Starting a Business in Hungary – Business Forms and Taxing
If you want to start a business as a foreigner in Hungary, it is easier than in many other places in Europe. The process is also less time-consuming.
There are many other benefits to this choice. For one, starting a business in Hungary could be your gateway into the European Union. Hungary is also known as a stable economy with a solid infrastructure. Wages and taxes are lower than in many other places, as are the registration fees and expenses.
Finally, Hungary, and especially the capital city of Budapest, is a safe and friendly place to do business in.
Entrepreneurship or Setting Up a Company?
To be eligible to become a private entrepreneur in Hungary, you’ll have to be a citizen of the European Union or another country that signed the European Economic Area Agreement. You will also have to be subject to the Act I of 2007 on the Admission and Residence of Persons with the Right of Free Movement and Residence.
The four available types of enterprise you can establish in Hungary include independent/private entrepreneurship, business association, branch office, and commercial representative office. Let’s take a closer look at each one.
If you opt for private/independent entrepreneurship, the good news is that it’s free to register in Hungary. In general, it is done much faster than establishing a business association.
Once you’ve completed the registration, you will be able to pursue your business within the prescribed framework. However, you will have to notify the authorities of your choice of activities and you will be limited by what you state in the notification.
As a private entrepreneur, you are not obliged to notify the authorities of activities that can be conducted as independent activities. The most notable example is letting property.
However, you should keep in mind that as a private entrepreneur, your liability is unlimited. In practice, this means that all your assets can be used to cover the debt your entrepreneurship accrues.
Another important thing – as a private entrepreneur, your financial accounts will have to be cash-based. It is thus strongly recommended that you hire an accountant.
As a foreigner, you can establish five types of business associations in Hungary. Have in mind that all business associations need a HUF bank account.
- Unlimited partnership (Kkt). Needs a minimum of two members, but there’s no required starting capital. However, involved partners share unlimited liability. The registration fee is 50,000 HUF. The administration is done by partners.
- Limited Partnership (Bt). It needs a minimum of two members – a general and a limited partner. The general partner has unlimited liability while the limited partner is liable only for their stake in the company. No minimum capital is required and the general partner manages the company.
- Limited liability companies (Kft). The minimum number of members of an LLC is one and all members have limited liability. Minimum investment capital is 3.000,000 HUF and each company must have at least one managing director. It also needs a supervisory board if the law requires so or the company has more than 200 employees.
- Private limited company (Zrt). Needs at least one member and at least 5,000,000 HUF of starting capital. The liability of the shareholders is limited to their shares. In terms of administrative provisions, it must have a board of directors. There needs to be a supervisory board if the company has more than 200 employees or if the shareholders that have at least 5% voting rights demand so.
- Public limited company (Nyrt). Needs at least one member and the starting capital must be at least 20,000,000 HUF. A board of directors is required, while the existence of the advisory and supervisory boards depends on the same criteria as for private limited companies.
One of the main advantages of business association is that you can register a company via “one-stop shop” where the Court of Registration obtains your VAT number from the tax authority for you. Generally, setting up a company takes up to 15 days.
Company registration fees range from 50,000 HUF for unlimited and limited partnerships to 100,000 HUF for LLCs and private limited companies. It costs 600,000 HUF to register a public limited company.
Every foreign company can establish a branch office in Hungary. Unlike the company types represented in the previous section, you do not need to register a legal entity with the Court of Registration when opening a branch office from abroad.
This form of company is beneficial to businesses already established abroad. The registration fee is 50,000 HUF and the establishment time doesn’t exceed 15 days. There are no strict administrative requirements.
Through your branch office, your company can conduct its business. Have in mind that your company is represented before the Hungarian law and other companies through its branch office. Accordingly, branch offices assume all the benefits and liabilities of their parent companies in Hungary.
For the purposes of taxation, a branch office is considered a separate legal entity from its parent company. You will be required by Hungarian law to hire or employ a certified accountant who will maintain the books and prepare financial statements each year. Your employees, though tied to a foreign entity, will meet their liabilities through your branch office.
