Highlights of Hungarian Company Law

1. Types of Companies in Hungary

Hungary offers several business structures to suit various needs, ranging from small enterprises to large corporations. The main types of companies include:

• Sole Proprietorship (Egyéni Vállalkozás):

• • Suitable for individuals starting small businesses.
  • Unlimited liability for the owner.
  • Simplified registration process.

• Limited Liability Company (Kft.):

• • Most common form for small and medium enterprises (SMEs).
  • Requires a minimum share capital of HUF 3,000,000.
  • Liability of shareholders is limited to their contributions.

• Private Company Limited by Shares (Zrt.):

• • Designed for larger businesses.
  • Requires a minimum share capital of HUF 5,000,000.
  • Shares are not publicly traded but can be transferred privately.

• Public Company Limited by Shares (Nyrt.):

• • Suitable for companies seeking public investment through stock exchanges.
  • Minimum share capital is HUF 20,000,000.
  • Subject to strict transparency and reporting requirements.

• Partnerships (Bt. and Kkt.):

• General Partnership (Kkt.): Partners have unlimited liability.
• Limited Partnership (Bt.): At least one partner has unlimited liability, while others are limited to their contributions.

2. Company Formation

The incorporation process in Hungary is straightforward, facilitated by modern digital systems. Key Steps for Company Formation:

• Drafting Articles of Association:

• • Must include the company name, registered seat, scope of activity, ownership structure, and share capital.

• Legal Representation:

• • Incorporation must be carried out with the assistance of a Hungarian attorney.

• Registration with the Court of Registry:

• • Applications are submitted electronically to the Company Court.
  • The process typically takes 1-3 business days for limited liability companies or private companies limited by shares.

• Tax Registration:

• • Companies must register with the Hungarian Tax Authority (NAV) to obtain a tax number.

• Opening a Bank Account:

1. • Companies are required to open a Hungarian bank account and deposit the minimum share capital.

3. Corporate Governance

Hungary mandates clear governance structures to ensure accountability and efficiency.

• Management:

• • Limited Liability Companies (Kft.) are managed by one or more managing directors.
  • Companies Limited by Shares (Zrt. or Nyrt.) must have a board of directors or a supervisory board.
    
    

• Supervisory Board:

• • Mandatory for companies with more than 200 employees or when specified in the articles of association.
  • The board oversees management and protects shareholder interests.
    

• General Meetings:

• • Shareholders exercise their rights primarily through general meetings, where key decisions like dividend distribution, mergers, or capital changes are approved.

4. Liability and Reporting

Limited Liability:

• Shareholders in Kft. and Zrt. are not personally liable for company debts, limited to their capital contributions.
  
  

Accounting and Auditing:

• All companies must maintain accurate financial records in accordance with Hungarian accounting standards.
• Auditing is mandatory for companies exceeding specific thresholds (e.g., HUF 300 million in annual revenue).

Transparency:

In Hungary, companies are required to adhere to several transparency regulations to ensure proper corporate governance and accountability. Key transparency requirements include:

• Company Registration Information: Companies must register with the Hungarian Court of Registration and provide detailed information, including the company’s name, legal form, registered address, business activity, and directors. This information is publicly accessible through the Hungarian Company Register.
  
  
• Annual Financial Statements: Hungarian companies are required to prepare and file annual financial statements with the Hungarian Tax Authority (NAV). These must include a balance sheet, profit and loss account, and notes. Small companies have simplified reporting requirements, while larger companies must comply with more extensive reporting standards.
  
  
• Shareholder and Ownership Information: Companies must disclose information about their shareholders and owners. In the case of entities with more than 25% ownership, the company must provide this data to the Hungarian authorities. This disclosure is important for anti-money laundering (AML) and combating the financing of terrorism (CFT) purposes.
  
  
• Beneficial Ownership Transparency: As part of Hungary’s commitment to the European Union’s AML directive, companies are required to disclose their beneficial owners. This includes individuals who ultimately own or control the company, directly or indirectly, through shares or voting rights.
  
  
• Audit and Corporate Governance: Certain companies, especially those that meet specific size thresholds (e.g., exceeding a certain revenue, total assets, or employee count), must appoint an auditor to review and report on their financial statements. The auditor’s report must be submitted to the company’s shareholders and made publicly available.
  
  
• Public Tender and Procurement Transparency: Companies engaging in public procurement or tenders are subject to strict transparency rules. They must disclose bid details, including financial information, and comply with public procurement regulations.
  
  
• Taxation Compliance: Companies in Hungary must comply with tax reporting obligations. This includes submitting VAT returns, corporate tax returns, and, where applicable, other taxes like social security contributions.

5. Taxation for Companies

Hungary offers a favorable tax environment for businesses:

• Corporate Income Tax: a flat rate of 9%, the lowest in the European Union;
• Local Business Tax: levied by municipalities, typically at a rate of 1-2% of net revenues;
• VAT: standard rate of 27%, with reduced rates of 5% and 18% for specific goods and services.

6. Mergers, Acquisitions, and Dissolution

Hungarian law provides detailed procedures for corporate restructuring:

a) Mergers and Acquisitions (M&A):

• • Governed by the Civil Code and EU directives.
  • Requires shareholder approval and compliance with anti-monopoly regulations.

b) Voluntary Dissolution:

• • Shareholders can decide to dissolve the company, provided all debts are settled.
  • The liquidation process involves notifying creditors and filing documentation with the Company Court.

c) Involuntary Dissolution:

• • Companies may be dissolved by the authorities due to non-compliance, insolvency, or failure to meet reporting obligations.

