The corporate law in Hungary is governed by the Civil Code which incorporates the fundamental regulations and mandatory rules for all economic entities and also governed by the Act on Public Company Information, Court Registration Proceedings and Dissolution Procedures – “Registration Act” – which provides a flexible and expedient legal regime.

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Legal forms of business, minimum capital, contribution

The Hungarian Civil Code determines four different corporate forms that may serve for investors as a basis to carry out business activity in Hungary. In addition to those 4, there are two other forms with which investors can establish Hungarian presence. All of these forms can exclusively be established and operated by foreign owners and management:

  • Limited Liability Company (Kft.)
  • Company Limited by Shares which may be privately founded (Zrt.) or publicly operated (Nyrt.)
  • Limited Partnership (Bt.)
  • General Partnership (Kkt.)
  • Branch Office, Representative Office.

Limited Liability Company (Korlátolt Felelősségű Társaság | Kft.)

A Limited Liability Company is established with a predetermined amount of initial capital that is HUF 3,000,000 provided by its Founders.

The liability of its members is limited to the provision of the company’s initial capital. As a general rule, members are not otherwise responsible for the company’s liabilities, meaning that the private property of the members cannot be touched by the liabilities of the company, except few cases which are specified by relevant legislation.

Members of a Limited Liability Company may not be solicited by public invitation. The capital contribution of members is provided in the form of core deposits. The capital contributions of members may differ in terms of value, however, the amount of each contribution may not be less than one hundred thousand forints. Each member shall have one core deposit. The members’ rights and their title to the company’s assets are represented by quotas (business share) in the company. Business shares shall come to existence upon the company’s registration. The business shares of members shall be consistent with their respective capital contributions.

No securities may be issued in respect of the business quotas. A Limited Liability Company could operate even having one member (as a single-member Limited Liability Company).

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Company Limited by Shares (Részvénytársaság | Rt.)

This is the most strictly regulated corporate form, which shows similarity to the German AG or to the English Plc.

There are two types of stock companies:

Private Limited Company (Zártkörűen működő részvénytársaság; Zrt.)

Public Limited Company (Nyilvánosan működő részvénytársaság; Nyrt.)

A stock company is particularly suitable to large business entities with several investors, but it is also possible to establish such entity as a single-person company.

A Private Limited Company in Hungary shall be founded with an initial capital consisting of a predetermined amount. The minimum of the share capital of a Private Limited Company may be HUF 5,000,000, while in the case of a Public Limited Company it is HUF 20,000,000.

Minimum of the share capital of a Private Limited Company
5,000,000 HUF

%
Minimum of the share capital of a Public Limited Company
20,000,000 HUF

%

The amount of cash contributions at the time of foundation may not be less than thirty per cent of the share capital. The liability of its members is limited to the provision of the nominal or issue value of the shares.

At foundation of a company limited by shares, it is compulsory to establish Private Limited Company, later the company may transform into Public Limited Company.

Shares may be:

  • ordinary shares
  • employee shares
  • interest-bearing shares
  • redeemable shares
  • preference shares

Limited Partnership (Betéti Társaság | Bt.)

In a Hungarian Limited Partnership, the members of the partnership agree to make available to the partnership the capital contribution necessary for its activities.

The minimum number of members is two, of which at least one – the general partner – bears joint and several liability and while at least one other partner – limited partner – is not liable for the obligations of the partnership, unless the relevant legislation provides otherwise.

Only the general partners may manage the partnership and represent the partnership in its dealings with third parties. The profit distribution is generally proportional to the capital contributed, but the parties are free to agree otherwise. It is against the law, however, to exclude any partner from the distribution of profits.

General Partnership (Közkereseti Társaság | Kkt.)

In a General Partnership, the members of the partnership agree to make available to the partnership the capital contribution necessary for its activities, the liabilities of its members are joint and several for the partnership’s obligations.

No minimum initial capital requirement is set forth by law. By law, every member is entitled to represent the partnership unless its articles of association state otherwise.

The partnership must have at least two members. Individuals may also become members of a General Partnership, however minor persons and individuals already bearing a joint and several liability in another company are excluded.

The active participation of the partners in conduct of the partnership’s business is legally required. No minimum capital is required to found and operate a General Partnership.

Representative Office, Branch Office

There are two other forms foreign investors might choose in Hungary to establish their presence.

Through a Representative Office, foreign investors can perform normal liaison functions, including assisting with contract negotiation, advertising and exhibiting products and other forms of marketing on behalf of the parent company; but the office is not allowed to pursue core business activities. This form can be useful if the foreign undertaking intends to familiarize itself with the local business conditions before embarking on an investment.

The other form to establish a presence in Hungary can be done via a Branch Office, which is an organizational unit of a foreign company, being authorized to carry out independently normal business activities.

Minimum documentation

Companies formed and registered under Hungarian law may undertake obligations
and acquire rights in their own name.

As a general rule, companies may freely pursue activities; however, a license of the competent authority is required for certain activities. Thus, for example, banks can only be founded and operated as a company limited by shares and with license of establishment issued by the Central Bank of Hungary.

Companies can be founded by natural or legal entities, Hungarians and foreign nationals alike.

The founders of a company must first sign the company’s constitutive document after which an attorney-at law (a member of the Hungarian bar) must countersign and file it to the competent Court of Registration with the other documents necessary for the foundation of the company. The company is established by the court’s act of registration. A company’s fundamental corporate data (instrument of incorporation) and its internal regulations are set forth in its constitutive document, i.e. (i) articles of association, or (ii) deed of foundation, or (iii) statutes depending on the corporate form.

The instrument of incorporation must specify the following as a minimum:

company name

registered seat

a list of the company’s founding parties, with their respective addresses

the company’s business (main) activities (certain activities require special administrative permits)

the amount of the equity capital, the method and date of its availability

representative of the company, including decision on whether they perform the company management according to service contract OR labour relationship

Most documents at a company establishment will be prepared and countersigned by the attorney-at-law according to the will of the founder(s).

The list of the essential documents depends on the company form but followings shall be highlighted at establishment by a foreign person, or entity:

  • If a foreign company establishes a Hungarian company, the not more than 3 months old Register extract of the founder company and its attested translation to Hungarian language is necessary for an establishment. It is important to obtain these in timely manner because the attested translation is slow procedure, only provided by one official translation office.
  • If a foreign person (who is not resident in Hungary) will be the member or executive officer of the company, a delivery agent shall be mandated by the person. The mandated person shall have a registered Hungarian address.
  • if the required documents will be signed abroad in a foreign country, the documents shall be signed before a public notary and an apostille is also needed OR they shall be signed before the Hungarian consul.

