Hungary company formation

Company formation in Hungary company formation

With 27 member states to choose from, where is it most beneficial to form a company in the EU? Incorporating a business in Hungary comes with several benefits. Hungary not only has the lowest corporate tax rate in the EU but also setting up a company takes less than a few business days. Learn more about company formation in Hungary!

Benefits of doing business in Hungary

1. Access to the EU market

As a member of the European Union and Schengen Zone, Hungary is part of the largest single market in the world. By now, Hungary has become not only one of the most popular trading centers in the Central-East European region but also a starting point for investments in EU countries coming from outside the European Union. All this can help Hungarian commercial banks and the entire financial system to be at the forefront of the region.

2. Lowest corporate tax rate in the EU

Hungary’s taxation system is extremely favorable with its corporate tax rate of 9%. It is important to note that this tax rate is one of the lowest in Europe. Still, other member states do not regard Hungary as a jurisdiction for offshore company registration. In addition, several other types of income are also exempt from corporate tax, and in general, there is no withholding tax imposed on dividends and capital gains paid from Hungary. There is no tax payment obligation for dividends received by Hungarian companies, and under certain conditions, the income arising from the sale of shares in their subsidiaries is not subject to tax either. Hungary has entered into many international tax treaties, which also ensure optimal conditions for investments outside the EU. Local companies are required to prepare a report on their operations, which must be provided, with certain exceptions, with an attestation clause by the auditor before being submitted to the local authority. It is important to note that the report qualifies as public data.

3. Fast and convenient

Cutting through all the red tape during the company setup procedure can be energy and time-consuming. Fortunately, company formation in Hungary takes only 4-5 business days. To have your business up and running all you need is an official document to prove your identity. It is not obligatory to have a Hungarian business partner either.

Hungarian companies have a fully functioning EU VAT and EORI number from the first day of operation. Businesses are not required to register for VAT or meet any additional requirements after incorporation. Getting an EU VAT number is immediate, and automatic.

4. Low operating costs

The cost of labor, real estate, services, and other expenses is significantly lower than in Western European countries. According to a study published by Statista, the average cost of registering a private limited company in Hungary is less than half of the EU average. Despite the low business costs, Hungary has a central location and a highly qualified workforce.

5. Simplicity

The most popular corporate forms in Hungary are the limited liability company (Kft.) and the private company limited by shares (Zrt.). For both legal forms, the company is required to have one manager and one shareholder, who can also be foreign persons, but it is expedient to hire domestic persons to act as managing directors to maintain tax residence. The manager may only be a natural person, however, there is no similar requirement for shareholders. The company must have a local address, which qualifies as its official seat, i.e. registered office. An additional requirement for Hungarian companies is to have at least one domestic bank account.

6. Residence permit

Hungary is a full member of the European Union, and the residence permit issued by the Hungarian authorities is valid for the entire Schengen Area. It signifies a zone of 29 European countries that have officially abolished all passports and all other types of border control at their mutual borders. Hungary provides guest self-sufficient residence permits (based on the gainful activity purpose) for all foreign investors on equal terms if they establish a company in Hungary that provides services or trades with goods.

E-commerce

Clients from the online business sector are increasingly striving to find compliant, onshore solutions in a jurisdiction with a positive reputation. Hungary fulfills all these requirements at the level of banks, payment service providers, card issuers and competent authorities.

The EU place of supply rules on e-commerce and e-services require EU sellers and providers across borders to charge the VAT rate of their customer’s country of residence. Online sellers, marketplaces/platforms and service providers can register in one EU Member State  (One Stop Shop – OSS) and this is valid for the declaration and payment of VAT on all distance sales of goods and cross-border supplies of services to customers within the EU.

Frequently asked questions about company formation in Hungary

Why Hungary?

The Republic of Hungary is situated in Central Europe and has borders with Austria, Slovenia, Croatia, Serbia, Romania, Ukraine, and Slovakia. Hungary is a civil law jurisdiction, based on written laws enacted under the Constitution. Hungarian governments have always been keen to encourage foreign investments.

Hungary now serves as an investment hub for foreign investors wishing to invest in the European Union. Clients are increasingly striving to find compliant, onshore solutions in a jurisdiction with a positive reputation. Hungary fulfills all these requirements at the level of your banks, business partners, or competent authorities.

More and more foreign companies are setting up joint ventures, manufacturing, logistics, financing, licensing, holding, and other service centers intending to provide capital, goods and services, and expertise to targeted jurisdictions. The Hungarian commercial banking and financial system is the most advanced in the Central and Eastern European region.

What are the most commonly used company forms in Hungary?

The most commonly used company forms in Hungary are Limited Liability Company (korlátolt felelősségű társaság, KFT.) and the Private Limited Company (zártkörűen működő részvénytársaság, ZRT.)