7. Special Legal Considerations for Foreign Investors

Hungary is a member of the EU, and its company law is highly favorable for foreign investors.

a) No Restriction on Foreign Ownership:

In Hungary, there are no restrictions on foreign ownership for most types of companies. This means that foreign investors can fully own and control Hungarian companies without the need for a local partner or any specific foreign ownership limits. This openness to foreign investment is part of Hungary’s efforts to attract international business and encourage economic growth.

However, there are a few exceptions in certain regulated sectors, such as:

• • Defense and National Security: Foreign ownership in companies involved in defense, national security, or critical infrastructure may be subject to restrictions or require prior approval from the Hungarian government.
  • Media and Telecommunications: There may be regulations or restrictions on foreign ownership in media companies, especially those operating in broadcasting or telecommunications.
  • Land Ownership: Foreigners are generally restricted from purchasing agricultural land in Hungary. EU citizens can acquire land, but non-EU citizens face limitations, typically requiring them to establish a business presence in the country or meet specific conditions.
  • Outside of these exceptions, Hungary maintains a business-friendly environment with no significant barriers to foreign ownership in most industries.

b) Double Taxation Treaties:

• • Hungary has agreements with over 80 countries to prevent double taxation.
  • This section has been explored in detail in one of our other articles.
  • to learn more about the Hungarian taxation system, please visit: 
    https://firmaxhungary.com/services/tax-advisory-in-hungary/

c) Ease of Cross-Border Operations:

EU membership facilitates cross-border trade and investment under the single market framework. Hungary offers significant advantages for businesses looking to operate across borders, due to its strategic location in Central Europe, EU membership, and favorable regulatory environment. Key aspects of the ease of cross-border operations include:

EU Membership: As a member of the European Union, Hungary benefits from the EU’s single market, allowing for the free movement of goods, services, capital, and people. This makes it easier for companies to trade and establish operations in other EU countries without facing tariffs or restrictive regulations.

Access to Global Markets: Hungary’s location provides companies with easy access to neighboring countries in Central and Eastern Europe, as well as the broader European market. The country’s infrastructure, including well-developed transport links (roads, rail, and airports), makes it convenient for businesses to engage in cross-border logistics and operations.

Favorable Tax Treaties: Hungary has signed numerous double tax treaties with other countries, which helps businesses avoid double taxation on income earned abroad and ensures more favorable tax treatment for cross-border operations. This can be particularly advantageous for international businesses and investors.

Multilingual Workforce: Hungary’s workforce is highly skilled and many people speak multiple languages, including English, German, and other European languages, making it easier for foreign businesses to communicate and collaborate in cross-border projects.

Foreign Investment Incentives: Hungary offers a range of incentives and support for foreign investors, which can streamline the process of establishing cross-border operations. This includes tax benefits, grants, and assistance with navigating local regulations.

Legal and Regulatory Framework: Hungary’s legal system is aligned with EU standards, which ensures consistency and predictability for businesses operating across borders. The country’s regulations are designed to support international trade and investment, making it easier to manage cross-border transactions and partnerships.

Overall, Hungary’s business-friendly environment and strong integration into the global economy make it an attractive hub for cross-border operations, offering companies the opportunity to expand within the European Union and beyond.

8. Compliance

The proper business operation of a Hungarian company requires the compliance with a number of administrative and accounting obligations: 

• Annual Financial Statements: Companies in Hungary are required to file their annual financial statements with the Hungarian Tax Authority (NAV) and the Court of Registration. If financial statements are submitted late, companies may face fines based on the delay, and in some cases, their financial statements may be publicly unavailable for a period. This can affect the company’s reputation and credibility with stakeholders.
  
  
• Tax Returns: Late filing of tax returns, such as VAT, corporate tax, or other local taxes, can result in interest charges, penalties, or additional fines. The penalties are usually calculated based on the amount of tax owed and the length of the delay. For example, late VAT returns may incur a fine of up to 50% of the unpaid tax amount, with interest applied on any overdue payments.
• Late Filing Penalties: Hungary imposes specific penalties for late filings, and the severity of the penalty depends on the type of report and how long the submission is delayed. For instance, late registration of company details or the failure to submit annual reports on time could lead to a fine ranging from a few thousand HUF to significantly higher amounts for more serious cases.
• Impact on Business Operations: Repeated late filings can trigger additional scrutiny from regulators, potentially leading to audits or legal action. It can also undermine relationships with banks, investors, and business partners, who may view late filings as indicative of poor management practices or financial instability.
• Grace Periods and Extensions: In some cases, businesses may apply for an extension or grace period for filing certain reports, though this is not always guaranteed. It’s crucial to submit any required documentation on time to avoid unnecessary complications.
• Reputation and Trust: Timely filing is a key part of maintaining transparency and trust with regulators, investors, and clients. Delays in filing can negatively impact a company’s reputation and credibility, especially in competitive industries or markets where compliance is a critical factor in success.

To avoid penalties, it is essential for companies operating in Hungary to adhere to deadlines for filings, stay informed about regulatory changes, and maintain efficient internal processes for financial and tax reporting.

Conclusion

Hungarian company law provides a robust and transparent legal framework for businesses, combining EU-aligned regulations with local incentives. The availability of diverse business structures, a streamlined incorporation process, and investor-friendly policies make Hungary, particularly Budapest, an appealing destination for entrepreneurs and corporations alike.