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Registration process

The registration of business associations is a must in Hungary.

The Company’s constitutive document must be drafted and countersigned by a Hungarian registered attorney-at-law. Incorporation procedure must be initiated by request.

The registration request must be filed with the competent Hungarian Court of Registration within 30 days from the conclusion of the constitutive document.

Company registration proceedings is fully electronic.

If the applicable laws require any official license for the establishment of the company, it must be attached to the request form and the request form must be submitted within 15 days as of the receipt of the official license.

When the registration court receives the application for registry, a certificate is issued for the company with the company’s name, address, temporary tax and statistical number and the number of reference of the registration. After receiving the above certificate, the company may commence to operate in the form of a pre-incorporated company. This means that the company may operate as an incorporated company but special provisions regarding personal liability of the founder(s) apply. A pre-company may pursue business activities but is not allowed to conduct business activities requiring an official license. Upon registration by final decision of the court of registry the business association shall cease to function as a pre-company, and all transactions concluded in that capacity will be treated as if they were concluded by the business association.

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Shareholders

Company’s supreme decision-making entity in Hungary is the supreme body.

In case of General Partnership the supreme body is the Meeting of the Members, where all the members have the same value, and only members may be managing director of the General Partnership.

In case of a single-member company the only member practises the rights of the supreme body. In matters falling within the supreme body’s competence the founder or the sole member shall take decisions in writing, and such decisions shall take effect when communicated to management.

In case of Limited Partnership the supreme body is the Meeting of the Members, and only the general partner(s) – with unlimited liability – may be the managing director of the Limited Partnership.

In case of Limited Liability Company the supreme body is the Members’ Meeting and the members entitled to dividend in the proportion of their quotas (business share). Not only members, anybody may be managing director of a Limited Liability Company.

In case of a Company Limited by Shares the supreme body is the General Meeting and the executive body is the Board of Directors.

Foreign and Hungarian persons also may be Member (Shareholder) and executive officer (managing director) in a company, but there are some general restrictions towards these people which must be satisfied independently from the nationality of a person.

Requirements for executive officers (grounds for exclusion)

  • The executive officer must be of legal age (18 years) and must have full legal capacity in the scope required for discharging his functions. The executive officer shall perform management functions in person.
  • In the case if the executive officer is a legal person, that legal person shall designate a natural person to discharge the functions of the executive officer in its name and on its behalf. The rules pertaining to executive officers shall apply to the designated person as well.
  • Any person who has been sentenced to imprisonment by final verdict for the commission of a crime may not be an executive officer until exonerated from the detrimental consequences of having a criminal record.
  • A person may not be an executive officer if he has been prohibited from practicing that profession. Any person who has been prohibited by final court order from practicing a profession may not serve as an executive officer of a legal person that is engaged in the activity indicated in the verdict.
  • Any person who has been prohibited from holding an executive office may not serve as an executive officer within the time limit specified in the prohibition order.

Conflict of interest

Executive officers may not acquire any share in the capital of a business association – except for the shares of public limited companies – which is engaged in the pursuit of the same economic activity, as its main activity, as the business association in which they hold an executive office.

In the event of accepting a new executive office, within fifteen days of accepting such office the executive officer shall notify any other company in which he already serves as an executive officer or a supervisory board member.

With the exception of everyday dealings, an executive officer and his close relatives may not conclude any transactions falling within the scope of the main activities of the business association in his own name and on his own behalf.

Disqualification

The person who has been disqualified by a Registry Court of Hungary, according to the binding legislation, cannot be member or executive officer.

Tax law restrictions

Members, executives of those companies which:

  • had tax debts for a long period;
  • has been terminated (by forced termination) due to tax debt;

would not be eligible to be member or executive officer of another company due to the above stated reasons.

The examination of the above stated restrictions shall be done at the establishment of the company.

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Incorporation time

The registration request must be filed with the competent Hungarian Court of Registration within 30 days from the conclusion of the constitutive document.

Companies can be incorporated in two ways: simplified or standard electronic filing.

Simplified electronic filing

The Court of Registry shall make decision within 1 working day from the submission of the application and the concerning documents. In present procedure the companies must use a standardised template for the constitutive documents.

Only Limited Liability Company, Limited Partnership, General Partnership and Private Limited Company can be established by the simplified procedure.  Public Limited Company cannot be incorporated by the simplified procedure.

Standard electronic filing

In course of standard electronic filing, the companies are not bounded by the standard templates for constitutive documents; content of it may be freely determined by the founders according to the relevant laws. The Court of Registry shall make decision within 15 working days from the submission of the application and the concerning documents.

Branch Offices and Commercial Representation Offices should also be registered by the Court of Registration and may start their activities only after the registration. The time of registration may take up to 15 days.

General overview of corporate taxes

Corporate income tax

Businesses in Hungary are subject to corporate income tax. The corporate tax rate is 9% of the positive tax base.

Amortization

When determining taxable income for the corporate income tax, the relevant legislation allows for calculating with amortisation.

Accounting is done on a net value basis: depreciation increases corporation´s pre-tax earnings, while amortization under the tax law reduces corporation’s earnings before taxes.

In certain cases, the tax law allows for amortization or permits accelerated depreciation (e.g. immaterial assets, leased equipment).

Losses carried forward

All losses can be carried forward and used up within 5 years following the given tax year. Losses can be offset against future positive tax bases, up to max 50% of the given tax base.

Losses shall be used up with FIFO method.

Tax credits

Tax credits reduce corporate income tax and can also reduce taxable corporate income.

Duties, fees and penalties

Duties

Duty on company registration of the different corporate forms in Hungary are as follows:

Duty on company registration of Private Limited Company in case of simplified electronic filing
50,000 HUF

%
Duty on company registration of a Branch Office or a Representative Office of a foreign enterprise is
50,000 HUF

%
Duty on company registration of Private Limited Company in case of standard electronic filing
100,000 HUF

%

Duty on company registration of Private Limited Company is HUF 50,000 in case of simplified electronic filing and HUF 100,000 in case of standard electronic filing.

Duty on company registration of a Branch Office or a Representative Office of a foreign enterprise is HUF 50,000.

The registration of Limited Liability Companies, General Partnerships and Limited Partnerships shall be exempt from duties.

