Hungary: Investments In Hungary

1. THE NATURE OF COMPANIES IN HUNGARY , SHAREHOLDERS PROTECTED BY LIMITED LIABILITY

1.1 Corporate forms in Hungary

The Hungarian Company Act determines five different corporate forms that may serve for investors as a basis to carry out business activity in Hungary. All of these forms can exclusively be established and operated by foreign owners and management:

  • limited liability company
  • company limited by shares (public or private)
  • European company limited by shares
  • joint enterprise
  • limited partnership
  • unlimited partnership.

These corporate forms enable the foreign investors to carry out all kinds of business activities, provided that the necessary licenses have been granted (e.g.: banking), if such license is a precondition of the operation. The Hungarian laws may prescribe that certain business activities can exclusively be carried out in particular corporate forms. Thus, for example, banks can only be founded and operated as a company limited by shares.

Of the six business associations, the joint enterprise, the limited liability company, the company limited by shares and the European company limited by shares have legal personality. The two partnership forms do not bear legal personality.

There are two other forms foreign investors might choose in Hungary to establish presence in Hungary.

Through a representative office foreign investors can perform normal liaison functions, including assisting with contract negotiation, advertising and exhibiting products and other forms of marketing on behalf of the parent company; but the office is not allowed to pursue core business activities. This vehicle can be useful if the foreign undertaking intends to familiarize itself with the local business conditions before embarking on an investment.

Another form to establish a presence in Hungary can be done via a branch office, which is an organizational unit of a foreign company, being authorized to carry out independently normal business activities.

Neither the representative office nor the branch office bear legal personality.

1.2 Capital requirements

No minimum capital is required to establish and operate an unlimited partnership, a limited partnership and a joint enterprise.

The Company Act determines a minimum amount of subscribed capital for the limited liability company and the company limited by shares. The minimum initial capital is HUF 500.000.- ($ 2630.-) for the former and HUF 5.000.000.- ($ 26,315.-) for the latter if it is private and HUF 20.000.000.- ($ 105,265.-) if it is public. The European company limited by shares can be established at a capital investment of EUR 120.000.-.

The subscribed capital can be contributed in the form of cash or in kind. Upon foundation, the amount of contribution in cash shall amount at least to 25% of the company's stated capital and to 50% of the capital at least in the case of a limited liability company.

In order to be registered, the founders of a limited liability company and a company limited by shares have to provide their contributions in kind fully, and pay in at least half of each cash contribution to the company's bank account prior to the submission of the application for registration. The unpaid cash contributions must be contributed within one year from the date of registration of the company.

If the limited liability company or the company limited by shares is established as a single-person company, the capital must be fully paid up (contributed) prior to the submission of the application for registration.

There are no capital requirements for branches and commercial representative offices.

1.3 Limited liability company

This corporate form is the most popular vehicle for foreign investors. The legal characteristics of an LLC are very similar to those of the German GmbH or the US limited liability company, while its nearest English equivalent is the private limited liability company.

An LLC can be founded as a single-person company as well.

The members have limited liability, which means that - in principle - the shareholders of a limited liability company are not liable for the obligations of the company. The obligation of the shareholders of the company extends only to the provision of their capital contributions and to other possible contributions set forth in the articles of association. The Company Act, however, determines certain cases when the corporate veil can be lifted.

The supreme body of an LLC is the members' meeting, which must be convened at least once a year and where all members are entitled to participate. The members' meeting decides the most important strategic business issues, elects and removes the managing director(s), the auditor and the members of the supervisory board and it may alter the Articles of Association.

The day-to-day operations of an LLC are headed by one or more managing directors, who may be the members of the company or outsiders. An LLC need not appoint a supervisory board or an auditor as a main rule; however, the laws determine the conditions when the establishment of a supervisory board and the appointment of an auditor is mandatory.

1.4 Company limited by shares (CLS)

This is the most strictly regulated corporate form, which shows similarity to the German AG or to the English Plc. A CLS is particularly suitable to large business entities with several investors, but it is also possible to establish such entity as a single-person company. A CLS can be operated as either a public or a private company. A public CLS has to have at least a portion of its shares publicly traded.