• KFT. can be established with a minimum registered capital of 3 million HUF. The members of a KFT. are not liable for the obligations of the legal entity unless the Civil Code provides otherwise.
• ZRT. is a business vehicle typically used for large-scale foreign investments. Hungarian Private Limited Company gives limited liability to all of its shareholders. It can be established with a minimum share capital of 5 million HUF.

Foreign companies are allowed to set up companies, branches, and representative offices.

What are the main characteristics of the Hungarian KFT.?

The Hungarian KFT is very similar to the German GmbH. Most inward foreign investment to date has been channeled through this type of company. It gives limited liability to all of its members. KFT. is an ideal company form if the number of members is low. Directors and members of a KFT. are considered to be public records accessible at the Court of Registry.

KFT. can be established with a minimum registered capital of HUF 3 million. It is not required to pay up the whole capital at the time of incorporation, however, no dividends can be paid till the whole payment of capital. The company has no issued shares. The business shares of the members represent the ownership of the company.

A statutory audit is not required for a KFT. unless the average net sales revenues and the average number of employees have not exceeded HUF 300 million and 50 people respectively in the past two years preceding the business year.

A KFT. must have at least one director who can be a natural person or a legal entity (if a legal entity is a director, a natural person has to be appointed, who will act on behalf of the director). Annual General Meeting shall be held at least once in a business year but no personal attendance is required.

What should I know about the Hungarian ZRT.?

The Hungarian Private Limited Company is not used as often as a KFT., although large-scale foreign investments are typically channeled through a ZRT. It gives limited liability to all of its shareholders, and it is well-suited for cases where the number of shareholders is high.

In the case of a private limited company (i.e. ZRT.), only directors and shareholders owning more than 50% are considered to be public records accessible at the Court of Registry.

The minimum amount of share capital is HUF 5 million, of which at least 25 percent must be paid up at the time of incorporation. The remaining balance must be paid in 365 days.

The audit requirements are the same as for the KFT.

How does the incorporation work in Hungary?

Hungarian companies are registered by the Court of Registry. As a general rule incorporation procedure is completed within a few working days by the Court of Registry. The incorporation is an online procedure that can be performed only with the assistance of a Hungarian attorney-at-law.

The following information is available for public inspection at the Court of Registry:

• names, mother’s name, date of birth, and addresses of shareholders – for ZRT. if exceeds 50% (registered seat and incorporation nr. in case of corporate shareholder),
• names, mother’s name, tax nr., date of birth, and addresses of directors,
• registered office address,
• main activities of the company,
• share capital,
• e-mail address of the company.

After registration of the company, the owners will be supplied with the following documentation, if necessary, properly translated into English:

• Certificate of Incorporation
• Memorandum and Articles of Association
• List of shareholders
• Address of the company’s registered office
• Specimen signature of the director

What are the main advantages of the Hungarian tax system?

According to the Corporate Tax Act companies are obligated to pay income tax at a flat rate of 9%. Hungarian resident companies are compelled to pay corporate income tax on their worldwide income. The corporate income tax base is the adjusted accounting profit. Various items are exempt from corporate income tax. The most important ones are as follows:

• 100% of dividends received (except for dividends received from a Controlled Foreign Company – CFC);
• 100% of capital gain realized upon the sale of the Declared Participation (except for capital gain derived from the sale of shares held in a CFC). Declared participation: If a Hungarian company owns more than 1% of the share capital of a Hungarian or foreign company for a minimum of one year then capital gains realized on the sale of such shares are exempt from corporate income tax provided that the taxpayer declares purchase of such shares within 75 days of acquisition.
• There is no withholding tax in Hungary for foreign entities. Only dividends for foreign individuals are charged with 15% personal income tax,  except if the double tax treaty states otherwise.

In addition to corporate income tax, Hungarian companies are obligated to pay the local business tax imposed by municipalities where the company carries on its business activities. The actual rate of local business tax is to be set by the local municipality, however, the rate cannot exceed 2% according to the respective law. It is important to mention that some municipalities do not impose local business tax.

The calculation method of the local business tax base is different from that of corporate income tax. Local business tax is imposed on gross profit (net revenues less cost of goods sold, subcontractor fees, direct costs associated with R&D, etc.). However, inbound royalty, interest, and dividends are exempt from local business tax.

How can we help?

Crystal Worldwide Group is an international business consulting firm with more than 30 years of experience which is specialized in tax planning, and corporate structuring. asset protection, and immigration services. Our services include:

Legal, tax, and financial assistance throughout the whole process of immigration, real estate investment, or company formation in Hungary

• Representation in the course of administrative procedures
• Corporate and accounting services
• Assistance in bank account opening
• Multilingual, prompt administration with a dedicated contact person

Should you have any questions, please do not hesitate to contact us.