Publication fee

Publication fee of company registration
5,000 HUF

%

Publication fee of company registration is HUF 5,000 for Private Company Limited in standard electronic filing.

In any other cases (for General Partnership, Limited Partnership and Limited Liability Company regardless the form of filing, and Private Company Limited, in case of simplified electronic filing) payment of publication fee is not needed.

Penalty

Minimum penalty
50,000 HUF

%
Maximum penalty
900,000 HUF

%

Failure to comply with deadlines stated by relevant legislation could result in a penalty amounting from HUF 50,000 to HUF 900,000.

Investment incentives

The Hungarian Investment and Promotion Agency supports high value-added investment projects with a one-stop-shop service including a VIP treatment and comprehensive information about available subsidies for investment projects.

The maximum available aid intensity decreases if the investment is a large investment (exceeding EUR 50 million):

50% of the maximum aid intensity determined in the regional aid map is available for investment between EUR 50 and EUR 100 million
50%

%
34% of the maximum aid intensity for investment over EUR 100 million
34%

%

The incentive package may consist of the following elements:

  • cash subsidy decided individually by the Hungarian Government (for investments, training, job creation and R&D)
  • development tax allowance (reduction of corporate tax, social tax, or for encouraging R&D activities)
  • low interest loans
  • special incentives of the free enterprise zones

Key investment sectors: Automotive; Electronics; Information and Communications Technology; Shared Services Centres; Renewable Energy; Medical Technology; Life Science; Food Industry; Logistics.

Other aspects

Other registrations of a newly registered company

A newly registered company must also register with the local municipalityHungarian Tax Authority, Central Statistical Office and Social Security Authorities.

Simultaneously with the submission of the registration application, the court registers companies with the Hungarian Tax Authority (for VAT and income tax purposes) and with the Statistical Office through an online system.

Opening a bank account

According to the binding registration, a bank account shall be opened in 15 days from the tax registration of the company.

For opening a bank

According to the binding registration, a bank account shall be opened in 15 days from the tax registration of the company.

For opening a bank account, personal presence of the executive officer is mandatory in most cases.

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There are three main types of liquidation and bankruptcy proceedings in Hungary. Voluntary liquidation procedure (in Hungarian: ‘végelszámolás’) may be initiated by the company itself if its assets cover its liabilities. If this is not the case, i.e. the company is insolvent, it may be subject to a bankruptcy procedure (in Hungarian: ‘csődeljárás’) or an insolvency procedure (in Hungarian: ‘felszámolási eljárás’). The former is aimed at the restructuring of debts of the company so it may continue its operation if it manages to make an arrangement with its creditors whereas the latter procedure inevitably leads to the liquidation of the company and the procedure merely focuses on the distribution of the assets of the company.

All three types of procedures are governed by mandatory law that provides for transparency. Business partners of such companies shall be granted the possibility to claim receivables, which eventually may change the scenario, e.g. a company initiating voluntary liquidation procedure may turn out to be insolvent and may ultimately be liquidated by virtue of an insolvency procedure. There is an additional procedure that may also lead to the liquidation of the company: the involuntary liquidation procedure (in Hungarian: ‘kényszertörlés’) is based on the decision of the competent court of registry on the non-existence of the company. This is usually the consequence of a permanent dysfunction, e.g. the company is not available at its registered seat, the tax authority withdraws its tax ID, etc. Transparency in this procedure is equally important and creditors may claim receivables. Hence, an involuntary liquidation may also turn into an insolvency procedure.

It shall be noted that enforcement proceedings against a company are not aimed at its liquidation and are based on the assumption that the company is solvent. In case there is a reasonable risk that the company’s assets will not cover its liabilities, it is more advisable to file an application for initiating the insolvency procedure, since unsuccessful enforcement proceedings may turn into an insolvency procedure and that, if initiated by a third party, would anyway lead to the termination of the enforcement. If the court orders a grace period, the enforcement proceedings will be automatically suspended during such period and, if concluded, under the term of the agreement with creditors.

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Filing an application by the debtor or creditor

A bankruptcy procedure may be applied solely by the debtor company itself. To avoid blindfold decisions, representation by an attorney is mandatory for such application. The motion will be automatically dismissed if:

there is an ongoing bankruptcy or insolvency procedure against the company,

there are unsettled claims from an arrangement with creditors concluded during a preceding bankruptcy procedure

two years have not passed since the date of termination of the last bankruptcy procedure

a preceding motion was dismissed by the court and one year has not passed since the date of the resolution on such dismissal

The decision on the application shall be made by the general meeting of the company. The Civil Code does not stipulate any special rule on such voting, hence, generally, a simple majority of the votes is sufficient but the articles of association of the company may set qualified majority or other voting rules. The company shall inform its employees, the trade unions and the work council (if applicable). The managing director of the debtor shall make a statement on all significant changes in the financial situation of the company since the date of the last accounts and a detailed list of all creditors and bank accounts of the company. The managing director shall also declare that (s)he will inform all banks of the company on the application prior to its publication and that (s)he will refrain from any act that would jeopardize the objective of the moratorium or apply discrimination among the creditors.

Applying for insolvency procedure by the debtor

An insolvency procedure may be initiated by the court (e.g. if the bankruptcy procedure was unsuccessful), the debtor or the creditor. If the debtor is the applicant, the general meeting shall approve such decision (see above on voting) and the company shall engage an attorney to submit the application. The above-mentioned duties of the company on informing its employees and committees as well as the duties of the managing director shall also apply.

Applying for insolvency procedure by the creditor

If the insolvency procedure is initiated by the creditor, the motion shall describe the nature of the debt, the due date and the reasoning why the creditor believes that the debtor is insolvent. The insolvency of the debtor will be established if:

  • the debtor does not pay or dispute a contractual debt within 20 days after its maturity date, despite a written dunning letter of the creditor
  • the debtor does not pay a debt established in a final and binding verdict or payment order within the period set out in such verdict or order
  • enforcement proceedings against the debtor were unsuccessful
  • the bankruptcy procedure was unsuccessful or the debtor breaches the agreement with creditors concluded in a bankruptcy or an insolvency procedure
  • it turns out in a voluntary liquidation procedure that the assets of the company will not cover all its liabilities and the shareholders do not oblige themselves to hold the creditors harmless for the uncovered liabilities.

It shall be noted that in cases a) and b), the insolvency procedure may be initiated only if the claim exceeds HUF 200,000.

