Hungary is a country located in Central Europe and member of the EU as well as the Schengen Area. Hungarian governments have always been keen to encourage foreign investments. Hungary now serves as a hub for investments not only into Central and Eastern Europe, but the European Union as well. The Hungarian commercial banking and financial system is the one of the most advanced in the Central and Eastern European region.
Hungarian Law regulates several legal institutions for investors and business people to enhance their trade capacity and use these for wealth protection purposes. Especially with it’s favourable tax regime and variety of opportunity it brings, Hungary became very attractive. The most preferred path to get benefit from these opportunities is incorporation of a Hungarian Company or a trust or asset management foundation. We will look into each one of them back to back.
TYPES OF BUSINESS ENTITY
The following five types of business entity are available under the Companies Act:
- Company limited by shares (Részvénytársaság – Rt.)
- Limited liability company (Korlátolt felelősségű társaság – Kft.)
- General partnership (Közkereseti társaság – Kkt.)
- Limited partnership (Betéti társaság – Bt.)
- Trade Association (Egyesülés).
Each of these entities can be 100% foreign-owned or foreign-controlled. Companies limited by shares and limited liability companies are the most popular structures among foreign investors.
The Limited Liability Company (Korlátolt felelősségű társaság, KFT.)
A limited liability company is a company with legal personality which is established with an initial capital and where the obligations of members towards the company is limited to their capital contribution. The company bears unlimited liability towards its creditors with its own assets. The members of the company are not liable for the obligations of the company. The amount of the initial capital may not be less than three million HUF. But there is no need to pay the whole amount in the start. This capital requirement can be paid until the payment of the dividends.
It is a statutory requirement that a KFT must have a bank account opened in a Hungarian financial institution.
The Private Limited Company (Részvénytársaság, RT)
Apart from minor differences the requirements for Zrt.’s are quite similar to what asked for a Kft. The minimum amount of share capital is HUF 5,000,000 (app. EUR 16,000), of which at least 25 percent must be paid up at the time of incorporation. The remaining balance must be paid in 365 days. It is also a requirement that a ZRT must have a bank account open in a Hungary.
FIDUCIARY ASSET MANAGEMENT
There are three main legal constructions for fiduciary asset management in Hungary today;
- Ad hoc trust;
- Professional trust; and
- Asset management foundation
TRUST
A trust is a legal instrument whereby the settlor transfers trust assets to the trustee, who is then bound to manage the trust assets for the benefit of the beneficiaries. So there are three main actors in a trust relationship: grantor (settlor), trustee and beneficiary/ies. One important point regarding the trust is that even, trusts don’t have legal personality but they are subject to corporate tax.
Ad Hoc Trust:
Ad hoc trusts main aim can be go from family estate planning to transactional purposes like depositing money and etc. In case of an ad hoc trust, the trustee can only manage this one and only trust. Unlike a professional trustee, ad hoc trustee’s are usually a family relative or someone close to the settlor. Since ad hoc trusts tend to involve a smaller volume of assets and therefore require less regulation and they are not asked to have special financial licenses or training. Both natural and legal person, as long as they have the legal capacity, can be an ad hoc trustee.
Professional Trust:
Unlike a family member or a friend, professional trustee’s are who conduct trust business as a profession and consequently face stricter regulatory requirements than ad hoc trusts. Professional trustees require the approval of the National Bank of Hungary (NBH). In order to obtain an approval they must cover several requirements.
Asset Management Foundation:
This specific form of foundation is to manage the assets assigned by the founder. Like a trust there are three main actors. Founder, beneficiaries and foundation. Unlike a trust an AMF has a legal personality and founded by not an agreement but registration via court. It is important to know there is a 600 Million HUF minimum capital requirement for AMF.
Sources
- Worldbank Group Doing Business in Hungary 2020 report
- József Benke, 2020, The Fundamentals of Hungarian Private Law
- Lexology Corporate Governance in Hungary
- Trust Laws in the Cech Republic and Hungary,2024, Globe Law and Business
