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Setting up a business in Hungary - part 2

Corporate legislation

In order to harmonize with the respective EU regulations as well as to establish a modern and comprehensive regulation of business entities, Hungary implemented substantial changes to its corporate law in 1997. The new Act on Business Associations (hereinafter: Company Act) has given mandatory rules for all economic entities, and the Act on Company registration regulates the registration of such entities. Alternative corporate forms

The 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
  • 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.

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. The last 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.

Of the five business associations, the joint enterprise, the limited liability company and company limited by shares have legal personality. The two partnership forms do not bear legal personality. All companies, however, have legal capacity and under their own name they may acquire rights and undertake obligations. The only noteworthy consequence of the afore-mentioned distinction relating to the company's legal personality is the fact, that non-legal personalities are registered within a shorter period and at a smaller cost.

Capital requirements

No minimum capital is required to found 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 3 million ($ 13,527) for the former and HUF 20,000,000 ($ 95,238) for the latter.

The subscribed capital can be contributed in the form of cash or in kind contributions. To be registered, the founders of a limited liability company have to make available the in kind contributions of more than 50% of the registered capital and deposit at least half of each cash contribution into 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, whereas the in kind contributions of up to 50% of the registered capital must be made within 3 years. In the case of a company limited by shares, at least 25% of the share capital must either be paid up in full on registration or provided in cash whtih a year of registration or in kind within 5 years of registration.

If the limited liability company or the company limited by shares is founded 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.

Limited liability company (LLC)

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.

This form is suitable to coordinate the co-operation of a small number of shareholders, where the members are actively participating in the company's affairs. An LLC can be founded as a single-person company as well.

The members have a limited liability, which means that – under normal circumstances – they are not liable for the obligations of the company. 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 members' meeting has a quorum if – unless the Articles of Association otherwise provide – at least half of the subscribed capital or the majority of the eligible votes are represented.

The members' meeting passes its resolution by the simple and two third majority of the votes cast.
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.

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 (Nyrt.) has to have at least a portion of its shares publicly traded.

The shares embody membership rights. A CLS may issue several classes of shares, namely - ordinary shares, preference shares, employee shares and interest shares. One share class constitutes identical rights to its holders. In general the shareholders' voting rights are in proportion to the sum of the face value of the shares they hold. The statutes of the company, however, may provide otherwise by creating the above-mentioned share classes, and may specify the maximum voting power an individual may exercise.
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 (for companies with an annual average of more than 200 full-time employees) and the appointment of an auditor is mandatory requirement of the Company Act.

A CLS is the only corporate form that may issue securities. The Company Act specifies two types of bonds that a share company may issue. A convertible bond guarantees the right of conversion to shares upon the request of the bondholder. The other bond form grants subscription rights upon the issue of new shares.

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 liable to stand surety for the unsettled obligations of the companies.

Unlimited partnership

Partners in an unlimited partnership bear joint and several liability in respect of the unsettled 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.

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 partners' liability is limited to the amount of their 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.

New forms of companies

In addition to the unaltered forms of Hungarian commercial enterprises (company limited by shares [Hungarian abbreviation: Nyrt. for public and Zrt. for private company limited by shares], limited liability company [Hungarian abbreviation: kft.], limited partnerships [Hungarian abbreviation: bt.], unlimited partnerships [Hungarian abbreviation: kkt.] and joint ventures [Hungarian abbreviation: kv.] ) some new forms of corporations have appeared with Hungary's accession to the European Union: European Economic Interest Grouping, European Company (European Joint-Stock Company) and European Cooperative Society.

The objective of a European Economic Interest Grouping is to facilitate and develop its members' activities, as well as to improve and increase their success, but it cannot have the direct goal of making profit. Its main function is to ensure that identical conditions are applied on the Community market and to create an efficient and flexible cooperative form for small and medium enterprises. At least two founding members are required, either foreign or Hungarian nationals or legal entities, or commercial enterprises without legal status. The “European Economic Interest Grouping” company form was instituted by Council Regulation (EEC) No. 2137/85, dated 25 July 1985. The Decree automatically became part of our internal body of law upon the country's accession to the EU.

The European Company most closely resembles a Hungarian joint-stock company, therefore it is referred to in Hungarian as a European Joint-Stock Company. Typically a merger of two joint-stock companies registered in at least two member states is required, with one of them being registered in the relevant member state. Therefore, a joint-stock company registered in Hungary cannot simply be transformed into a European company just because it has a presence in several member states at the same time. A corporation must pay taxes (on its entire earnings) in the members state where it is registered, but conventions on the avoidance of double taxation allow for companies with a base of operations abroad, but headquarters in Hungary, to pay taxes on the earnings attributable to the foreign base of operations in the country where said base is located. The equity capital of a European Company is 120,000 EUR. The “European Company” company form was instituted by Council Regulation (EEC) No. 2157/2001, dated 8 October 2001.

Members of a European Cooperative Society may retain their independence while endeavouring to improve their business and social activities through internal agreements. Such agreements are typically related to shipping or performing services. Such companies must have at least five natural persons as founders, of whom at least two must be residents of another member state. A European Cooperative Society can also be created as a result of a merger or the restructuring of an already existing cooperative society. The “European Cooperative Society” company form was instituted by Council Regulation (EEC) No. 1435/2003, dated 22 July 2003.

Source: ITDH Hungary
Last updated 3rd July 2006


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