Claiming receivables

Both the bankruptcy procedure and the insolvency procedure starts officially with the resolution of the court that is published in the Company Gazette (in Hungarian: ‘Cégközlöny’). The date of publication is also the starting date of the period during which creditors may submit their claims on receivables against the company. In the bankruptcy procedure, such period is 30 days for the claims that became due before the date of publication. Claims that become due during the bankruptcy procedure shall be submitted within 8 business days from maturity date. In the insolvency procedure, the period for claiming receivables is 40 days. Since upon the date of publication of the insolvency, all receivables become due by law, creditors shall observe the above deadline with utmost care.

It shall be noted that the resolution of the court also appoints a bankruptcy administrator (in Hungarian: ‘vagyonfelügyelő’) or an insolvency administrator (in Hungarian: ‘felszámolóbiztos’), respectively. Both persons are by virtue of law the exclusive representatives of the company from the date of publication of the proceedings, therefore, claims of receivables shall be submitted to their registered address. The timely submission of such claims is not sufficient; the creditor shall also pay a registration fee to the bank account of the bankruptcy administrator or the court ordering the insolvency procedure, respectively.

Max. fee in the bankruptcy procedure
HUF 100,000

%
Max. fee in the insolvency procedure
HUF 200,000

%

The amount of the registration fee is 1% of the amount of the claim (excluding interest rate and other expenses) but at least HUF 5,000 and shall not exceed HUF 100,000 in the bankruptcy procedure and HUF 200,000 in the insolvency procedure.

As mentioned in the introduction, any ongoing enforcement proceedings against the company will be automatically terminated upon the start of the insolvency procedure. The creditor who initiated the enforcement procedure shall claim his receivables the same way as all other creditors. On the other hand, creditors who submitted their claims during a bankruptcy procedure will not have to submit those again if the bankruptcy procedure turns into an insolvency procedure.

Final solution (possible options)

The first stage of the bankruptcy procedure is that the court orders a temporary moratorium for 120 days already before it resolves on the merits of the application. If the court resolves on the commencement of the procedure, then such moratorium may be extended upon request of the bankruptcy administrator. (Privileged claims, e.g. salary, taxes on employment, utility fees, banking fees, VAT, etc. are not subject to the moratorium.)

The debtor shall invite all registered creditors to a negotiation of compromise within 60 days from the starting date. The invitation shall be published in at least two nationwide newspapers. In the meantime, he shall prepare suggestions to restore his solvency, the so-called reorganisation programme.

Each creditor has one vote after each HUF 50,000 of his claim (excluding interest and other expenses but including the registration fee).

The creditors may:

  • reject the reorganisation programme by simple majority on the first session and request the debtor to rework the programme within a deadline;
  • approve of the extension of the moratorium by additional 120 days by simple majority or for a period which shall not be longer than 1 year in total by qualified majority;
  • enter into an arrangement with the creditors, provided that is supported by the majority of creditors in both classes of secured and unsecured claims.

The arrangement with creditors may contain any provision aiming to restore the solvency of the debtor, in particular a partial or total write-off of certain claims, transfer of claims, deferred payment, stipulating securities, or even acquiring shares of the debtor. If the debtor does not achieve an arrangement with creditors or such is not approved by the court, it terminates the bankruptcy procedure and initiates the insolvency procedure.

The objective of the insolvency procedure is the liquidation of the company and the distribution of its assets. Before the court orders the commencement of the procedure, it may allow up to 45 days of deferment for the debtor. The debtor may also claim that he has a counterclaim eligible for set-off by presenting qualified evidence. However, once the court orders the commencement of the insolvency procedure, it may be terminated without the liquidation of the company only in two cases:

The debtor achieves an arrangement with creditors. This arrangement shall be approved by the majority of votes in all creditor classes (for creditor classes see Chapter V, for calculation of votes see above in this Chapter) provided the claims of the approving creditors amount to at least two third of the total amount of registered claims.

The debtor pays all registered claims that are not disputed by them and provides a guarantee to the extent of the disputed claims and the costs of the procedure.

If neither of the above is possible, the court will divide the assets of the company as set out below.

Property division rules

The insolvency administrator registers all claims that have been submitted to the company following the publication of the order and classifies them into eight categories:

Costs of the insolvency procedure which include all salaries and payments to employees with respect to the termination of their employment, costs of selling the assets and claiming receivables of the debtor, costs of maintaining files of the company, fee of the insolvency administrator, etc.;

  • Claims secured by a pledge;
  • Alimony, life rent, annuity and similar claims;
  • Customer claims and claims of small businesses;
  • Taxes and other contributions to the state;
  • Other claims;
  • Interest and other penalties;
  • Claims of related parties and the management of the company.

If the assets of the company do not cover all claims, the claims in the higher classes shall have priority and if the assets do not cover the claims in a certain class, the creditors in that class shall be satisfied proportionally.

If there are creditors who submit their claims after 40 days following the date of publication but still within 180 days, their claim will be classified separately from the claims submitted within 40 days (which shall have priority) and according to the above classification. In B2B relations, a creditor typically does not secure its claim with a pledge, therefore, its claim is classified under Class 6 which, in most of the cases, remains completely unsatisfied.

If the creditor misses the 40 days’ deadline, it usually does not make sense to submit the claim, unless the amount of the claim is significant compared to the other claims – and there is a chance to achieve an arrangement with the other creditors.

Sanctions against debtor’s management

The bankruptcy procedure is initiated by the debtor. To avoid that this tool be misused, the court may impose a penalty up to HUF 2,000,000 on the person submitting the application if it contains false information.

A further type of misuse is if the management of the debtor pays a creditor during the moratorium. In that case, the court may impose a fine up to 10% of the paid amount.

The managers of the debtor shall co-operate with the bankruptcy administrator and inform the court on the result of the negotiation of compromise. Failing to do so may result in a penalty up to HUF 500,000.

The main duties of the debtor’s management during the insolvency procedure are:

  1. to prepare an inventory and the closing accounts for the date of commencement of the procedure;
  2. to make a statement on any significant changes in the financial situation of the debtor since the date of the last balance sheet;
  3. to prepare a list of company documents;
  4. to hand these documents over to the insolvency administrator and
  5. to inform the employees.

In the event that the managers fail to comply with these obligations or deliver false information, a fine of up to HUF 2,000,000 or 50% of their annual salary in the last year may be imposed on them.

