Business Law in Hungary
Business Law in Hungary is governed by a well-developed legal framework that provides clarity and structure for both domestic and foreign businesses. Hungary’s legal system is based on civil law, and the country is a member of the European Union, which means its business laws are aligned with EU regulations. The business legal landscape is primarily shaped by the Civil Code, Companies Act, Labour Code, and various laws governing taxation, intellectual property, and commercial transactions.
1. Business Entity Formation
Hungary offers several types of business entities for entrepreneurs, each with its own set of regulatory requirements and liabilities. The Civil Code and Companies Act are the primary legal sources governing company formation.
Types of Business Entities:
Sole Proprietorship (Egyéni Vállalkozó): This is the simplest form of business in Hungary, operated by a single individual. The business owner is personally liable for all debts and obligations of the business.
Partnership (Közkereseti Társaság - Kkt): A general partnership involves two or more individuals or entities who share joint liability for the business’s debts. All partners are responsible for managing the business.
Limited Partnership (Betéti Társaság - Bt): Similar to a general partnership, but in this structure, at least one partner has limited liability (the limited partner), while the other partners have full liability.
Limited Liability Company (Korlátolt Felelősségű Társaság - Kft): This is the most popular form of business in Hungary, especially for small and medium-sized enterprises (SMEs). The liability of shareholders is limited to their contributions, and it requires at least one shareholder.
Public Limited Company (Részvénytársaság - Rt): A public company can issue shares and is suited for larger enterprises. It can be either a private (Zrt) or public (Nyrt) company, and it requires a minimum share capital.
Branch Office of a Foreign Company: Foreign companies may set up a branch office in Hungary. The branch is not a separate legal entity but operates as an extension of the parent company. The parent company is liable for the debts and operations of the branch.
Company Registration:
- Business Name Registration: All business entities must register their business name with the Hungarian Court of Registration (Cégbíróság).
- Incorporation Documents: Companies need to file Articles of Association and other incorporation documents, which must be notarized for certain types of companies (like an LLC).
- Tax Identification Number (TIN): All businesses must obtain a tax number from the Hungarian Tax Authority (NAV).
- Social Security and Health Insurance: Employers must register employees with the National Health Insurance Fund (NEAK).
2. Foreign Investment and Ownership
Hungary is open to foreign investment, and foreign investors can establish businesses in the country with few restrictions. Hungary’s investment climate is favorable, with incentives for certain sectors such as technology, manufacturing, and research.
Foreign Ownership:
No Restrictions on Foreign Ownership: Foreigners can own businesses in Hungary without restrictions, including owning land (with some exceptions in agricultural and forest land).
Investment Incentives: Hungary offers various incentives for foreign investors, particularly in special economic zones, tax incentives, and grants for projects in high-tech industries.
Investment Protection:
Expropriation: Hungarian law guarantees the protection of foreign investments. Expropriation can only occur under public interest and must be compensated in accordance with the law.
Bilateral Investment Treaties (BITs): Hungary has signed BITs with many countries to protect foreign investments, which often provide protection from unfair expropriation and offer access to international dispute resolution.
3. Taxation
Hungary has a relatively business-friendly tax regime, with low corporate tax rates compared to other EU countries, making it an attractive destination for businesses.
Corporate Income Tax:
Corporate Tax Rate: The standard corporate tax rate in Hungary is 9%, one of the lowest in the European Union. This makes Hungary an attractive jurisdiction for corporate entities.
Tax on Dividends: Dividends distributed by a Hungarian company are subject to a 15% withholding tax, though exemptions or reductions may apply under tax treaties.
Value Added Tax (VAT):
- VAT Rate: The standard VAT rate is 27%, which is the highest in the EU, but there are reduced rates for certain goods and services, such as 5% for books and certain food products and 18% for other goods and services.
Other Taxes:
- Local Taxes: Local municipalities in Hungary may impose local business taxes, which are generally calculated based on the gross revenue of the company.
- Personal Income Tax: The flat rate for personal income tax is 15%.
Transfer Pricing:
- Hungary follows the OECD guidelines for transfer pricing, and businesses are required to ensure their intercompany transactions comply with arm's-length principles. Documentation is required to support transfer pricing policies.
