How to start a business in Hungary (by Dr. Kiss Edit)

This article tells you the main aspects of starting a business in Hungary.

I. Useful informations about the Hungarian Economy


1. To understand the recenet situatuion, some words about the last 10 years

The economy of Hungary is a medium-sized, structurally, politically and institutionally open economy in Central Europe and is part of the European Union's (EU) single market. Like most Eastern European economies, the economy of Hungary experienced market liberalisation in the early 1990s as part of the transition from socialist economy to market economy. Hungary is a member of the Organisation for Economic Co-operation and Development (OECD) since 1995, a member of the World Trade Organization (WTO) since 1996, and a member of the European Union since 2004.

2. General government gross debt in Hungary amongst other countries and the EU

Reaching 1995, Hungary's fiscal indices deteriorated: foreign investment fell as well as judgement of foreign analysts on economic outlook. Due to high demand in import goods, Hungary also had a high trade deficit and budget gap, and it could not reach an agreement with the IMF, either. After not having a minister of finance for more than a month, prime minister Gyula Horn appointed Lajos Bokros as Finance Minister on March 1, 1995. He introduced a string of austerity measures (the "Bokros Package") on March 12, 1995 which had the following key points: one-time 9% devaluation of the forint, introducing a constant sliding devaluation, 8% additional customs duty on all goods except for energy sources, limitation of growth of wages in the public sector, simplified and accelerated privatization. The package also included welfare cutbacks, including abolition of free higher education and dental service; reduced family allowances, child-care benefits, and maternity payments depending on income and wealth; lowering subsidies of pharmaceuticals, and raising retirement age.

These reforms not only increased investor confidence, but they were also supported by the IMF and the World Bank, however, they were not welcome widely by the Hungarians; Bokros broke the negative record of popularity: 9% of the population wanted to see him in an "important political position" and only 4% were convinced that the reforms would "improve the country's finances in a big way".

In 1996, the Ministry of Finance introduced a new pension system instead of the fully state-backed one: private pension savings accounts were introduced, which were 50% social security based and 50% funded.

In 2006 Prime Minister Ferenc Gyurcsány was reelected on a platform promising economic “reform without austerity.” However, after the elections in April 2006, the Socialist coalition under Prime Minister Ferenc Gyurcsany unveiled a package of austerity measures which were designed to reduce the budget deficit to 3% of GDP by 2008.

Because of the austerity program, the economy of Hungary slowed down in 2007. However, due to many large investments, GDP growth may improve to 2.8-4.0 percent in the second half of 2008. In foreign investments, Hungary has seen a shift from lower-value textile and food industry to investment in luxury vehicle production, renewable energy systems, high-end tourism, and information technology. As well as farming in the southern region of Hungary.

3. 2008-2009 financial crisis

On 27 October 2008, Hungary reached an agreement with the IMF and EU for a rescue package of US$25 billion, aiming to restore financial stability and investors' confidence.

Because of the uncertainty of the crisis, banks gave less loans which led to a decrease in investment. This along with price-awareness and fear of bankruptcy led to a fallback in consumption which then increased job losses and decreased consumption even further. Inflation did not rise significantly, but real wages decreased.

The fact that the euro and the Swiss franc is worth a lot more in forints than they did before affected a lot of people. According to The Daily Telegraph, "statistics show that more than 60 per cent of Hungarian mortgages and car loans are denominated in foreign currencies".

Though the forint has got stronger, some economists believe that "The Hungarian forint is too strong in the current economic environment".

4. 2010-2011

After the fall of the Berlin Wall, Hungary was a magnet for foreign investment, particularly in car manufacturing and property.

But after a run on the currency last year, the property market collapsed. The accompanying collapse in Western European demand for manufactured goods - most notably cars - means Hungary has seen no advantage from the devaluation. Unemployment has soared - 100,000 people are expected to lose their jobs this year.

The Hungarian government is attempting to guarantee the mortgage payments of everyone who loses a job in the crisis but it is already in receipt of IMF assistance and the pledge will mean more cuts in general expenditure.

International help has been sought. Switzerland has promised to provide all the Swiss francs the Hungarian government needs to meet repayment demands. Austria is demanding the EU establish a euro150 billion ( pounds 134 billion) fund to bail out East and central Europe. (see in Daily Telegraph as well).

