Business law in Hungary
Business Law in Hungary
Hungary, as a member of the European Union, follows a legal framework that harmonizes with EU regulations, while also maintaining its national laws to regulate business operations. The business law in Hungary is designed to facilitate both domestic and international trade, offering various forms of business structures and a competitive taxation system. Below is an overview of the key aspects of business law in Hungary:
1. Legal System
Hungary operates under a civil law system, which is based on written statutes and codes, with primary sources being legislative acts passed by the Hungarian Parliament.
Key Legal Frameworks:
- Civil Code: Governs a wide range of private and commercial matters, including contracts, torts, property rights, and business organizations.
- Act on Business Associations: This regulates the establishment, management, and governance of different types of companies in Hungary.
- Act on the Protection of Personal Data: Aligns with EU General Data Protection Regulation (GDPR) to govern data privacy.
2. Types of Business Entities in Hungary
Hungary provides a variety of business structures for entrepreneurs, which include:
a. Sole Proprietorship (Egyéni Vállalkozó)
- A sole proprietorship is an individual business owned and operated by one person.
- The business owner has unlimited liability, meaning they are personally responsible for all debts and obligations.
- Sole proprietorships are often simpler and cheaper to set up, but may not be ideal for larger operations.
b. Partnership (Közkereseti Társaság - KKT)
- A general partnership involves two or more partners who share profits, management, and liabilities.
- Partners have unlimited liability, meaning they are personally liable for business debts and obligations.
c. Limited Partnership (Betéti Társaság - BT)
- In a limited partnership, there are two types of partners: general partners (with unlimited liability) and limited partners (whose liability is restricted to their capital investment).
- This structure is often used for passive investors who do not wish to be involved in daily business operations.
d. Limited Liability Company (Korlátolt Felelősségű Társaság - Kft.)
- The Limited Liability Company (Kft.) is the most popular type of company in Hungary. It limits the liability of its owners to the amount of their contribution to the company's capital.
- An Kft. must have at least one shareholder and one director. There is no upper limit on the number of shareholders.
- It is the preferred form for small and medium-sized businesses due to its flexibility and limited liability protections.
e. Public Limited Company (Részvénytársaság - Rt.)
- A public limited company (Rt.) is typically used for large businesses, especially those that plan to raise capital by issuing shares to the public.
- This structure requires at least three shareholders and a minimum share capital of 5 million HUF (about EUR 14,000).
- Public limited companies are subject to more stringent regulations, especially if listed on the stock exchange.
f. Branch of a Foreign Company
- A foreign company can set up a branch in Hungary, which is not a separate legal entity but an extension of the parent company.
- The parent company is liable for the branch's activities and debts.
3. Company Registration Process
All businesses in Hungary, whether foreign or local, need to be registered. The process involves:
a. Company Name and Documentation
- The company must choose a unique name and provide Articles of Association (or a similar governing document for other business structures).
- Necessary documents include identification details of the directors, shareholders, and proof of the company’s address in Hungary.
b. Registration with the Court of Registration
- Companies are registered with the Court of Registration in Hungary, and the registration process is typically quick, taking approximately 1-2 weeks.
- Upon successful registration, the company receives a registration number and is added to the Hungarian Company Registry.
c. Tax Registration
- After company registration, businesses must also register with the National Tax and Customs Administration (NAV) to obtain a tax identification number (TIN) for the business.
- This registration allows businesses to be taxed and ensures compliance with Hungary’s tax laws.
4. Taxation in Hungary
Hungary offers a competitive tax environment, making it attractive for both local and foreign businesses. The key taxes for businesses are:
a. Corporate Tax (Corporate Income Tax)
- The corporate income tax rate in Hungary is one of the lowest in Europe, standing at 9%.
- Corporate tax is levied on the net profit of businesses, with the tax rate being relatively straightforward and transparent.
b. Value Added Tax (VAT)
- Hungary has a standard VAT rate of 27%, which is among the highest in the EU.
