In Hungary, law firms proceed as company registrars, like notary public in other legal systems. Therefore, every company documents gets prepared, drafted and authentificated by an attorney at law, who also proceeds in the company registration procedure, interacting with the Company Registration Court, which keeps the company register.
Company formation comprises of three steps:
1. Designing the right type of company for you.
2. Preparing, drafting, signing and authentificating company documents.
3. Registration procedure, that concludes with the company registration
+1 To-do list after the company is registered
1. DESIGNING THE RIGHT TYPE OF COMPANY
Hungarian company law is designed based on european continental legal system, more specifically, the german legal system. Main company types are Kft. (limited liability company), Rt. (corporation) and Bt. (partnership). It's a part of our service to choose the right company type for you, based on your individual needs, and the type of activity you plan to pursue. At this stage, we already imply tax expertise as well, as we try to optimize taxation (design company with lower tax rates) and operation expenses. The choice you make at this point, determines a long period. Below we'd like to summarize the main pros and cons of each company type.
Kft. (Ltd.) The most popular type, not because it's the best for every business, but because decades ago it became the most common due to reasons back then, and lawyers simply got used to it, and passed it on to other lawyers. In a modern setting, Kft. can be the best choice for some, and not the best for others. So advantages: 1. You can set it up without depositing any registered capital to a bank account at all. 2. Neither the shareholder, nor the CEO is liable for any debts of the company. Disadvantages: 1. Transferring shares is registered, and pretty formal, compared to a corporation. 2. Accounting is slightly more expensive than a Partnership (Bt.)
Rt. (Corporation) In the past, decades ago, Kft. has become popular, because Rt. required 20 million HUF registered capital (7 times more than a Kft.). However, later on this was reduced to 5 million HUF, which is not much higher than a Kft. Advantages: 1. Shareholders names are not shown in the company registered, which allows privacy. 2. Shares can be transferred without any registration anywhere. Paper based shares still exist (optionally) and simply handing them over physically transfers ownership of the company. 3. Owning a "corporation" may mean more prestige. Disadvantages: 1. You shall deposit the 5 million HUF capital to a bank account, though you can withdraw it once the company is registered. 2. If you want paper based stocks, it costs extra fee (1200 EUR recently). In every other relevant aspect it is like a Kft.
Bt. (Partnership) In a past even more distant, when Kft.s became the most popular, Bt. was a popular little company type, set up and runned by simple, average people. However, it was a transitional period both politically and economically, and many Bt.-s went bankrupt, as they were mostly small busiensses. It had, still has a feature, that one shareholder is fully liable for company debts, which earned Bt. a negative reputation. Advantages: 1. Bt. can choose KATA taxation, that Kft. and Rt. cant, making it the best company to run a small business, with a simple, and the lowest tax rate in Hungary, as low as 5% including all taxes and even health insurance. 2. Bt. does not have a minimum capital, you can declare as much as you want (we typically declare 50-100.000 HUF) and you don't need to deposit it to a bank account. 3. Bt. is the only company, where even legal persons can be managers and CEOs (appointing a signatory, which of course needs to be a natural person). Disadvantages: 1. As said, one shareholder is fully liable for company debts. It's a practice to appoint a foreigner, that is not even in Hungary, or a Kft. (that has limited liability) to "switch off" the full liability. 2. At least two shareholders (it can be any nationality and even legal person) are needed, while Kft. and Rt. can have one single shareholder.
All hungarian companies (Kft., Rt., Bt.) are legal persons, can be owned and managed by foreigners (even foreign legal persons) only (no local partner is needed), that don't need any visa or residency either (to set up and run a company). Hungarian companies generally pay 9% tax from the profit (annual income minus expense) in the following year. Any expenses are subtractable, reducable, if related to company operations. Although theoretically foreigners need to pay social security if becoming a CEO or a general manager, technically this is avoidable, as they don't have a social security (TAJ) numbert and are not permanent hungarian residents. Practically a hungarian company can be operated without paying any tax, until it reaches any profit (that is taxed with 9%). Bt. is the lowest tax option, with a 5% total tax rate, including social security as well.
