The popularity of branch offices in Hungary is unrelenting, and they are perhaps even gaining in popularity among foreign investors compared to establishing a subsidiary. Below we summarise the most important aspects worth considering in connection with a Hungarian branch of a foreign-registered company.
Hungarian branch of a foreign-registered company as an independent organisational unit
A branch office is an organisational unit of a foreign-registered company with no legal personality, but authorised to conduct business independently, and it is registered as an independent entity. A foreign-registered company can perform business activities through a branch office, it has legal capacity, and under its company name the branch office may obtain rights and assume obligations on behalf of the foreign-registered company.
While a limited liability company may be founded with share capital of HUF 3 million (roughly EUR 8,300), and a private company limited by shares with HUF 5 million (roughly EUR 13,800), there is no minimum amount for the initial capital of a branch office. What is more, the foreign-registered company may transfer permanent resources to the branch even several times a year to ensure continuous operations, without the obligation to register this at the Hungarian Court of Registration. The accumulated capital transferred to the branch office must be reported to the Court of Registration only once a year.
A Hungarian branch of a foreign-registered company must be audited, irrespective of sales revenue and the headcount. A branch office may be exempted from this obligation only if the registered seat of the foreign entity is in one of the Member States of the European Union, or the regulation of the given country pertaining to the preparation of financial statements is consistent with the relevant provisions of the European Union, and therefore it can be found in the list of states published on the government’s website, namely, in the Republic of Iceland, the Principality of Liechtenstein or the Kingdom of Norway.
Bookkeeping, publication and filing of financial statements
A Hungarian branch of a foreign-registered company is subject to the Hungarian Act on Accounting, so pursuant to the provisions of the Accounting Act it must keep books and prepare financial statements on the financial year in accordance with the Act on Accounting.
Similarly to companies, branch offices must prepare, publish and file their financial statements until the last day of the fifth month following the balance sheet date of the given financial year. If the registered seat of the foreign entity is in one of the Member States of the European Union, or the regulation of the given country pertaining to the preparation of financial statements is consistent with the relevant provisions of the European Union, and therefore it can be found in the list of states published on the government’s website, the branch office is exempted from filing the financial statements.
In the event of exemption, the financial statements of the branch office must be available for stakeholders at the registered seat of the branch office, and in such cases the branch office is obliged to file the Hungarian translation of the foreign entity’s financial statements.
If the Hungarian branch of a foreign-registered company publishes and files its own financial statements, it is still obliged to send the financial statements of the foreign-registered company to the company information register in the original language within 60 days of the approval of the financial statements.
As per the general rules, a branch office is subject to tax. This means that the Hungarian branch of a foreign-registered company pays corporate tax and local business tax, but it does not have to pay the innovation contribution.
With regard to corporate tax, it is worth paying special attention to the accounting of transactions between the foreign-registered company and the branch, to tax-base modifying items derived from potential allocations of income and expenses, and to complying with and documenting transfer pricing rules.
Terminating a branch office
Terminating a business has become significantly easier with the introduction of the simplified voluntary liquidation procedure, yet terminating a branch office is even simpler. The foreign-registered company must report its decision to terminate the branch office to the Court of Registration within 60 days of the decision. The Court of Registration will delete the branch office without voluntary liquidation proceedings if it has no public debt and all other obligations have been fulfilled, or the foreign-registered company presents security for this. Upon its erasure from the company register, the branch office must prepare financial statements closing its activities as of the balance sheet date, and compile final tax returns within 45 days of the balance sheet date.
If your foreign-registered company is considering opening a branch office in Hungary instead of establishing a subsidiary, we recommend you contact our expert advisers to map out your options. The lawyers at WTS Klient Hungary are here to help.