HUNGARY

COMPANY FORMATION IN
HUNGARY

HUNGARIAN RESIDENT COMPANIES
A NEW DOOR ON THE EUROPEAN
HOLDING MARKET

HUNGARY COMPANY FORMATION
If properly structured, Hungary company formation is a tax-efficient corporate solution for international entrepreneurs, especially for those operating in the European Union (EU). The following information will help you determine whether Hungary company formation is the optimum corporate solution to meet your international business objectives:

ADVANTAGES TO INCORPORATE IN HUNGARY
Hungary is a member of the European Union (EU) and has a stable economic and political system.
Hungary company formation is not perceived as an offshore corporate structure in a tax haven.
If properly structured, Hungary company incorporation is a tax-efficient solution. Corporate tax ranges between 10% and 16%.
Dividends paid to any resident or non-resident person are legally tax-free.
Paid royalties are considered expenditures and can be deducted from Hungary corporate profits. Withholding tax is 0%.
Only one shareholder and one director are required to fulfil Hungary company formation requirements.
Corporate shareholders are permitted with Hungary company formation.
Investors considering Hungary company formation can take advantage of the double taxation treaties the country has signed with other states.
Details of the beneficial owner of the company are not publicly accessible.
Following Hungary company formation, the entity can be run from anywhere in the world.
It is easy to open global corporate bank accounts to support Hungary company formation. Our Firm works with internationally recognised banks to provide corporate bank account services.
A Hungary company can be fully owned and controlled by international directors and shareholders. There is no requirement to appoint local shareholders and directors.

DISADVANTAGES TO INCORPORATE IN HUNGARY
A Hungarian company is subject to 16% corporate profits tax on its worldwide income. Hungary is negatively ranked as the world's 43rd freest economy in the Heritage Foundation’s 2008 Index of Economic Freedom , a measure of freedom enjoyed in business, trade, monetary, financial, investment and labour markets.
The minimum capital required for Hungary company formation is 12,000 Euros.
Nominee shareholders and directors are not permitted with Hungary company formation.
The entity is required to prepare an annual report following Hungary company incorporation.
A Hungarian company is required to register for Value Added Tax (VAT).
Hungary is negatively ranked as the 39th least corrupt country in the 2007 Corruption Perceptions Index
(http://www.transparency.org/policy_research/surveys_indices/cpi/2007) by Transparency International (http://www.transparency.org/) , a global measure of corruption amongst public officials and politicians.

HUNGARY COMPANY

LEGAL FORMS OF ENTITIES
Under the terms of the Companies Act, a company in Hungary may be established under a variety of legal forms.

The most common for foreign investors are the company limited by shares (reszvenytarsasag - Rt) and the limited-liability company (korlatolt felelossegu tarsasag - Kft).

These corporate forms correspond closely to the German AG (Aktiengesellschaft) and GmbH (Gesellschaft mit beschränkter Haftung).

Foreign investment may take two other legal forms: the limited partnership (beteti tarsasag - Bt) and the general partnership (kozkereseti tarsasag - Kkt). These latter forms of organisation require unlimited legal liability. All members of a Kkt are jointly and severally liable; at least one member of a Bt must have unlimited liability. Owing to less stringent registration and operating procedures and to lower minimum capital requirements, most new private-sector firms incorporating in Hungary now choose the Kft form.

SHAREHOLDERS
A Kft may be formed by one owner. It is not permitted to solicit others publicly to become owners. Initial capital may not be increased until all quotas are fully paid. A Kft may not be filed for registration until at least half of each cash contribution (but at least Ft1m) has been paid and all in-kind contributions have been transferred. All outstanding cash contributions must be fully paid no later than one year from registration. For a single-owner Kft, all cash contributions must be paid before filing. There are no restrictions on the number of shareholders or founders, or on their nationality or residence. However, a single-member company may not be a single member of an Rt or Kft.