In addition, the insolvency administrator or any creditors may sue any person who was a manager of the company in the last 3 years prior to the starting date of the insolvency to establish that such person has not represented the interest of creditors since the financial difficulties started and such act led to the decrease of assets of the company or it jeopardized the satisfaction of claims of creditors in full. If this is established, any creditor or the insolvency administrator may request the court to oblige the manager to pay those creditors whose claims could not have been satisfied from the assets of the company.

Hungarian legislation follows both European legislation and international trends in the field of labour law while showing characteristics inherent in national regulation.

Employment relations in Hungary are governed by the Act I of 2012 on Labour Code and other labour law legislation, collective bargaining agreements and individual employment contracts. In the context of labour disputes in Hungary, courts generally protect employees’ rights by interpreting the provisions of the Labour Code, collective bargaining agreements and employment contracts often in favor of the employees. Overall, litigation trends reflect a decrease in the number of lawsuit initiated by blue-collar employees, while more and more white-collar employees, particularly executives and key-employees, are initiating labour disputes against their employers before courts in Hungary.

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Employment possibilities

Employment relationship in Hungary may be concluded for:

Fixed term employment

Indefinite period of time

Fixed term employment

The period of fixed-term employment in Hungary shall be determined according to the calendar or by other appropriate means. The duration of a fixed-term employment relationship may not exceed five years, including the duration of an extended relationship and that of another fixed-term employment relationship concluded within six months of the termination of the previous fixed-term employment relationship.

A fixed-term employment relationship may be extended, or another fixed-term employment relationship may be concluded within six months from the time of termination of the previous one upon the employer’s legitimate interests. The agreement may not infringe upon the employee’s legitimate interest. If the fixed-term employment relationship is extended or another fixed-term employment relationship is established within six months from the time of termination of the previous one and employment is provided in the same or similar position, no probationary period may be stipulated. If the duration of employment relationship does not exceed twelve months, the length of the probationary period shall be proportionate.

Indefinite period (permanent employment)

In the absence of an agreement to the contrary, an employment relation is established for an indefinite period of time.

Employment contract minimums

In Hungary, the conclusion of a written employment contract is a pre-requisite to enter into an employment relationship. It is the employer’s obligation to set forth any employment contract in writing.

There are essential items in the contract, which has to be included. The parties of the employment contract must agree, by all means, on both the personal base wage and the position of the employee – these terms are essential under Hungarian labour law.

It is not essential for the parties to set the place of work and the duration of the employment contract as well as the starting date of the employment relationship (lack of agreement on these issues will not affect the validity of the employment contract and relationship). The place of work maybe a city, a region or a country as well

If the parties fail to define the place of work, then the place where the employee regularly performs his work shall qualify as the place of work. The term of the employment relationship shall be defined in the employment contract. In the absence of an agreement to the contrary, all employment relations are concluded on general principle for full-time daily employment.

In the absence of an agreement to the contrary, all employment relations are concluded on general principle for full-time daily employment.

Besides the essential and mandatory elements discussed above, the parties may set any other term they wish to provide for in the employment contract. The only thing the parties need to be aware of: such term may not be in violation of statutory labour law.

As a general rule, the employment contract may derogate from the provisions of Part Two and from employment regulations to the benefit of the employee.

In the case of executive employees, the parties are to agree on the terms of employment and there are less minimum terms to observe and apply of the Labour Code.

Probationary period

In the Hungarian employment contract, the parties may stipulate a probation period of not more than three months from the date of commencement of the employment relationship. In the event that a shorter probationary period has been stipulated, the parties may extend the probation period once. In either case, the duration of the probation period may not exceed three months.

In either case, the duration of the probation period may not exceed three months.

Probation period could be stipulated in case of fixed term employment and also in case of permanent employment.

Stipulation of probation period shall be included in the employment contract.

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Termination of the employment

Cases of termination of employment depend on the intention of the parties. An employment relationship in Hungary may be terminated in three ways:

by mutual consent

by notice

by dismissal without notice

Termination by notice

An employment relationship may be terminated by the employee and the employer by notice. If so, agreed by the parties, the employment relationship may not be terminated by notice for a period of up to one year from the date of commencement of the employment relationship.

Employers must justify their dismissals in writing. The reasons must be clearly specified, authentic and substantial. Reasons of termination by notice may be in connection with the employer’s behaviour in relation to the employment relationship, with the employee’s ability or in connection with the employer’s operations.

The employer shall be permitted to terminate a fixed-term employment relationship by notice:

  • if undergoing liquidation or bankruptcy proceedings; or
  • for reasons related to the employee’s ability; or
  • if maintaining the employment relationship is no longer possible due to unavoidable external reasons.

Restrictions – the employer may not terminate the employment relationship by notice:

  • during pregnancy;
  • during maternity leave;
  • during paternity leave;
  • during parental leave;
  • during a leave of absence taken without pay for caring for a child;
  • during any period of actual voluntary reserve military service; and
  • in the case of women, while receiving treatment related to a human reproduction procedure, for up to six months from the beginning of such treatment;
  • in the case of women, while receiving treatment related to a human reproduction procedure, for up to six months from the beginning of such treatment;
  • when the employee is exempted from the requirement of availability and from work duty for up to five working days a year for the purpose of providing personal care or support to a relative, or to a person who lives in the same household as the worker, and who is in need of significant care or support for a serious medical reason.
Notice period
30 days

%

The notice period shall begin at the earliest on the day following the date when dismissal is communicated.

Where employment is terminated by the employer, the thirty-day notice period shall be extended:

  • by five days after three years;
  • by fifteen days after five years;
  • by twenty days after eight years;
  • by twenty-five days after ten years;
  • by thirty days after fifteen years;
  • by forty days after eighteen years;
  • by sixty days after twenty years of employment at the employer.

The period of notice for the termination of a fixed-term employment relationship by notice may not go beyond the fixed term. In the event of dismissal the employer shall excuse the employee concerned from work duty for at least half of the notice period. The exemption from work duty shall be allocated in not more than two parts, at the employee’s discretion.

Termination by mutual consent

The termination by mutual consent is not regulated by expressed Hungarian Labour Code provisions. Termination by mutual consent allows to the employer and employee to agree freely but in agreement with each other on the conditions of termination.

Dismissal without notice

Employer or employee may terminate an employment relationship without notice if the other party:

  • wilfully or by gross negligence commits a grave violation of any substantive obligations arising from the employment relationship; or
  • otherwise engages in conduct that would render the employment relationship impossible.

The right of termination without notice may be exercised within a period of fifteen days of gaining knowledge of the grounds therefor, in any case within not more than one year of the occurrence of such grounds, or in the event of a criminal offense up to the statute of limitation for criminal liability.

