Open a Branch vs.a Subsidiary in Hungary - Updated Guide 2022
Open a Branch vs.a Subsidiary in HungaryUpdated on Tuesday 26th April 2022
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Subsidiaries and branches both have advantages for European firms, and they may be a great way to develop throughout Europe, raise awareness, and build a client base by tapping into new markets. If you want to open a branch or a subsidiary in Hungary, you should know that these entities are chosen according to the activity of the company and its specific needs. Both entities have their particularities and while one may be suitable for certain businesses, it may not be the perfect business choice for other types of activities.
Our lawyers in Hungary are ready to offer you specialized counseling if you want to open a branch or a subsidiary in Hungary. You are also welcome to get in touch with our immigration lawyers if you want to move to Hungary. Their legal assistance can help you with your relocation plans.
Branch office in Hungary
A branch is flexible as compared to a subsidiary, the time needed to open a branch in Hungary and prepare it for business is much shorter. Another advantage of the branch model is a lower setup cost, generally, branches will require less capital than other business structures in Hungary.
The main disadvantage of the branch is that the parent company has unlimited liability for the actions and obligations of the Hungarian branch. Despite this negative aspect, international companies may find the branch model more suitable for providing services for clients around the world. If you are planning to open a branch or a subsidiary in Hungary, you can get legal assistance from our local lawyers.
How to register a branch in Hungary?
For branch registration, you need to provide the proof of:
- Existence of parent company;
- Names of directors;
- Share capital;
- Names of representatives who will act for you in Hungary;
- Registered office;
- Certified copies of the Articles of Association or Statutes.
Along with these pieces of evidence, some documents need a translation. These documents include:
- The names of your company’s secretary and directors;
- The registration certificate of the parent company;
- Your company’s articles of association.
You can rely on the legal services of our Hungarian lawyers if you want to incorporate and register your branch in this country. They will help you open a branch or a subsidiary in Hungary.
Obligations for a branch in Hungary
If you open a branch in Hungary, then your parent company will be fully responsible for the branch liabilities. Your Hungarian branch must have the same name as the non-resident parent company. To fulfill tax obligations, the branch of a non-resident company is obliged to appoint a company or a resident individual to represent it in its dealings with the tax authorities. The assets and cash necessary for the functioning of the branch office and the settlement of its liabilities must be provided continuously by the parent company. The foreign entity has a legal relationship with the employees of a branch office, and the foreign parent has employer rights. A branch is thought to be connected to its parent firm or headquarters. As a result, the prices used in intercompany transactions must be at arm's length, and the standards for transfer pricing paperwork must be met.
When a branch office is put into the company registration, it is considered established. A branch office may begin operations after applying for registration to the Court of Registration, as long as it declares on its corporate communications that it is "under registration." A branch cannot engage in any activities that require government approval until it has been registered. When a branch office is removed from the company registry, it is deemed dissolved.
Our law firm in Hungary will guide you about the obligations needed to be met for opening a branch in this country. You are also welcome to get in touch with our lawyers if you planning to apply for a residency in Hungary.
Taxation on branch offices in Hungary
For tax reasons, branch offices are classified as PEs (permanent establishments). They must establish their tax base following the basic regulations that apply to Hungarian businesses. The profit for the year is subject to a corporate income tax (CIT) of 9% (calculated based on the Hungarian accounting system and modified by particular CDTA provisions). PE is defined similarly to how it is defined in tax treaties, although it is a little wider. The respective treaty term applies to treaty countries.
If Hungary and the other nation have signed a treaty, the treaty's terms supersede domestic law. As a result, in the first place, the treaty's terms must be fulfilled, and all expenditures associated with the branch's activity must be assigned to the branch, subject to the aforementioned constraints in domestic law, and all profit earned concerning the branch must likewise be provided to the branch. Unless there is a compelling cause to change the allocation mechanism, it must be constant from year to year. For further assistance regarding branch taxation, you are welcome to interact with the seasoned lawyers located at our law firm in Hungary. They can also provide you with clarity based on your business demands whether you should open a branch or a subsidiary in Hungary.
Subsidiaries in Hungary
If neither a commercial representative nor a branch office is appropriate, you can open a subsidiary in Hungary, which is a corporation that is owned by a foreign firm. The most common option, the Ltd (Kft in Hungarian), has a HUF 3 million minimum capital requirement. It is not necessary to put money into the corporate bank account at the time of incorporation, but you must certify that you have it in writing. Please keep in mind that if the funds are not used for business purposes, you must be able to show the authorities that they are in the company's control. Unlike branches, subsidiaries in Hungary have legal status and they are generally set up as a Hungarian limited liability company. Subsidiaries have their share capital and the parent company is their main shareholder. Because the parent company is not liable for the actions of the subsidiary, these types of structures are independent.