The obligation of the shareholder extends to the provision of the face value or issue value of shares. In principle, the shareholders of a company limited by shares shall not be liable for the obligation of the company.

The supreme body of a CLS is the shareholders' meeting, which decides strategic issues, appoints and recalls the board of directors, the supervisory board and the auditor. The election of a supervisory board and the appointment of an auditor is mandatory requirement due to the Company Act.

1.5 Joint enterprise

This corporate form is a profit-oriented association of at least two foreign and/or domestic companies and individuals to pursue business activities of common objectives and where the members are jointly and unlimited liable for the obligations of the company exceeding the company's assets.

1.6 Unlimited partnership

Partners in an unlimited partnership bear joint and several liabilities in respect of the obligations of the company and at least two partners are required for the formation and operation of such entity. Any company, with the exception of partnerships, may become a partner in an unlimited partnership. Individuals may also become partners, however minor persons and individuals already bearing a joint and several liability in another company are excluded.

The active participation of the partners in conduct of the partnership's business is legally required.

1.7 Limited partnership

In a limited partnership the minimum number of members is two, of which at least one, the general partner bears unlimited liability. The other partner's liability is limited to the amount of its capital contribution.

Only the unlimited partners may manage the partnership and represent the partnership in its dealings with third parties.

The profit distribution is generally proportional to the capital contributed, but the parties are free to agree otherwise. It is against the law, however, to exclude any partner from the distribution of profits.

2. TITLE OF REAL PROPERTY

Ownership right is an exclusive right of the owner to possess, to use, to benefit from the property and to dispose over it.

A Constitutional amendment of the year 1990 provides full range protection against expropriation, nationalization and any arbitrary action by the government except in cases of national concern. In such cases, immediate and full compensation is provided to the owner.

Foreign individuals and corporations may own real property other than agricultural land. However, after concluding the purchase contract and before requesting registration of the ownership at the land registry, foreign individuals and corporations are obliged to obtain the permission of the county administration office. Permission for the acquisition of title of ownership to real property shall be granted if it does not constitute any injury to local government or other public interest.

3. TRANSFER TAXES ON PROPERTY TRANSACTIONS

3.1 Duty for property transfer

3.1.1 General rate of duty

The general rate of the duty for asset transfer is 10%. The duty is established with this rate with regard to the acquisition for example of land for construction, garage, retail outlet or office. It will reduce to 4% from 1st January 2010.

The basis of the duty on property transfer is the market value of the acquired property.

3.1.2 Discounted rate of duty

The acquisitions of those engaged in regular real property trade are subject to duty, specified as 2% of the market value, irrespective of the nature of the property, providing that they do not purchase the property for their own purposes, but in order to re-sell them.

There is an obligation duty as well as an enterprise with real property alienates its shares. This rule is valid from 1st January 2010.

Enterprises engaged in real property trade as their core activity as well as enterprises engaged in the financial leasing of real properties, as their core activity are entitled to benefit from the preferential rule.

Enterprises acquiring properties must make a statement, at the time of reporting the contract for imposing duty, whether they have purchased the property for the purpose of re-sale or financial leasing.

3.2 Income tax

A company pays a tax rate of 16% (19% from 1st January 2010) after selling a property compared to 20% when a private individual sells a property.

3.3 Miscellaneous

Real property transfers become effective when entered into the real estate register. All real estate is registered at the land registry, where the property is situated.

Contracts involving real property must be in writing. Real property purchase contracts must be countersigned by an attorney or legal counselor.

4. REPATRIATION OF FOREIGN CAPITAL

The Foreign Investment Act of 1988 grants full protection to the investments and businesses on non-Hungarian resident investors and guarantees that investors will be treated in the same manner as national investors. The Act also contains a repatriation guarantee under which foreign investors are free to repatriate any dividends, after-tax profits, royalties, fees, or other income deriving from the operation or sale of the investment as well as remit profits and investment capital to their home country in the event of partial or complete termination of their enterprise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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