If the right of termination without notice is exercised by a body, the date of gaining knowledge shall be the date when the body, acting as the body exercising employer’s rights, is informed regarding the grounds for termination without notice.

In case of termination without notice, the justification is obligatory for the employer or the employee as well. The right of termination without notice may be exercised, without giving reasons:

  1. by either party during the probationary period;
  2. by the employer in connection with fixed-term employment relationships.

In case of termination under point b), employee shall be entitled to absentee pay due for twelve months, or if the time remaining from the fixed period is less than one year, for the remaining time period.

Social contributions and income tax

Employers in Hungary are required to pay the following taxes and contributions on the gross salaries of their employees:

Contribution Employee Employer
Social contribution tax 13 %
Personal income tax 15 %
Social security contribution 18.5 %
TOTAL 33.5 % 13%

Working time and vacation

The daily working time in full-time jobs is eight hours (regular daily working time). Work shall be scheduled for five days a week. The daily working time can be increased or reduced.

Based on an agreement between the parties, the daily working time in full-time jobs may be increased to not more than twelve hours daily for employees: working in stand-by jobs, and who are relatives of the employer or the owner (extended daily working time).

Employees in Hungary shall be entitled to have two rest days in a given week.

In case of an irregular work schedule the weekly rest days may be scheduled irregularly as well. Instead of weekly rest days, employee shall be given at least forty-eight hours uninterrupted weekly rest period.

Overtime

In case of full-time employment, two hundred and fifty hours of overtime work is permitted in a calendar year. Working overtime shall be in writing, if requested by the employee.

Overtime work’ shall mean work performed:

  1. outside regular working hours;
  2. over and above the hours covered within the framework of working time banking;
  3. over and above the weekly working time covered by the payroll period, where applicable; and
  4. the duration of on-call duty.

Vacation time

The amount of vested vacation time shall be twenty working days. Workers shall be entitled to extra vacation time from 1 to 10 days depend on the age of the employee according to the Labour Code. Parents also entitled to vacation after children (2 days after one, 4 days after two children, 7 days as a maximum per calendar year). Vacation days after children shall be granted on days requested by the employee.

Employees shall be entitled to fifteen working days of sick leave per calendar year for the duration of time during which the employee is incapacitated to work.

Upon the birth of his child, a father shall be entitled to ten working days’ leave at the latest by the end of the second month following the birth of the child, or the definitive date of the resolution on adoption if the child was adopted (hereinafter referred to as “paternity leave”), which shall be granted on the days requested by the father in not more than two installments.

The employee shall be entitled to forty-four working days’ of parental leave until his or her child reaches three years of age. Parental leave shall be provided after at least one year of employment.

Vacation time shall be scheduled by the employer upon hearing the employee.

With the exception of the first three months of the employment relationship, employers shall allocate seven working days of the vacation time in a given year in not more than two parts, at the time requested by the employee. The employee shall notify the employer of such request at least fifteen days in advance.

Unless otherwise agreed, vacation shall be allocated to contain at least fourteen consecutive days once in a calendar year, where the employee is exempted from the requirement of availability and from work duty.

Unpaid leave

Unpaid leave can be defined as quasi extraordinary vacation without pay, which is an opportunity, but also there are compulsory cases according to the Hungarian Labour Code.

Employees shall convey the request for leave of absence without pay in writing, at least fifteen days in advance.

The employee is eligible for unpaid leave

  • for the purpose of taking care of children – until the child is 3 years old
  • over 3 years of age, for the purpose of take personal care of a child until the 10 years of age, under the term of childcare allowance, allowance support the childcare
  • for the purpose of taking care of his/her adopted child for a period of three years from the initial date of placement of the child under care, or for a period of six months for a child over three years of age, and such leave shall be allocated at the times requested by the employee.
  • for the duration of receiving child-care benefits
  • for the period of effective volunteer reservist military service

In addition to the above unpaid leave also possible by mutual agreement of the employer and employee, however it is not regulated by the Hungarian Labour Code. Employees shall convey the request for leave of absence without pay in writing, at least fifteen days in advance. The leave of absence without pay shall end at the time the employee has indicated, at the earliest on the thirtieth day from the date of delivery of the legal statement for the termination of leave.

Most common employee benefits

The benefits can be systematised by many ways in Hungary, many kinds of benefit have catering purposes, purpose of welfare, or social purpose.

It is also common to give cost contribution by the employer to the employee for example work clothes contribution.

The benefits given by the employer may be:

  • optional (the benefits can be chosen by the employer from list of benefits within frames of a determined amount) – optional system called “Cafeteria system”

Most common benefits in Hungary

SZÉP Card

Local public transport season ticket

Vouchers – School starting voucher; Culture vouchers; Gift voucher

Health Care Fund Card

Voluntary pension fund additions

Temporary work – general aspects

Fixed term employment

The period of fixed-term employment in Hungary shall be determined according to the calendar or by other appropriate means. The duration of a fixed-term employment relationship may not exceed five years, including the duration of an extended relationship and that of another fixed-term employment relationship concluded within six months of the termination of the previous fixed-term employment relationship.

Part-time work, call for work

The daily working time applicable for a specific full-time job may be reduced by agreement of the parties (part-time work). The scheduled daily working time of an employee may not be less than four hours, with the exception of part-time work.

Part-time workers employed under employment contract in jobs for up to six hours a day shall work at times deemed necessary to best accommodate the function of their jobs. In this case, the duration of the working time limit may not exceed four months.

Simplified employment and occasional work

Such an employment relationship is established by the fulfilment of the notification requirement of the employer. Not EU citizen shall only be employed in present employment relationship form in the frame of seasonal agricultural work except if he/she is a third-country national with resident or immigrant status.

Number of employees in present form of employment is strictly regulated by the Labour Code. Present form of employment between employer and employee shall not exceed 120 days, even if the parties entered into more than one employment relationship.

Temporary agency work

Present employment means when an employee is hired out by a temporary-work agency to a user enterprise for remunerated temporary work, provided there is an employment relationship between the worker and the temporary-work agency (placement).

The duration of assignment may not exceed five years, including any period of extended assignment and re-assignment within a period of six months from the time of termination of his/her previous employment.

Posting of employees

Employers shall be entitled to temporarily reassign their employees to jobs and workplaces other than what is contained in the employment contracts, or to another employer.