MINIMUM SHARE CAPITAL
Rt (reszvenytarsasag -company limited by shares): Minimum capital is Ft20m. The amount of the cash contribution at the time of formation may not be less than 30% of the share capital or Ft10m (whichever is higher). The share capital of the company must be secured completely by subscription. The amount of capital contributed in kind must be declared in writing and must be audited by certified auditors. Kft (korlatolt felelossegu tarsasag - limited-liability company): Minimum capital is Ft3m; cash contributions may not be less than 30% of the capital or Ft1m (whichever is higher).

TYPE OF SHARES
Rt: Bearer shares are freely transferable. The transfer of registered shares issued by a private Rt may be limited in the deed of foundation. Under the new Companies Act, since June 16th 1998 foreigners may acquire both types of shares. Preference shares may be distributed up to a value of 50% of the total share capital of the company.

Kft: Quotas have a minimum par value of Ft100,000. The amount of capital contribution must be divisible by Ft10,000. Every quota holder has one quota, though several persons together may constitute a single quota holder.

SUPERVISORY BOARD
An Rt must have a supervisory board of at least three members, elected by the shareholders. For Kft a supervisory board of at least three members must be established if the capital of the Kft exceeds Ft50m, or the annual average number of employees exceeds 200. For a single-member Kft, the supervisory board is compulsory only in the latter case. If the annual average number of full-time employees exceeds 200, then one-third of the members of the supervisory board must be elected by the employees.

DIRECTORS
A director of a company must be an individual. It is not possible for a company to be a director. Managing directors for a Kft; members of the board of directors for an Rt: The same person may be elected as an executive officer in three companies at most. The person elected must inform in writing those companies of which he or she is already an executive officer within 15 days of acceptance of a new position. There are strict regulations on conflicts of interest. Except when acquiring shares in a public Rt, an executive officer may not acquire interest in another business association pursuing identical activities. Furthermore, no person may be an executive officer in another company pursuing an identical activity unless specified in the company’s articles of association approved by the supreme body of the company. A company’s supreme body may confer the right of general representation upon an employee appointed by it, as a so-called company secretary.

Rt: Management is conducted by the board of directors (igazgatosag), consisting of 3–11 members elected by the shareholders at the general meeting. The board is responsible for preparing financial statements and balance sheets of the company and for producing an annual report. No restrictions apply regarding nationality or residence of directors (except for banks, where at least two members of the board must be Hungarian residents for foreign-exchange purposes).

Kft: Management can be conducted by one or several managing directors elected by the members for a definite term; alternatively, the articles of association may provide that all equity holders are entitled to manage the Kft as managing directors. The same duties and restrictions apply as for an Rt.

REGISTERED OFFICE
Every Hungarian company is required to have a registered office and address in Hungary.

BASIC TAX PRINCIPLES
Resident companies are taxed on worldwide income; non-resident companies pay tax on Hungarian-source income only. Taxpayers are treated as resident for tax purposes if they are created under Hungarian law or (from January 1st 2005) if they are managed or controlled in Hungary. Tax is charged at a flat rate of 16%, and a special rate of 4% applied to the profits of Hungarian offshore companies was abolished on December 31st 2005. As of January 1st 2006, for up to HUF 5m taxable income, a lower tax rate of 10% was introduced.

AUDIT AND FINANCIAL RETURNS
A statutory auditor is required to be appointed by:
- an Rt.; a Kft., if the registered capital exceeds 50 million HUF, or if there is only one registered owner;
- the total net revenue of the company exceeds 50 million HUF in two years average;
- when any law requires (insurance companies, banks…).

In order to be appointed as an auditor, the individual person or audit company must be registered in the list of registered accountants. The auditor must be named in the Articles of Association and can be appointed for a period not exceeding five years. The auditor can be re-appointed following the end of his term of office.

Following closing of the books upon the end of the calendar year, companies are obliged to prepare a report based on the book- keeping records maintained in accordance with the law, representing the company s operations, assets, financial and profit situation.

MEETINGS
Annual board meetings and shareholders meetings should be held at least once a year. The place of the meeting must be in Hungary, unless arranged otherwise.

TIME FRAME TO INCORPORATE
Usually it is 10-15 working days.

