions which shall be overall equal to the total equity capital of the company, whichshall equal to HUF 3,000,000.- (that is approx. € 9800,-). The stake of the quotaholder(s) in the equity capital of the Company is represented by their respective business quotas. Unlike shareholders of a company limited by shares, each quotaholder can have only one business quota, which increases if the quotaholder obtains the business quota of another quotaholder. It is also possible that one business quota is owned by more quotaholders. The quotaholder(s) is (are) not liable for the debts and other obligations of the company, except for the limited number of cases where Hungarian corporate law so prescribes (“corporate veil piercing”). 
 
The most advanced type of Hungarian company formations, requiring the highest share capital iscompany limited by shares (részvénytársaság –“rt.”) which can be established as a private formation either by a single or more shareholder(s). This does not affect the already existing public entities subject to the stock market and the private entities can still convert into a public company limited by shares. Shareholders of a company limited by shares shall bear no responsibility for the debts or obligations of the company. The shareholder(s) shall be only  liable to provide the contribution equal to the nominal or the output value of the shares which ultimately build up the total value of the shares of the company. The minimum statutory share capital in case of private companies (not present on stock market) equals toHUF 5,000,000.- (that is approx. € 17000,-), meanwhilepublic companies established earlier or resulting from a corporate conversion must have at least HUF 20,000,000.- (that is approx. € 65000,-) as share capital.
With respect to the structure, a special management structure, supervisory board and auditor could be mandatory in case of limited liability companies and companies limited by shares in certain instances prescribed by statute.
 
With respect to the taxation, business entities registered in Hungary must fulfil tax payment obligations related to profit (e.g. personal income tax, corporate business tax – 10 % under HUF 500 million cap, above 19%, real estate tax if applicable), as well as taxes resulting from consumption (e.g. VAT, excise duty) and local municipality taxes (e.g. industry tax).  Hungarian companies are required to submit annual, quarterly or monthly VAT returns depending on their annual sales turnover. Corporate Income Tax returns are to be filed annually. As a main rule, the business year of companies shall be identical with the calendar year, although may be deterred.
 
During the establishment, legal representation by an attorney is mandatory, who must also conduct the anti-money laundering and prevention of financing terrorism checks by identifying the founders, management and the ultimate beneficial owners in a legal due diligence. All documents signed outside Hungary must be notarized and apostilled. In certain countries that have a bilateral agreement with Hungary to this effect, documents need only to be notarized (e.g. France, Austria). Non-Hungarian language documents are statutorily required to be translated and such translation to be certified. The fees of incorporation vary depending on the type of company formation.

Ádám Illés joined PETERKA & PARTNERS in 2013 to help establish the firm's Hungarian office, where he holds the position of Director. He previously managed his own firm, Illés Law Office, specialising in company, employment, intellectual property and competition. He also worked for Hungarian law firm Fuglinszky and Partner. Ádám attended an internship abroad, including work for Herfurth und Partner Rechtsanwalts GmbH in Hannover, and took an internship with the Constitution Court of Hungary and with Köves Clifford Chance.

Ádám can be contacted on +36 1 235 10 90 or by email at illes@peterkapartners.hu

Veronika Francis-Hegedűs joined the Budapest office of PETERKA & PARTNERS in 2016 as an Associate. She obtained her undergraduate law degrees in Hungary at the University of Miskolc and the UK at the University of Westminster. Additionally, she has a specialized LLM degree from the University College London in International Commercial Transactions. 

Veronika can be contacted on +36 1 235 10 90 or by email at francis-hegedus@peterkapartners.hu


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