Although the business costs may be lower for branches than for subsidiaries, the subsidiary structure has more stability and is generally more protected against the failure of an affiliate of the same company set up in another country. The political stability in the country or other significant aspects, such as the easiness to open new structures may be key arguments when deciding to open a branch or a subsidiary in another country. The business model of the parent company is also an important aspect to consider.
Our Hungarian lawyers can present you with detailed information about the percentages of branches and subsidiaries set up in different financial regions in Hungary. They will also provide you with legal assistance regarding opening a subsidiary in Hungary.
How to set up a subsidiary in Hungary?
If you want to open a subsidiary in Hungary, you need to know that the setup of your subsidiary will vary depending upon the regulatory framework and the type of your business entity. Because the laws change as per the nature of your industry and nationality. For a swift setup of a subsidiary, you can get in touch with our lawyers in Hungary. They will legally assist you in the establishment of your subsidiary. To open a subsidiary in Hungary, you first need legal representation from a legal professional. Our lawyers will represent you, and you can get registered with the help of our local law firm in Hungary. After registration, you need to open a bank account and deposit a minimum of 50% of the share capital; our attorneys will assist you in this matter. They will also help you register for the municipal business tax with the Tax Department of Municipality and the Hungarian Chamber of Commerce and Industry. Lastly, you need to register for social security with the National Office for Health Insurance.
You can trust the legal services of our lawyers whether you want to open a branch or a subsidiary in Hungary. Our lawyers will provide you with legal assistance through the whole procedure of starting a business in Hungary.
Legal regulations for a Subsidiary in Hungary
In Hungary, the rules and regulations that govern the business in the country include, Act CCXXXII of 1997, Act XLV of 2004, Act X of 2006, Act V of 2013, etc. However, the regulations of these legal frameworks will differ depending on which type of business structure you choose. These business structures include general partnership, limited partnership, limited liability company, public limited company by shares, private limited company by shares, or commercial representative office. The Hungarian laws not only vary depending on the type of your business structure but also on the location of your business entity in the country. Companies usually prefer to incorporate an LLC, because it benefits all the parties involved.
As per the legal requirements, you will need to appoint a supervisory board (if applicable). To run the day-to-day operations of a subsidiary, the limited liability companies (LLCs) need at least one managing director. Please note that the cost of opening a subsidiary in Hungary is relatively higher than in other countries. You can get legal advice from our Hungarian lawyers if you are planning to open a branch or a subsidiary in Hungary.
Benefits of opening a branch or a subsidiary in Hungary
Subsidiaries are legally independent of their overseas parent business, whereas branches do not have a legal entity. Because the subsidiary is a separate legal company, it is easier to conduct business. A subsidiary also boosts the company's legitimacy, especially with banks, service providers, and partners. Branches are important for learning about the local market and determining whether the company can develop a niche there. In terms of liability, a subsidiary is far more advantageous as a separate entity from the overseas parent company, and so stockholders are not liable for the subsidiary's debts or obligations. Because a branch is not self-contained, the foreign parent company is solely responsible for the branch's operations.
In comparison to the branch office, the subsidiary has more freedom in that it can issue or transfer shares to third parties, such as partners, investors, venture capitalists, managers, workers, or other group firms, as part of a joint venture. It may also sell bonds or stock to the general public and receive stock market quotes. So, if you are planning to open a branch vs. a subsidiary in Hungary, consider how much freedom and how much responsibility you want to bear, and then select a structure carefully. If you would like to know more about forms of business in Hungary, please get in touch with our knowledgeable lawyers in Hungary for a detailed breakdown.
Foreign direct investment (FDI) in Hungary
The branches and subsidiaries are incorporated by foreign companies in Hungary by foreigners. The main countries that invest in different sectors of Hungary include the Netherlands, Austria, Canada, the United Kingdom, and Germany. Please find below the percentage of foreign investments in different sectors of Hungary:
- In 2019, the FDI net inflows (% of GDP) in Hungary were reported at 56.37%;
- The foreign direct investment of 53.2% was made in financial and insurance activities;
- The FDI of 21.5% was made in the manufacturing sector;
- 2.6% of FDI was made in the information and communication sector;
- 4.2% of foreign direct investment was made in real estate.
If you want to open a branch or a subsidiary in Hungary and you are not sure about the advantages of each structure and how it will help your business grow, please contact our Hungarian lawyers. Our team can present the main regulations which are in force in 2022 and can offer advice on the tax obligations that you will have for each structure. For instance, both of them are charged with the corporate tax of 9% in 2022, but the branch is liable to taxation only for the income obtained on the Hungarian territory.