- There are reduced rates for specific goods and services (such as a 5% rate for books and a 18% rate for certain food items).
c. Social Security and Payroll Taxes
- Employers in Hungary must contribute to social security, which includes contributions for pension, health insurance, and unemployment insurance.
- Social security contributions are generally shared between the employer and the employee, with a significant portion being borne by the employer.
d. Personal Income Tax
- Individuals working in Hungary are subject to a flat personal income tax rate of 15% on their income.
- Non-residents working in Hungary may also be subject to this tax rate depending on their circumstances.
e. Local Business Tax
- Municipalities in Hungary may also levy a local business tax (known as “municipal business tax”), typically around 2% of a company's gross income.
f. Dividend Tax
- Dividend income is subject to a withholding tax of 15% for both residents and non-residents.
5. Employment and Labor Laws
Hungary’s labor laws are designed to ensure fair treatment of employees while maintaining flexibility for businesses.
a. Employment Contracts
- All employees must have a written employment contract outlining terms and conditions such as salary, working hours, job duties, and notice period.
- Employees are protected by the Labor Code, which governs working hours, rest periods, overtime, and workplace safety.
b. Minimum Wage
- The minimum wage in Hungary is set annually. As of 2023, the gross minimum wage for full-time workers is approximately HUF 232,000 per month (about EUR 625).
- The gross minimum wage for skilled workers is higher at HUF 296,400 per month.
c. Working Hours
- The standard working week is 40 hours (8 hours a day, 5 days a week), with a maximum of 12 hours of overtime allowed per week.
- Employees are entitled to paid annual leave of at least 20 days per year.
d. Termination of Employment
- Employers must provide notice if terminating an employee, which is typically dependent on the employee’s length of service.
- Severance payments may be required if the employer initiates the termination.
6. Intellectual Property (IP) Protection
Hungary provides robust intellectual property protection, in line with EU regulations. The main types of IP protection available in Hungary include:
a. Trademarks
- Trademarks in Hungary can be registered with the Hungarian Intellectual Property Office. The trademark protection is valid for 10 years and can be renewed indefinitely.
b. Patents
- Patents can be obtained for inventions and are valid for up to 20 years in Hungary, subject to annual renewal fees.
c. Copyright
- Copyright protection in Hungary is automatically granted when an original work is created and is valid for the life of the author plus 70 years.
d. Designs
- Industrial designs can be registered for protection through the Hungarian Intellectual Property Office for up to 25 years.
7. Foreign Investment and Trade
Hungary offers a favorable environment for foreign investors, with minimal restrictions on foreign ownership in businesses. It is a member of the European Union, allowing for easy access to the EU market.
a. Foreign Ownership
- Foreign investors can wholly own Hungarian businesses, and there are generally no restrictions on foreign investment in most sectors.
b. Free Trade Agreements
- As an EU member, Hungary benefits from the EU's free trade agreements, providing access to the EU’s single market and other global trade deals.
8. Dispute Resolution
Hungary has a well-established system for resolving business disputes:
a. Litigation
- Commercial disputes can be resolved through the Hungarian court system, with commercial cases being handled by specialized courts.
b. Arbitration and Mediation
- Hungary is a member of the New York Convention on international arbitration, and the Hungarian Chamber of Commerce and Industry offers arbitration services for commercial disputes.
c. Mediation
- Mediation is increasingly used as an alternative dispute resolution method in Hungary, with various mediation centers offering services to resolve conflicts outside of the courtroom.
Conclusion
Hungary offers a competitive and transparent legal environment for business operations. The combination of low corporate taxes, straightforward business registration processes, and protection for intellectual property makes it an attractive jurisdiction for both local and foreign businesses. Additionally, Hungary's position within the EU gives businesses access to the vast European market, making it a desirable location for companies seeking to expand their operations in Central Europe.
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