Doing Business in Hungary

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In Hungary a high priority of the economic policy is to make further efforts to develop the economy as an integrated part of the European market. Hungary now provides for foreign investors a relatively stable legal framework and very competitive, mostly European Union harmonized tax system. The government has a strong commitment to easing business processes and to increasing the competitiveness of both SMEs and large enterprises in Hungary based on the wide range of available incentives.

However there are a number of issues which you must consider when you are looking to set up your business in Hungary. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider.

What type of Business Structure should we use?

There are advantages and disadvantages to all of them, and there is no one correct answer, it’s all dependent on your specific business circumstances and needs. A brief overview of the main structures is below:

Establishment (a branch of your overseas business)

  • Not a separate legal entity but an extension of the overseas parent company;
  • No limited liability or ring-fencing of the Hungarian operations;
  • If have a permanent establishment in Hungary then profits from this PE are liable to Hungarian Corporation tax;
  • Must file audited branch accounts, prepared under Hungarian GAAP, at Court of Registration for public inspection. Branches with parent companies established in EU are not obliged for audit and to file the Branch’s accounts, but the parent company accounts translated into Hungarian language must be filed, even if these are not disclosed overseas.

Limited Liability Company

  • Members (partners) have limited liability up to share capital (minimum of HUF 3m);
  • Gives a perception of a local business, with longevity;
  • Corporation tax to be paid on company profit;
  • Has to disclose annual report according to Hungarian GAAP at Court of Registration for public view;
  • Accounts require auditing if turnover exceed HUF 300m p.a. or number of employees exceed 50 in average of last two business years.

Company limited by shares

  • Members (partners) have limited liability;
  • Can be a private limited company or a public limited company;
  • Public limited company is registered at a stock exchange or the trade with their shares is public;
  • Corporation tax to be paid on company profit;
  • Corporation tax to be paid on company profit;
  • Has to disclose annual report according to Hungarian GAAP at Court of Registration for public view;
  • Accounts require auditing if turnover exceed HUF 300m p.a. or number of employees exceed 50 in average of last two business years.

How much Corporation Tax will the business pay?

Current Corporation Tax rate in Hungary is:

Tax rate Taxable profit (HUF)
Flat rate 9% no limit 

If a Hungarian Business incurs a loss then it can only be carried forward and offset against future profits from the same trade. It cannot be offset against parent company’s profits. The loss can be carried forward for five years time. But only 50% of the future tax base can be offset against the losses in a tax year.

What if we use Hungary to set up our holding company?

Hungary’s tax legislation means that it is a very attractive place to set up a holding company.

Dividends and liquidation proceeds received by Hungarian companies are exempt from corporation tax. There is no withholding tax on profit distributions paid to persons other than individuals. The withholding tax exemption does not depend on the corporate shareholder’s location, size of its holding and the time the shares are held.

The capital gains realized by the Hungarian entity on the sale of shares are exempt under following conditions. Such exemption is conditional upon the Hungarian company holding at least 30% interest in the subsidiary, and on the reporting of the acquisition of the shares to the tax authority within 60 days from the purchase or incorporation. If such conditions are met, then the exemption is applicable after a one-year holding period. But in this case any loss suffered upon the resale will become non-tax-deductible.

All of which makes Hungary a very advantageous location to set up a holding company.

What if we make cross-border transactions between group companies?

Hungary follows internationally recognized Transfer Pricing (TP) rules where cross-border trading and financial transactions between affiliated entities have to be conducted on an arm’s length basis. The price and terms should be the same as if the transactions had been concluded between completely independent parties.

Typical transactions between affiliated entities that are covered by TP regulations are:

  • Sale and purchase of goods;
  • Wagework;
  • Provision of management services;
  • Property rental charges;
  • Transfer of intangible assets e.g. trademarks, patents, etc.;
  • Sharing of knowledge, expertise, business contacts etc.;
  • Provision of financial support e.g. inter-group loans and charging a “market” interest on loans.

A business will need to prepare a Transfer Pricing Report proving the arm’s length basis of transactions. The report will include a functional and risk analysis, analysis of the adopted pricing model and benchmarking of the arm’s length basis.

Small enterprises are exempt from Hungary’s TP reporting regime, so only “medium” and “large” entities need to undertake detailed TP analysis. A “medium or large entity” for TP purposes is one with 50+ employees, or Revenues €10m+, or Gross Assets €10m+. However, these figures shall be calculated on group level.

However, even if an entity is exempt from the Hungarian transfer pricing regime it may fall under the scrutiny of the other international tax jurisdictions where it transacts. There may also be other tax regulations which ensure transactions are undertaken at a commercial value.

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