Company Formations: A jurisdictional guide to setting up a business

QUESTION ONE – What are the most common structures used when international clients want to form a company in your jurisdiction? Any examples?

In business partnerships such as General Partnerships (Kkt.) and Limited Partner­ships (Bt.), at least one of the shareholders are personally liable for the debts of the company. They are not very attractive because of that, however, they are useful for multinational tax structure optimisation.

The most common company form is the Limited Liability Company (Kft.), under which the managing director is liable vis-á-vis the shareholders and, in some cases, vis-à-vis third party business partners. Limited liability companies are used most widely, as this form of company is best suited for SME businesses best.

Apart from the limited liability of the shareholders, it offers great structural flexibility. Shareholders may agree with different terms in the Articles of Association, and the Kft. may be set up as a single-shareholder company as well. This is a solution that is commonly used, as formal statutory restrictions, such as obligatory auditing or the prohibition of a single-shareholder company being owned by the single-shareholder company itself, have been abolished by the Hungarian legislator.

The minimum share capital of a limited liability company (Kft.) is three million HUF. A new, quite attractive, legislation allows the shareholder to delay the actual perfor­mance (payment) of the share capital and to wait for dividends to arise in order to use such monies to serve as a capital contribution.

The most formal type of Hungarian business association is the Company Limited by Shares. They might be established privately (Zrt.) or publicly (Nyrt.). In the latter case, shares are listed on the stock exchange. Also, personal liability is limited to the registered capital as a main rule. The minimum initial capital is HUF 5 million (approx. EUR 17 000) for private limited companies and HUF 20 million (approx. EUR 65 000) for public limited companies.

The best way to set up a Hungarian legal entity is to establish a Hungarian branch (Magyarországi fióktelep) or Hungarian commercial representation office (Mag­yarországi kereskedelmi képviselet). Both entities may de facto be deemed as an extended workbench of the foreign enterprise. While the Hungarian branch has full legal capacity, it acquires rights to the benefit of and assumes liabilities for, the foreign enterprise under its own company name. The scope of activities of a Hungarian Commercial Representation Office is limited to mediating and preparing contracts and carrying out information, advertising and propaganda activities on behalf of the “mother” company (i.e. they may not conduct profit-oriented activities in their own name).

QUESTION TWO – Please detail some of the favourable and unfavourable legislation that businesses considering establishing a presence in your jurisdiction should be aware of? How can you help them to streamline the process?

Foreign investors are free to carry out business without a local partner. Company registration fees and regular maintenance costs are low, compared to other Euro­pean countries. Corporate income tax is only 9 per cent, the lowest in the whole EU. Investors may benefit from a wide range of refundable and non-refundable subsidies.

The legal regime applicable to the liability of managing directors was completely reshaped in 2014, raising questions and uncertainties. In order to properly deal with the managing directors’ liability issues, more sophisticated legal advice and more detailed contractual stipulations are now necessary, compared with advis­able, under the old legislation. Hungarian VAT, amounting to 27 per cent, is the highest rate in the world at the moment. However, an exclusive 5 per cent VAT rate for newly built residential properties has given the property market quite a boost.

The procedure of company registration is very quick, as the documents are being filed electronically. The Court of Registry only carries out a formal check of the documents, rather than a material legal check, as it used to be. It is worthwhile mentioning that the Hungarian company may operate as a pre-company after the corporate documents have been countersigned by the local lawyer – giving the company a further time advantage, which can be worth its weight in gold in some situations.

QUESTION THREE – What due diligence is required to be undertaken by company formations agents under anti-money laundering laws in your jurisdiction?

Hungary is completely compliant with applicable EU legislation. A client due dili­gence procedure is obligatory in legally-defined business transactions, particularly in case of the establishment of a Hungarian company. This is in the interest of prevention of money laundering and terrorist financing, and for the purpose of appropriate compliance with the obligations set out in the Hungarian implementa­tion act (Act No. LIII of 2017).

Service providers, including law firms, have to carry out client identification and verification procedures, aimed at the clear identification of the client (KYC) and its agents, proxies or other authorised representatives. In the course of the identifica­tion procedure, law firms are required to record the following particulars:

1. In case of private persons: Present family name and given name, family name and given a name at birth, nationality, place and date of birth, mother’s maiden name (which is a Hungarian speciality!), foreign residential address, Hungarian residential or domicile.
2. In case of legal persons: Company name, short company name, registered office or registered address of the Hungarian branch, main company activity, name and position of authorised representative(s), identification data of Hun­garian delivery agent, company registry number or similar data, tax number.

Next to the data to be provided, law firms have to request the following documents:

1. In case of private persons: Passport or personal identification document, valid residence permit for Hungary or similar document (if any).
2. In the case of legal persons: Company registry extract.

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