HNGARY INCOME TAXES AND TAX LAWS
Last partial update , February 2008
Hungary's taxation of an individual's income is progressive. In other words, the higher the income, the higher the rate of tax payable. In 2008 the tax rate in Hungary for an individual is 18% or 36% , There are reduced rates of tax for certain income earners.

Corporate tax in Hungary in 2008 is fixed at 16%. There is an additional 4% solidarity tax.

Corporate tax for income up to HUF 5 million, about EUR 20,00, is 10%, subject to certain conditions.

INDIVIDUAL INCOME TAX
An individual pays tax on his income as a wage-earner or as a self-employed person. Tax for an individual who meets the criteria of a "permanent resident" in Hungary will be calculated on his income in Hungary and abroad. A foreign resident who is employed in Hungary pays tax only on his income earned in Hungary.

To be considered a Hungarian resident, there are a number of criteria to be met, such as ownership of an apartment, the permanent place of residence of the family and the criterion of spending more than 183 days a year in Hungary.

An employer is obligated to deduct, immediately on a monthly basis, the tax payable on an employee's salary. A self-employed person must prepay income tax that will be offset on filing an annual return. The advance payment is determined on the basis of the return made for the previous year. In the event of a new business, the advance will be calculated on the basis of estimates made by the owner of the business.

Certain payments are deductible from taxable income as detailed below.

Hungary Individual Income tax rates for the year 2008 (HUF):

There is an additional 4% solidarity tax for salary income above 7,137,000.

CAPITAL GAINS
Capital gains in Hungarian companies are added to regular income. The rate of tax imposed on capital gains is identical to the tax on regular company income.
Individuals pay 25% for capital gains and other investment income.
20% tax rate is paid on capital gains from sale of shares in EU and OECD markets.
Dividend income from shares in EU stock exchanges is taxed at 10%.
Interest income is taxed at 20%.

REPORTING DATES
The tax year in Hungary is the calendar year ending on December 31st.

- AN INDIVIDUAL
If your income is only from a salary, you are not obliged to file an annual return.
An employer is obliged to deduct tax monthly at source from the wage of a hired worker. The tax deducted will be transferred by the employer to the Tax Authorities by the 12th of each month for the previous month.
An individual who is obliged to make an advance payment of income tax, will do so each month or each quarter, depending on the scope of his business.
The advance payment here too will be paid by the 12th of the following month.
The annual return for an individual including a supplement for any debt for tax arrears should be filed by March 20th of the year after the tax year.

- A LIMITED COMPANY
A company is bound to prepay tax during the year. The advance payments are determined on the basis of the figures for the previous year. In the event of a new company, the advance payment will be calculated according to the assessment of the profits forecast for the first year. A report on advance payments is filed once a month, if the tax forecast is in excess of HUF 3 million. If the tax forecast is less than this, the report is filed once every three months.

The date for payment is the 20th day after the period of the report (whether monthly or quarterly as stated). The company will pay the difference between the tax it forecast and the tax due for the current year by December 20th.
The date for filing an annual return is May 31st in the year following the year reported.

CORPORATE TAX
The rate of Hungary corporate tax in 2008 is 16%, plus a 4% solidarity tax.

TAXATION OF EMPLOYEES
The employer is obligated to deduct tax at source from a salaried worker and to allocate an additional sum for social insurance.
The rates of tax are as follows: (a) Employer – 33,5%; (b) Employee – 17%;

DIVIDEND, ROYALTIES AND INTEREST
When payments of the above sorts are made to a foreign resident, the deductions at source are the following rates:
Dividend – 0%
Royalties – 0%
Interest – 0%

HUNGARY VAT
In most cases, Hungary Value Added Tax is payable at a rate of 20%.
There is a reduced 5% rate that relates mainly to products and services such as books and medicines.

DATES FOR FILING REPORTS
Reports must be filed monthly or quarterly with the VAT Authorities, with the report and payment being made by the 20th day of the month following the period relevant to the report.
A monthly return must be made by the owner of a business for which the VAT payable in the previous year was in excess of HUF 1 million.

