Company Formation In Hungary: Tax Exemptions, 9% Corporate Income Tax And 0% Withholding Tax

I. Introduction

In the current landscape of global commerce, from multinational enterprises to start-ups, investors are prioritizing jurisdictions that offer a compliant, stable, and fiscally advantageous environment for establishing their European Union (EU) operations. While international tax standards continue to evolve, particularly through initiatives like the Pillar II Global Tax, OECD's Base Erosion and Profit Shifting framework, Hungary has strategically maintained its status as a premier location for corporate structuring and wealth protection.

For international investors Hungary can be an option not just for trading but holding purposes as well. With its location at the heart of Europe Hungary can be seen as an investment hub.

II. Key Factors for Company Formation in Hungary

2.1 Company Features in Hungary and Differences

The central pillar of Hungary's economic appeal is its remarkably low 9% Corporate Income Tax (CIT) flat rate, a rate that remains the lowest across all EU member states. This low rate is combined with a fast and smooth incorporation process, typically utilizing the Limited Liability Company (Kft.) or Limited Liability Company by Shares (Zrt.) structure.

The primary requirement for both types of companies is to open a local bank account in Hungary within one year of the company's establishment. Otherwise, the company will be removed from the trade registry. Opening a bank account in Hungary is possible by disclosing the company's ownership, activities, and potential business partners to the bank's compliance department.

Turkish citizens and legal entities based in Turkey can be 100% shareholders in both Kft. and Zrt. companies and can be appointed as directors or members of the board of directors. This is because in companies with foreign shareholders, the involvement of a Hungarian person is not mandatory, either as a shareholder or in the management body. In addition, legal entities based in Turkey can open representative offices and branches in Hungary.

2.2 Main Characteristics of a Hungarian Kft

The Limited Liability Company stands as the most common corporate entity available and is the standard legal vehicle through which the majority of inward foreign direct investment into Hungary is channeled.

The minimum registered capital required for establishing a Kft. is HUF 3 million (approximately €7,700). Crucially, the full amount of the registered capital is not mandated to be fully paid up at the time of incorporation; however, the distribution of dividends is legally prohibited until the capital contribution requirement is satisfied in its entirety. A Kft. must appoint at least one director, who can be either a natural person or a legal entity.

If a legal entity is appointed as director, a natural person must be designated to act on its behalf. Directors and members of a Kft. are considered public records and are accessible to the public via the Court of Registry, ensuring a high degree of transparency regarding the company's controlling interests. The Annual General Meeting must convene at least once per business year, though physical attendance is typically not a mandatory requirement.

A statutory audit is generally not required for a Kft. unless specific criteria related to the scale of its operations are met. An audit becomes mandatory if the company's financial performance in the two preceding business years exceeds two of the following thresholds: average net sales revenues of HUF 600 million (approximately €15.735,00) and an average headcount of 50 employees.

2.3. Main Characteristics of a Hungarian Zrt.

While the Limited Liability Company (Kft.) is the most common vehicle, the Limited Liability Company by Shares (zártkörűen működő részvénytársaság, Zrt.) serves as the preferred legal form for managing most high-scale foreign investments and substantial ventures. The minimum registered capital required for establishing a Hungarian Zrt. is set at a higher threshold of HUF 5 million (approximately €12,800). Unlike the Kft., the Zrt. requires a minimum of 25% of the total share capital to be paid up front at the time of incorporation, with the legal obligation to remit the remaining capital within 365 days.

In terms of public disclosure, the Hungarian Zrt. offers a slightly higher degree of discretion: only the details of the directors and shareholders owning more than 50% of the voting rights are considered public records, accessible via the Court of Registry.

Finally, the statutory audit requirements for a Zrt. are identical to those stipulated for a Kft., becoming mandatory only when specific financial and personnel thresholds are exceeded for the preceding two business years.