2. REGISTRATION PROCEDURE
After deciding what company we should set up, we draft the company documents ready for signing. You can sign them in our office or online, sending us the signed copies in both pdf. and in original hard copy. We'll then submit the registration request to the company register, and follow up the registration procedure.
3. REGISTRATION PROCEDURE
The company court, that keeps the company register, researches if the company name is differing from all existing company names by at least 4 characters. By this time we have also conducted a research, which means that a modification of the name at this point is very rare. The company court also compares the content of the documents with other databases. Parallelly, an other procedure has been started as well, the registration of the company's tax number. It is conducted by the tax authority, which in Hungary is called NAV (Nemzeti Ado es Vamhivatal). Within 1-2 weeks, the company registration procedure is complete.
+1 TO-DO LIST AFTER REGISTRATION
newly registered companies shall report immediately to the tax office, which is usually performed by a certified accountant, in the form of tax reports and files. Separate forms shall be submitted for the company, and the CEO's. A client page shall be created for the company, to establish electronic correspondence with the tax office and all other authorities. Hungarian companies shall open at least one bank account, and maintain it until they operate. We support this through recommending a bank, and preparing the opening of the bank account.
What are the main taxes, that should be taken into consideration when planning a company
CORPORATE PROFIT TAX (CPT) 9%
At the end of each year, companies reduce their expenses from their incomes, declare and report CPT for the past year. From year 2., the state prescribes an advanced payment of CPT., calcuated from the previous year. It simply means, that some payment of CPT calculated from the previous years tax, shall be paid in advance for the following year. If you've got liquidity problems, it's best to keep the declared profit as low as possible, with legal techniques.
How is 9% „company total tax” understood?
It means it’s 9% of your total profit. If you show 100.000 EUR income, and 90.000 EUR expense, you’ll pay 900 EUR tax from the 100.000 EUR income (because you only pay 9% of your profit).
There’s even better: if you decide that you reinvest part of your profit into the company and don’t pay it out as profit share to the shareholders, your corporate taxes are cut to 4,5%, but it’s enough to verify the fact of the reinvestment (you’ve bought computer, IT, software, participated education, conferences and travelled to these, you’ve bought or rented property or any equipment for the company) in 5 years.
LOCAL TAX 0-2%
Beware, most municipialities impose local taxes on companies, but the municipialitIes where DETRE VARGA & PARTNERS LLP. has a cooperation with the municipiality government to support local business development, it’s guaranteed you don’t pay local tax. The reason of this, is that municipialities can decide themselves, whether they impose local taxes or not, and some of them wishes to attract investors and employers to their locality if there are no local taxes. Many large companies, like Bombardier in Hungary, operate in 0% tax localities.
WITHHOLDING TAX (WHT) 0%
What is withholding tax meant by?
It means when the shareholders receive personal profit share from the company (usually decided based on the annual report of the following year) the country of registration withholds, and cashes in a so called withholding tax from the company. It means if you decide to get paid 10.000 EUR profit share from your own company (for being it’s shareholder) Hungary will subtract 0%, Romania will subtract 5%, and Estonia will subtract 7%. This makes Hungary the best location in the EU to set up daughter companies for foreign companies.
DIVIDEND TAX (DVT)
Dividend tax is not a company tax, but related to a company. The company can distribute it's taxed profit among it's shareholders. Dividend is the distributed profit, coming from the word "divide". Dividend tax shall be declared and paid by your personal law. If you're a permanent resident, and hungarian is your personal law, you'll pay 30,5% dividend tax.
With 27% hungarian VAT is the highest in the world, but oddly, it is only hitting hungarian customers and companies, that do business within the borders of Hungary. Transactions between your hungarian company and any foreign company are exempted from VAT. Any company can choose exemption from VAT because it's a small company under annual turnover of 36.000 EUR.
Not surprisingly, the hungarian state provides an EU VAT number quite welcomingly, in a single act with the company formation, if so requested, or later on, at any point. Oddly this is mentioned as an advantage, as in other EU countries it's time consuming, money consuming and complicated procedure to get an EU VAT number. And without an EU VAT number, you can't do international trade, which makes Hungary an ideal location to set up a company for trade in the EU.