In 2010 it seems that our government had been changed and the new government planed to strenghten the economy. In 2010 we saw the first signs: for example, the forint (our national currency) had become stronger, and investors – from example from Russia- had appeared again. We still believe to turn a page after last year difficulties.

Hungary is part of the European Union’s (EU) single market and has been part of the EU since 2004. It is a medium sized open economy in Central Europe.

II. How to start a business in Hungary

1.Found your own company (in a nutshell)

The first step is to hire lawyer who represents the company (limitied liability company), creates company deeds, and prepares other legal documents. The company must be represented by an attorney at law in the registration process. The lawyer’s fee is subject to free agreement, so it varies significantly according to the services provided and company size. Attorneys charge at least from HUF 50.000,- - up to HUF 100,000 for registering a simple limited liability company (KFT). You can chosse between 2 types of procedures: 1. Simlified electronic filing or 2. Standard electronic filing.

To sum up the requirements for Hungary company incorporation: 1./ One shareholder and one Director is required; 2./ Must register for VAT; 3./ Corporate shareholders are permitted; 4./ A registered address or virtual office required (you need a real estate (=official seat). So you should buy or rent one); 5./ Minimum share capital is approx. HUF 500,000,-, this is not mandatory; 6./ An accountant should be appointed prior to the company application.

About the incorporation procedure: By simplified electronic filing the stamp duty is HUF 15,000 and there is no publication fee. Incorporation: 1 business day. By standard electronic filing the stamp duty is 100.000 HUF and there is HUF 15000 publication fee. Incorporation is 15 days.

Pay at least 50% of subscription amount (at least HUF 250,000) into the bank account designated at the time of subscription. Apply for registration at the Registration Court (simplified electronic registration). Half the cash contribution must be paid in at the time of company establishment. The remainder must be paid in according to the provisions of the articles of association, but no later than a year from establishment.

Simultaneously with the submission of the registration application, the court registers companies with the State Tax Authority (for VAT and income tax purposes) and with the Statistical Office through an online system.

After the registration some authorizations, permissions need to be got from different authorities and of course you need labour force. Among the costs we must mention the price of a real estate (I mean a real estate for official seat), the costs of advertising, etc. The company may choose to meet publication requirements by publishing the required information on its website instead of the Company Gazette (Cégközlöny). In the latter case, no publication fees are payable.[1]

In Hungary, the 1988 reform of taxes introduced a comprehensive tax system which mainly consists of central and local taxes, including a personal income tax, a corporate income tax and a value added tax. Among the total tax income the ratio of local taxes is solely 5% while the EU average is 30%.

The central tax system consists of three components:(a) Personal income tax- The taxation of an individual is progressive, determining the tax rate based on the individual’s income; (b) Corporate income tax- Corporate tax is fixed at 16% of the positive rateable value, with an additional tax called solidarity tax of 4%, the measure of which is calculated based on the result before tax of the company. The actual rateable value might be different is the two cases; (c) Value added tax (VAT)- The rate of value added tax in Hungary is 27% since 1 of January, 2012.


2. Make an agreement with a Hungarian company

Foreign companies often choose this way of starting their businesses in Hungary, because you do not have fulfil all the conditions on your own, and pay all costs, mentioned (in nutshell, it’ s not complete at all) in point 1., so this way can be faster and easier to open a market in our country.

You can buy a business share (the value must be at least HUF 10.000). In this case the procedure in front of the Registration Court is a bit longer. The company must be represented by an attorney at law in the registration process. The stamp duty is HUF 15,000 and there is publication fee HUF 3,000. The company is not able to sell business shares in case it has a debt for the tax authority. By simplified electronic filing the incorporation of the new owner is 1 business day. By standard electronic filing the incorporation is 15 days.

Forming a corporate entity in Hungary has many advantages such as low (in some cases none) capital gains and dividends tax, but Hungarian company formation is not seen as an offshore corporate structure or a tax heaven.  Some types of companies will benefit more than others in Hungary for example a holding company; dividends paid to any resident or non-resident person are legally tax free. Any paid royalties are considered expenditures and can be deducted from corporate profits.

Start your business in our country, and please don’t hesitate to contact us today.

[1] Source: http://www.doingbusiness.org