The duration of employment in present employment form may not exceed a total of forty-four working days or three hundred and fifty-two scheduled hours during a calendar year. This shall proportionately apply if the employment relationship commenced during the year, if it was entered into for a fixed term or in the case of irregular daily working time and part-time work. The employee affected shall be informed of the expected duration of work in derogation from the employment contract.

In some cases, stated in the Hungarian Labour Code employee may not be transferred to work at another location without the employee’s consent.

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Overview of applicable legislation

  • Act I of 2012 on the Labour Code;
  • Act LXXX of 2019 on Vocational Training
  • Act CXXII of 2019 on the Entitlements to Social Security Benefits and on Funding These Services;
  • Act LXXXI of 1997 on Social Security Pension Benefits;
  • Act LXXXII of 1997 on Private Pensions and Private Pension Funds;
  • Act LXXXIII of 1997 on the Services of the Compulsory Health Insurance System;
  • Act CXVII of 1995 on Personal Income Tax,
  • Act LXXV of 2010 on Simplified employment and occasional work relationships

Affecting both domestic and foreign businesses, a number of actions triggers the obligation to register for value-added tax in Hungary. To provide a basic overview, our Hungarian experts prepared a comprehensive eBook on value-added tax. Find out more about VAT rates, registration of taxable persons, communication with local tax authorities, compliance and VAT return filing, VAT refund to EU member states or third countries and penalties.

Download our free eBook on VAT in Hungary, or read more below

VAT rates

Basic and reduced VAT rates

The basic VAT rate in Hungary is 27% in accordance with the EU VAT directive. 0% rate applies to daily papers (issued at least 4 times a week) from 2024. A reduced rate of 5% applies to some type of milk, poultry meat, fresh eggs, medicine, books, magazines, specific large live animals, district heating services, instrumental live music performed by artists at private events, restaurants, commercial accommodation services and internet. The 18% rate can be applied to dairy products, products made from milk, corn, starch and service providers of open-air events.

Domestic reverse charge mechanism

When both the buyer and the seller are taxable persons and not exempt from VAT, domestic reverse charge mechanism is to be applied with regard to certain services and product supply. Instead of including VAT in the invoice, the seller should state in the invoice, that the transaction is subject to the reverse charge mechanism; hence the buyer will have to pay VAT to the competent tax authority.

Domestic reverse charge VAT can be applied to services that require a building permit, construction work in connection with expanding, restructuring, demolition of buildings, maintenance, sale of certain metal products, grain, collateral assets, sale of real estate, trading greenhouse gas emission rights – when the vendor opts for taxability, and labour hire relating to specified construction and other installation works.

Export within and outside the European Union

The supply of goods to other EU member states is free from VAT, if delivered to a VAT payer registered in the member state and the products are transported to any other member state. The export of goods is free from VAT, but subject to a confirmation by the customs authorities.

Taxable amount

The taxable amount equals everything that is deemed to be received or shall be received for the delivery of goods or services. In case of the import of goods from third countries, the taxable amount is based on the value of customs.

VAT registration of domestic taxable persons

Voluntary and obligatory registration

In Hungary, all domestic taxable persons are VAT payers by law. Before starting any business activity, taxable persons must be registered at least for a VAT number. Retrospective VAT registration is also possible, but it means a delay penalty risk. There is no threshold that makes the obligation applicable or non-applicable.

Group registration for taxable entities

Group registration for VAT is possible in Hungary.

Several taxable persons who have their seat, place of business or fixed establishment within the territory of Hungary and are considered as affiliated companies, may participate in group VAT registration and therefore be considered as a single taxable person for VAT purposes.

Other specifications of the VAT registration

Taxable persons must register to obtain an EU VAT number as well if they will be performing EU transactions, such as service delivery to other EU member states or acquiring goods or services from other EU member states. This registration must be done in advance because retrospective registration is not possible.

Besides that, even natural persons may become VAT payers by law without previous registration, e.g. in case of supplying new means of transport, buildings or unbuilt lands in a series of transactions.

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VAT registration of foreign taxable persons

Definition of foreign taxable persons

Foreign taxable person are entities who have no seat, place of business or fixed establishment in Hungary, but who are pursuing business activities with a place of performance is in Hungary.

Obligatory registration for foreign taxable persons

Foreign taxable persons in Hungary are obliged to register for VAT before doing any activities subject to VAT, and whose place of performance is in Hungary – except, for example, distance sale.

The rules of distance sale have significantly changed from 1st of July 2021. due to the introduction of the One-Stop-Shop (‘OSS’) single VAT return. From July 2021, B2C sellers dispatching their goods from a single country will no longer be required to register for foreign VAT and complete multiple VAT filings in countries where they are selling. Instead, they may opt to simply complete and file a new OSS filing. One of the main changes is the creation of a common threshold of EUR 10,000 up to which B2C EU cross-border supplies remain subject to the VAT rules of the Member State of dispatch, and above which supplies become subject to the VAT rules of the Member State of destination.

Communication with authorities

Local statutory representation for VAT

In Hungary, local representation by a tax advisor is not obligatory.

However, foreign persons may need local representation in specific situations.

Statutory language

Only Hungarian language may be used for communication with the tax authorities.

Communication with authorities

A taxable person can communicate with the tax authorities in electronic format, via the company gate or client gate portal of the tax authorities.

A qualified electronic signature is required for the electronic communication.

VAT compliance and return filing

Tax period and deadline for VAT return filing

In Hungary, the calendar month is considered as a tax period at the beginning of the business activity. Later on, and based on financial indicators, it can be changed to a calendar quarter or calendar year.

VAT returns are required to be submitted either monthly, quarterly or yearly. The deadline is the 20th day of the month following the given period. The yearly VAT return must be submitted by 25 February following the given tax year.

EC sales list and other documents

The EC sales list shall be filed till the 20th day following the respective period, which is in general the calendar month. The EC sales list may be filed for a period of a calendar quarter in case the taxable person submits the VAT returns at a quarterly basis and the value of delivered goods to other EU member states does not exceed the threshold of EUR 50 000 within the given calendar quarter.

Besides the VAT return, the control statement listing information from received invoices must be filed too, in case the amount of input VAT is deducted.

Live invoice data reporting

The legislation requires an immediate and automated data upload to the Hungarian Tax Authority’s online invoice system, integrated to the invoicing software of taxpayers. As of 1 April 2021, the scope of live invoice data reporting was extended to almost all outgoing invoices issued under HU VAT ID. Not meeting with this obligation may pose significant default penalties.