4. Labor and Employment Law
Hungary’s Labour Code (Munka Törvénykönyve) regulates employment contracts, worker rights, working conditions, and other employment-related issues.
Employment Contracts:
Written Contracts: Employment contracts are mandatory for employees working longer than one month. These contracts must define the job role, working hours, salary, and other key terms.
Fixed-Term and Permanent Contracts: Fixed-term contracts are allowed but must not exceed 5 years unless there are justified reasons for extension.
Working Hours:
- Standard Workweek: The standard workweek is 40 hours, typically split into 5 working days.
- Overtime: Employees are entitled to overtime pay if they work more than the standard weekly hours, usually at a rate of 150% of the normal hourly wage.
Minimum Wage:
- Minimum Wage: As of 2023, the gross minimum wage for a full-time employee is HUF 232,000 per month, with some variation based on the region and job sector.
Leave Entitlements:
- Annual Leave: Employees are entitled to a minimum of 20 days of paid annual leave, which increases after certain years of service.
- Sick Leave: Employees are entitled to paid sick leave for a limited period, with a portion of the pay provided by the employer and the rest by the state.
- Maternity Leave: Female employees are entitled to 24 weeks of maternity leave, with payments provided by the state.
5. Intellectual Property (IP)
Hungary adheres to international treaties governing intellectual property, including those administered by the World Intellectual Property Organization (WIPO).
Trademarks:
- Trademark Registration: Trademarks can be registered with the Hungarian Intellectual Property Office (HIPO). Protection is granted for 10 years, with the possibility of renewal.
Patents:
- Patent Protection: Patents are available for new inventions and are granted for a period of 20 years. Hungary follows the European Patent Convention (EPC).
Copyright:
- Copyright: Copyright is automatic for original works of literature, music, art, and software. It lasts for 70 years after the author's death.
6. Competition Law
Hungary has strict laws against anti-competitive practices, and its Competition Law is governed by the Hungarian Competition Authority (GVH), which enforces rules against market monopolies, price-fixing, and other unfair trade practices.
- Anti-Competitive Practices: Price-fixing, cartels, and other anti-competitive agreements are prohibited. The GVH has the power to impose fines and take corrective action against businesses engaging in such practices.
- Merger Control: Mergers and acquisitions are subject to review by the Hungarian Competition Authority if the transaction meets specific thresholds for turnover.
7. Dispute Resolution
Hungary provides several mechanisms for resolving business disputes, including litigation, arbitration, and mediation.
Courts:
- Commercial Courts: Commercial disputes, such as contractual disagreements or shareholder disputes, are generally handled by the District Courts or Regional Courts.
Arbitration:
Arbitration: Hungary is a member of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which makes it easier for international arbitration awards to be recognized and enforced in Hungary.
Hungarian Chamber of Commerce and Industry: The Hungarian Chamber of Commerce offers arbitration services, and businesses often choose this method to resolve commercial disputes outside of court.
Mediation:
- Mediation: Mediation is becoming more popular as an alternative dispute resolution method. Hungary has been encouraging the use of mediation, particularly in civil and commercial disputes.
8. Real Estate and Property Law
Property law in Hungary is governed by the Civil Code and other relevant laws regarding land ownership, zoning, and real estate transactions.
Property Ownership:
- Foreign Ownership: Foreign nationals can generally own property in Hungary, though there are some restrictions on purchasing agricultural land. Foreigners must obtain permission from the Ministry of Agriculture to purchase agricultural land.
Land Registration:
- Real Estate Transactions: Real estate transactions in Hungary must be registered with the Land Registry. The buyer is responsible for paying registration fees and stamp duties associated with the transaction.
Zoning and Land Use:
- Zoning Laws: Land use and zoning are regulated by local authorities, and businesses must comply with regulations regarding how land can be used for commercial, industrial, or residential purposes.
Conclusion
Business law in Hungary provides a stable and predictable environment for businesses, both domestic and foreign. With its low corporate tax rate, transparent legal system, and adherence to EU laws, Hungary is an attractive destination for investment and business operations. Foreign investors have access to a wide range of incentives, and businesses are well-protected under Hungarian law. Whether starting a small business or expanding a multinational corporation, Hungary offers a business-friendly climate for growth and success.
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