Commercial Representative Office
Similar to a branch office, a commercial representative office doesn’t need a registered legal personality in Hungary. Registration costs 50,000 HUF and there are no specific administrative requirements. Also, registration takes less than 15 days. This form is beneficial for companies already established abroad looking to expand their presence in Hungary.
A commercial representative office can’t perform commercial activities on behalf of the parent company or gain profit. Instead, it can engage in marketing, propaganda, spreading information, mediation with other companies, and contract preparation.
Regarding the employment rules, they are the same as for branch offices. The parent company bears all liabilities. Since there are no business activities, commercial representative offices can’t accrue any debts, being the least risky company type you can establish.
Commercial representative offices have the same employment rules as branch offices. You will also have to register the office with the tax authority and obtain a tax administration number to be able to fulfil your payment and tax duties.
Starting a Business in Hungary – Taxing
Here is a brief overview of the most important tax types in Hungary.
Kata stands for “small taxpayer’s itemized lump-sum tax.” This tax exempts the company from paying the corporate income tax, social contribution tax, and many other forms of taxes. Single-member companies, law firms with one private person, private entrepreneurs, and limited and general partnerships can apply for this tax.
The tax rate is 50,000 HUF (or 75,000 HUF if you’ve applied for the higher base of social security) per full-time employee per month or 25,000 HUF per employee that’s not employed full-time. If your revenue is over 12,000,000 HUF, you will have to pay a tax of 40%.
EVA, or simplified entrepreneurial tax, is not available starting from 2019. It was available to companies (LLCs, general partnerships, single-member companies, and private entrepreneurs) with revenue under 30,000,000 HUF. It used to relieve them of VAT, corporate tax, and a slew of other taxes.
The EVA rate used to be 37% of the company’s revenue.
Corporate Income Tax
Hungarian residency is not required for this tax, meaning both resident and foreign taxpayers have to pay it. Its rate is 9% flat, which may be beneficial if your company has a large revenue. Business associations, employee stock ownership plans (ESOP), companies owning real estate, Societas Europa (and similar partnerships), and other legal entities have to pay it.
Corporate Group Tax
As of 2019, two or more taxable persons, either domestic or foreign (through their Hungarian establishment) can form their own corporate tax group. This allows members with negative tax base to set it off with the base of a member that has a positive one, up to 50%. There are also other administrative benefits.
Controlled Foreign Company
As of 2019, a CFC or a controlled foreign company is a foreign company that has at least 50% of voting rights, registered capital or after-tax profits held by the taxpayer (a Hungarian business/Hungarian company). Also, if the foreign company would pay less than a 4.5% CIT in its home country, it is a subject to CFC in Hungary.
Hungarian companies can avoid this qualification if all their income comes from genuine or real arrangements (deals and arrangements not made for the purposes of tax advantages). Also, it is avoidable if their profit is under 243,952,500 HUF and non-trading income is under 23,495,250 HUF.
Who Can Be the Taxpayer for the Added Tax System?
Taxpayers with registered VAT numbers are subject to paying the value-added tax. Taxpayers with registered addresses in Hungary, as well as appointed representatives of the companies without a registered address, can be the taxpayers for the added tax system. The rate is mostly 27%, though there are also 18% and 5% rates that apply in certain cases.
VAT Tax Refund
In case your company qualifies for a tax refund, you have to file a request to the tax authority. The tax authority then has 75 days to refund you your VAT. This can be counted as 75 days since filing the request or 75 days since your tax is due. The later date is always used.
If the amount is under 1,000,000 HUF, the deadline is 30 days. If it’s over 1,000,000 HUF, it is 45 days. In case you or your company is considered risky, the deadline will be the full 75 days. For “reliable” taxpayers, the general deadline is 30 days. In the case of share-limited public companies deemed “reliable,” the deadline is 20 days.
When starting a business in Hungary, an accredited accountant can keep your books. They can also file your financial reports at the end of the year. At the same time, a legal representative can help you establish a company more easily, as well as represent the company before the Hungarian courts and authorities.
Pick between entrepreneurship and one of the available companies, register your organization, and enjoy doing business in Hungary.