HUNGARIAN TAX TREAY NETWORK

Hungary has a dense network of double taxation treaties with 65 countries. Under many of these treaties, the withholding tax on royalties is reduced to 0%, while under some, the rate is reduced to 5 or 10%. This is only of relevance for royalties received by a Hungarian sub-licensor, as royalties paid abroad by a Hungarian licensee are not subject to a withholding tax by virtue of Hungarian domestic law.

The US–Hungary tax treaty requires particular attention. This treaty provides the possibility of using Hungary to channel US source royalties to third parties in other countries without being hit by US anti-treaty shopping rules, such as limitation on benefits.

The current treaty between Hungary and the US dates back to 1974 and does not contain a limitation on benefits provision.

Although the US initiated the renegotiation process recently, experts do not expect a new or amended treaty before 2010 (actually no deadline has been set as yet).

Other treaty partners worth mentioning are Japan (0% withholding tax on cultural royalties), Korea (0% withholding tax on all kind of royalties), Malaysia (which also covers Labuan) and Singapore.

References to the treaty network:
(a) The lower rate applies if the loans are provided by a bank for a minimum of eight years for industrial development purposes; otherwise, the higher rate applies.
(b) The higher rate applies to trademarks.
(c) The lower rate applies if the receiving company owns (or controls) more than 25% of the payer.
(d) The 5% rate applies if the receiving company owns more than 25% of the payer. The 15% rate applies in other cases except for distributions to silent partners, to which the 25% rate applies.
(e) The lower rate applies if the company making the distribution is a resident of Hungary; the higher rate applies if the company is a resident of Greece.
(f) The lower rate applies to copyrights; the higher rate applies to patents, trademarks, or any industrial or commercial scientific equipment or information.
(g) The withholding tax applies only to instruments (debt or royalty contracts) entered into after 7 January 1987.
(h) The withholding tax applies only if the Indian shareholder owns at least 10% of the Hungarian company and if the dividends relate to shares issued after 7 January 1987.
(i) The lower rate applies to fees for technical services.
(j) The lower rate applies to royalties on cultural works.
(k) The lower rate applies if the receiving company owns more than 25% of the payer and has an industrial activity. The higher rate applies in all other situations.
(l) The lower rate applies if the receiving company is a financial institution, including an insurance company; otherwise the higher rate applies.
(m) The lower rate applies if the receiving company owns more than 10% of the payer.
(n) The 0% rate applies under special circumstances if the payer is resident in Singapore. The 5% rate applies if the receiving company owns 25% of the payer at least. The 10% rate applies in all other situations.
(o) The 0% rate applies to bank interest and interest on Hungarian treasury securities.
(p) The 5% rate applies if the beneficiary company owns or controls 25% of the payer at least. The 10% rate applies if the payer is a non-resident owned investment corporation in Canada and the Hungarian beneficiary company owns or controls 25% of the payer at least. The 15% rate applies in all other situations.
(q) The lower rate applies if the interest is in respect of a bond, debenture or other similar obligation of the government or political division of local authorities or if the loan is guaranteed by either the Export Development Corporation or the Hungarian National Bank.
(r) The lower rate applies if the recipient owns 10% of the payer at least.
(s) The 0% rate applies under special circumstances if the payer is resident in Malaysia. The 10% rate applies in all other situations.
(t) The lower rate applies if the loan is an approved loan under section 2(i) of the income tax law of Malaysia.
(u) The lower rate applies to interest paid to some government bodies.
(v) The 5% rate applies if the receiving company owns 40% of the payer at least. The 15% rate applies in all other situations.
(w) The lower rate applies if the beneficial recipient (not only companies!) owns 10% of the payer at least.
(x) The name of Yugoslavia changed to Serbia and Montenegro on the 4th February 2003.
(y) 10% applies to technical service fees; 15% applies to licence fees.
(z) The lower rate applies for the use of industrial, commercial or scientific equipments or transfer via satellite, cable, optic fibre or similar technology; the higher rate applies in every other case. (See also the partner’s commitment in the Final Protocol of the treaties)
(aa) No withholding tax on paid dividend after 31.12.2005.

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