III. Core tax facts of Hungary: 9% Corporate Income Tax

3.1 Corporate Tax Structure: Calculation of Payable Tax

In sharp contrast to the European Union's current average corporate tax rate, which approximates 21.5%, Hungary's fiscal policy receives a major attention from multinational enterprises or newly built start-ups which are seeking strategic establishment within the European Market. It is worth to mention that in the United Arab Emirates - a popular destination for tax optimization – the same %9 corporate income tax rate applies. Hungary, with being a EU country, can be a strong rival against UAE.

The taxable base is determined by adjusting the pre-tax accounting profit in strict compliance with the provisions of the relevant tax legislation. Should an entity's calculated taxable base be lower than the statutory minimum tax base (2% of the annual revenue), the company is obliged to remit tax on the minimum threshold unless a formal justification for the deficit is successfully submitted to the National Tax and Customs Administration (NAV).

IV. Other Taxes: Personal Income Tax, Value Added Tax (VAT) and Local Business Tax (LBT)

A full evaluation of Hungary's tax environment necessitates an understanding of the secondary, yet highly impactful, tax regimes that govern domestic activities, consumption, and employment.

4.1 Value Added Tax

As an EU Member State, Hungary's VAT system adheres to the EU VAT Directives, yet utilizes a notably high standard rate of 27%. This standard rate applies to the majority of goods and services, though reduced rates of 18% and 5% are prescribed for specific necessities and services. For international trade, the system facilitates cross-border commerce through the zero-rating (0%) of compliant intra-Community supplies and exports. Furthermore, compliance is governed by highly advanced mechanisms, including the mandatory Real-Time Invoice Reporting (RTIR) system, which requires immediate electronic data transmission to the tax authority (NAV), ensuring robust fiscal transparency.

4.2 Personal Income Tax

The Hungarian Personal Income Tax (PIT) system is characterized by its simplicity and competitive nature, utilizing a uniform flat rate of 15% levied on the gross taxable income of individuals. The scope of this tax adheres to the general principles of residency: Hungarian tax residents are subject to PIT on their worldwide income, while non-residents are taxed exclusively on their Hungary-sourced income. This 15% rate applies not only to employment income but generally extends to most forms of investment income and capital gains, ensuring fiscal predictability for individuals.

However, the true total cost of personnel must account for the social security burden. While employees contribute 18.5% of their gross salary, employers are obligated to remit a separate 13% Social Contribution Tax on the gross wages. This combined levy on employment costs must be factored into any financial model assessing the operational expenditure of a company established in Hungary.

4.3 Local Business Tax

The Local Business Tax (Helyi Iparűzési Adó or LBT) is a mandatory municipal levy that significantly impacts the overall operational tax burden. This tax is applied by the municipality where the business is established, at a rate that is legally capped at 2%. The critical distinction for LBT lies in its tax base, which is not corporate profit. Instead, the base is calculated based on the company's net sales revenue less certain statutorily defined costs.

Because of this revenue-based calculation, the LBT constitutes a fixed operational cost that may be due even if the company reports a net loss for Corporate Income Tax purposes. Also, in many of the cases the deductions available for the corporate income tax base might not be deductible under local business tax, which can result in a higher tax burden.

V. Conclusion

Hungary offers a strong alternative for Turkish investors in terms of capital investments and tax planning due to factors such as access to the EU market, 9% corporate income tax rate, the 0% withholding tax under certain conditions, and the absence of a requirement for a Hungarian partner/manager. In particular, the limited liability and relatively low capital thresholds offered by Kft. and Zrt. structures, combined with operational flexibility, position Hungary as a strong investment alternative.

However, in pre-investment analyses for a company formation in Hungary, the high VAT rate of 27%, social security obligations that increase employment costs, and most importantly, the Local Business Tax, which varies between 0% and 2% and is calculated on turnover, should be carefully evaluated. Furthermore, the requirement to open a local bank account within one year of the company's establishment necessitates proper planning of compliance processes in practice. Therefore, the decision to establish a company in Hungary should be made based on a comprehensive analysis, taking into account the target market, revenue model, employment plan, and central location (especially local tax rates).

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.