There are always a lot of questions surrounding the accounting and bookkeeping of the Hungarian branches of foreign-registered companies. One of the areas exhibiting the most uncertainty is the registered capital of branch offices, more precisely, whether registered capital needs to be recognised in the books of the branch office, and if yes, how? Why can this cause problems? In an earlier article of ours on the Hungarian branches of foreign-registered companies, we touched on the issues of initial capital and the registered capital of branch offices, but below we delve into more detail.
Based on Sections 2 (2) and 3 (1) 2 of Act C of 2000 on Accounting (Hungarian Act on Accounting), the Hungarian branch of a foreign-registered company, as a business entity, is subject to the Act on Accounting; at the same time, it is bound by the rules of Act CXXXII of 1997 on the Hungarian Branches and Commercial Representative Offices of Foreign-Registered Companies (Branch Office Act).
Initial registered capital based on the Hungarian Branch Office Act
In legal terms, i.e. by definition, the registered capital of branch offices differs from the registered capital of other business entities, i.e. from share capital. While a limited liability company may be founded with share capital of HUF 3 million, and a private company limited by shares with HUF 5 million, the Branch Office Act defines no minimum amount for the initial capital in relation to founding a branch office. However, it does prescribe that a foreign company must continuously provide the assets required to operate the branch office and settle debts.
Registered capital of branch offices based on Hungarian Accounting Act
Section 35 (6) of the Act on Accounting stipulates that in respect of Hungarian branch offices of foreign-registered companies, the capital provided and made permanently available by the foreign-registered company (including the endowment capital prescribed by law) for the operation of the Hungarian branch office, and for the settlement of its debts, must be recognised as registered capital.
So this is the registered capital of branch offices, which is not designed to cover the daily operating expenses of business activities, but to ensure operational conditions on a prolonged basis and be a source of assets required for operation.
As a result, it must be set forth in an agreement what the foreign-registered company allocates to its Hungarian branch office, and at what value. For non-cash contributions, the cost of the asset is the value defined in the agreement or contract in accordance with Section 50 (7) of the Act on Accounting.
Registered capital at the Court of Registration
The allocated amount mentioned above, as set out in an agreement, must be registered at the Court of Registration once a year. Although 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 Court of Registration, the cumulated amount of capital provided to the branch office must still be registered at the Court of Registration once a year.
If your foreign-registered company is considering opening a branch office in Hungary, or planning to make changes to registered capital (capital increase or decrease) at an existing branch office, we recommend you contact our expert advisers to get answers to any questions arising in relation to their accounting, or any other accounting issues related to the registered capital of branch offices. The accounting specialists at WTS Klient Hungary are here to help.