Global companies in Hungary operate primarily through subsidiaries, while the establishment of a branch office provides further interesting alternatives. Subsidiaries and branches both have benefits for European firms, and they may be an ideal way to develop throughout Europe, raise recognition, and build a client base by taking advantage of new markets. If you plan on opening a branch or a subsidiary in Hungary, you should know that these entities are selected according to the activity of the company and its special needs. Both entities have their explicitness and while one may be adequate for certain businesses, it may not be the ideal business choice for other types of activities.
Branch (FIÓKTELEP) in Hungary
A branch office is an organizational unit of a foreign company without legal quality, vested with financial independence, and registered in the Hungarian companies register as a district office of the foreign company.
A branch office is considered as established when it has been placed into the companies register. A branch office may initiate operating once the application for registering the branch office has been submitted to the Court of Registration, given that it reflects under registration’ on its corporate correspondence.
Branch offices are treated as PEs (permanent establishments) for taxation purposes. They have to specify their tax base according to the common rules applicable to Hungarian companies. The profit for the year is subject to CIT (corporate income tax) of 9%.
The foreign parent must continuously provide the assets and funds needed for the operation of the branch office and the concession of its liabilities. The employees of a branch office are in a lawful relationship with the foreign company, and the foreign parent utilizes the employer’s rights. A branch is regarded to be related to its parent company/headquarters.
Subsidiaries (LEÁNYVÁLLALAT) in Hungary
Subsidiaries are structures of legal entities opened by foreign companies in order to conduct commercial activities not certainly in the same field as the foreign company.
If both a commercial representative and a branch office are unsuitable, you can open a subsidiary in Hungary, which is a corporation that is possessed by a foreign firm. The most general option, the Ltd (Kft in Hungarian), has a HUF 3 million minimum equity requirement. It isn’t essential to put money into the corporate bank account at the time of incorporation, but you must validate that you have it in writing. Note that if the capital is not used for business purposes, you must be able to prove to the authorities that they are in the company’s control. Dissimilar to branches, subsidiaries in Hungary have legal status and they are commonly set up as a Hungarian LLC. Subsidiaries have their share capital and the parent company is their primary shareholder. Because the parent company is not responsible for the actions of the subsidiary, these types of structures are self-reliant.
Branch Vs Subsidiary
As stated, subsidiaries and branch offices are legal entities that perform business, while the action of representative offices is restricted to marketing and advertising. The major pros and cons of subsidiaries and branch offices are as follows:
- Liability
A subsidiary has limited liability, ensuring headquarters from legal, tax, and government compliance responsibilities, while in the case of a branch office, the foreign parent company will have full liability in Hungary, including legal, tax, and government compliance responsibilities.
- Oversight
A branch office can perform management decisions, processes, and systems directly from headquarters but the administration of a subsidiary takes place indirectly through local management and under local regulations.
- Compliance
A branch office in Hungary can benefit from less severe local regulations, also relating to financial reporting but a subsidiary is required to maintain a full adherence system, including its own authorizations and agreements, abide by capitalization rules, and other governmental obligations.
- Cost
A branch office can commonly be established and operated with lower cost because its activity is generally limited and it is part of the parent company infrastructure while subsidiaries tend to have a more various business activities and naturally also higher operational and keeping costs.
- Tax Risk
The limited liability of subsidiaries also applies also to risk while branch offices open a full window for tax risk, not only because of the joint liability of the branch and the parent company but also because the two states involved sometimes have unique views on the execution of double tax treaty rules. On the other hand, the very explicit application of double tax treaties and transfer prices may enable tax savings, preceded by careful tax planning.
- Political Exposure, Corporate Social Responsibility
Subsidiaries are normally only vulnerable in their country of operation but branch offices commonly induce a vaster exposure, because headquarters and the branch are generally liable in both of their legislations. On a general note, branches may be free from foreign country penalties in the country where they operate.
How to Set up a Hungary Subsidiary
The method of setting up a Hungary subsidiary relies on your business characteristics and the regulatory framework that relates to your entity. Hungary’s subsidiary statutes can change depending on your industry, the nature of your business, your nationality, and more.
Hungary also has various rules and regulations that govern businesses in the nation. The regulatory framework also changes based on the kind of Hungary subsidiary you set up. You can select between various structures, including a general (unlimited) partnership, limited liability company (LLC), limited partnership, a private company limited by shares, a public company limited by shares, or a commercial representative office.
Most companies incorporate as an LLC because of its advantages for all parties included. The steps to set up a Hungary subsidiary as an LLC include:
- maintaining legal representation from a legal professional in Hungary
- registering through a domestically based law firm
- opening a local bank account
- depositing at least half of share capital
- applying with the Registration Court
- passing muster with the Tax Authority
- registering for the municipal business tax with the Tax Department of Municipality and the Hungarian Chamber of Commerce and Industry
- registering for social security with the National Office for Health Insurance
How to Set Up a branch in Hungary
Before commencing operation in Hungary, the company must register with the Court of Registration. Contrary to local companies, foreign companies must present several more documents at registration. A dossier must be prepared and it must include the documents presented below;
- standard application and the certificate of registration of the foreign company,
- certificate of the share capital, as well as the memorandum and the articles of association of the parent company,
- verdict of opening a branch and a list with the directors and the secretary, as well as the registered address of the parent company,
- name of the branch and its registered address and the name of the representative appointed with power of attorney, and
- the specimen of signature for the person responsible for the branch’s decisions.
The Court of Registration will give a certificate of registration essential to registering the branch for taxes and VAT. Furthermore, if the branch has any employees, social services must be declared regarding the incorporation of the branch. The procedure of opening a branch in Hungary doesn’t take longer than five working days if all the documents are in adequate order and are submitted on time.
Branch or subsidiary: which option should I select for my Hungarian business?:
The answer should rely on what operations you are planning for Hungary, and how much liability you are ready to assume.
If you are ready to open a branch or a subsidiary in Hungary or if you would like to know more about forms of business in Hungary, contact your Damalion expert now.
