Hungary’s low-tax business formation

Hungary was the first of the former Eastern Block countries to start the transition towards a market economy in the 1970s. Since 2004, Hungary has been a full member of the European Union, and joined the Schengen zone in late 2007. Hungary has traditionally been in desperate need, and still needs and will need foreign investment and investors, as well as foreign connections. This is supported by the fortunate geopolitical situation, since Hungary is not just a Central European country, but also an important investment hub as a European Union border country.

It is also worth mentioning in relation to the advantages of Hungary that the Hungarian commercial banking sector and financial system have traditionally been the most developed in Central and Eastern Europe.

Hungarian company formation

Company formation in Hungary is very convenient. The most commonly incorporated company types are limited liability companies (Kft.) and companies limited by shares (Zrt.). Establishing a Hungarian company is very quick and takes 3-5 business days to cover the entire process for both entities. There is no requirement to have local directors. At least one general meeting per year must be held, but there is no need for personal presence. A statutory requirement is that Hungarian companies must have a bank account opened at a Hungarian bank. The audit of Hungarian companies are mandatory except if the company’s average net sales revenue in the two years preceding the financial year in question did not reach three hundred million Forints and the number of its employees did not reach fifty.

Cost of formation of a Hungarian Kft. and its process

The Hungarian Kft. is very similar to the German GmbH. Most foreign investments in the small and medium enterprise sector are established in Hungary with this company form. This company provides limited liability for all of its members. The data of the directors and owners are available to the public.

The minimum registered capital is HUF 3 million (approximately EUR 7,600), and the capital must be paid according to the provisions of the articles of association (not necessarily upon the establishment of the company).

Cost of formation of a Hungarian Zrt. and its process

Private limited company means a company limited by shares whose shares are not offered to the public. In this case, only directors and shareholders holding more than 50% of the votes appear to the public.

The minimum registered capital of a private limited company is HUF 5 mln (approximately EUR 12,750), of which 25% should be paid upon establishment. A general manager may be elected instead of the management board.

Corporate tax in Hungary

As mentioned in the introduction, the corporate tax rate is the lowest in the European Union in Hungary, as the corporate tax rate is only 9%. In addition to commercial activities, Hungarian companies are ideally suited to exercising holding functions, as neither the income from dividends nor from the sale of corporate shares is taxable, thus they are taxed at 0%. The list of possibilities is further broadened by the fact that Hungary may not impose a withholding tax on payments leaving the country.

Trusts based on the British model

It is possible in Hungary for business shares (in addition to other property elements) to be transferred into a trust and that the person transferring the assets names himself or any other person(s) as the beneficiary. Subsequently, the trustee is registered as the owner of the business share in the public records. According to the Hungarian regulations, assets transferred into the trust can also obtain the tax residence certificate.

Schengen VISA

The foreign director of the Hungarian company may be eligible for business residence in Hungary mainly for 2 years initially. Other family members of the applicant are also eligible for residence permit for the same period. After 2 years the residence permit can be renewed. The applicant shall spend at least 60 days in the Schengen Area 183 days before the renewal.