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VAT refund to EU member states

Refund for foreign taxable persons

VAT refund for a foreign taxable person is possible, upon the fulfilment of specific conditions.

Deadline and place of filing for VAT refund

In the case of taxable persons established in another Member State of the Community, the right of refund of VAT may be exercised on condition that the VAT refund application is submitted via the tax authority of the Member State concerned.  The Hungarian state tax authority shall adopt a decision on the VAT refund application submitted in another Member State of the Community for the given calendar year, if the taxable person established in another Member State of the Community has justifiably submitted the application at the latest on 30 September of the calendar year following the refund period. No application for continuation shall be accepted upon failure to meet the above deadline.

Minimum amount and applicable period

The minimum amount of VAT requested must be at least EUR 50 for the respective calendar year.

The VAT refund may be requested also for a shorter period. However, it shall not be shorter than 3 calendar months and the value of VAT must be at least € 400.

Value of VAT for shorter periods
400€

%
Value of VAT for the calendar year
50€

%

VAT refund to third countries

VAT refund conditions

VAT refund to third countries is possible for Liechtenstein, Switzerland, Norway, Serbia, United Kingdom and Turkey, although with restrictions.

Deadline and place of filing for VAT refund

The taxable person established in a recognized third State shall submit his VAT refund application directly to the state tax authority in Hungary.

The taxable person established in a recognized third State shall submit his VAT refund application at the latest on 30 September of the calendar year following the refund period, where the application shall be received by the state tax authority by that time. No application for continuation shall be accepted upon failure to meet the above deadline.

The deadline for VAT return is between 4 to 8 months after filing the refund request.

Minimum amount and applicable period for VAT refund

The value of requested VAT must be at least EUR 50 for the respective calendar year.

The VAT refund may be requested also for half calendar year. However, this case the value of the requested VAT has to exceed EUR 400.

Value of VAT for half calendar year
400€

%
Value of VAT for the calendar year
50€

%

Penalties for VAT non-compliance

Depending on the nature of the breach of the law, penalty for non-compliance can be imposed in form of fine, based on situation and severity, up to HUF 1,000,000 per infringement. Delay interest for late payment is the central bank base rate (that is 10% on 31 January 2024) plus 5% points.

Employing expats in Hungary or posting Hungarian employees abroad results in new obligations for any employer. Our tax and labour law experts gathered all the important information related to cross-border employment and global mobility in Hungary, to provide you with an easy overview on conditions for tax residency, personal income tax and social security contributions or penalties for non-compliance.

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Overview of key facts related to expat tax in Hungary

Our local tax, payroll and labour law experts are here to help you – as an expat or an employer – to obtain essential expert advice, so that you can effectively address all the matters related to cross-border mobility in Hungary and other locations globally.

Tax residency

In Hungary, a tax resident is:

A person who is a citizen of Hungary (except dual citizens), as formal criteria

A citizen of the European Union who spends more than 183 days per calendar year in Hungary

A third-country citizen with permanent residence status, whose vital interest is in Hungary

Any natural person who has a permanent home (habitually residing in the country) or habitual stay in Hungary (where they stay for more than 3 months without the intention to leave)

Tax rate

Rate
15%

%

Tax period

Calendar year

Social security contributions

Rate for the employer
13%

%
Rate for the employee
18.5%

%

Tax return filing

The due date for filing falls on May 20 with the possibility of extension, however, the tax office needs to be notified beforehand. Application for justification may not be refused if the private individual has any income from abroad, and in this case penalty for the delay in filing may not be imposed until November 20.

Penalties related to expat tax in Hungary

Delayed filing of the tax return: The fine ranges from HUF 0 up to HUF 200,000 (private persons) or up to HUF 500,000 (legal entities)

Delayed payment of the due tax: prevailing central bank (MNB) base rate plus 5% from the value of overdue tax

Delayed or missing registrations at tax authorities: up to HUF 1,000,000, or up to HUF 500,000 if the employer registers the employee,  but erroneously, defectively or with false data content

Delayed or missing report on monthly salary or withholding tax from salary: up to HUF 500,000

Penalties related to social security

Delayed report on social security: up to HUF 500,000

Delayed payment of the social security contributions: prevailing central bank (MNB) base rate plus 5% divided by 365 for each day from the overdue payment

Delayed or missing registrations for the purposes of social security: up to HUF 1,000,000

Penalties related to health insurance

Delayed report on health insurance: up to HUF 1,000,000

Delayed or missing registrations for the purposes of health insurance: up to HUF 1,000,000

Related party definition

Transfer pricing rules are the applicable regulations for transactions between related parties as defined by the Hungarian Act on Corporate Income Tax (CIT). In general, we can say that if a company meets at least one of the following criteria, then it will be deemed as related parties for income tax purposes:

In addition, the Hungarian head office and the foreign PEs/branches, as well as the Hungarian PEs/branches and the foreign head office qualify as related parties; thus, the transfer pricing rules also apply to these enterprises.

Furthermore, the definition of related parties was supplemented as of January 1st, 2015. As a result of the changes, the concept of common directorship was added to the definition. Thus, even if the ownership (voting) rights of one entity in another entity do not exceed 50%, but the entities in question have the same management, then the two entities are considered related parties and are subject to the obligations prescribed by transfer pricing rules.

Transfer pricing adjustment

The Act on CIT defines the cases when entities are obliged to apply transfer pricing adjustments. According to paragraph 18 of the Act on CIT, transfer pricing adjustment is required if the price used between related parties based on their agreement is lower or higher than the consideration used by independent parties within comparative conditions. The profit before taxation shall be modified by transfer pricing adjustment in the following cases:

if the profit before taxation is lower due to the agreed consideration between related parties, the tax base shall be increased by transfer pricing adjustments

if the profit before taxation is higher due to the agreed consideration between related parties, transfer pricing adjustment could be made as tax base decreasing items

Reduction of the tax base is only allowed if both parties are in possession of a declaration signed by both, declaring the difference between the arm’s length price and the price used, and the other party is subject to Hungarian corporate tax or a similar tax abroad and increase(d) its tax base with the similar amount. The reduction cannot be validated if the related party is considered as a controlled foreign company (CFC).

On 19 July 2022, the Hungarian Parliament government has submitted the proposal for the 2023 tax package, that sets out important changes to the transfer pricing (TP) rules, requiring TP adjustments to be made to the median.

The rule says that if the remuneration applied by the taxpayer is outside the arm’s length range, the median of the arm’s length range shall be considered as the arm’s length price. There is an exception, if the taxpayer demonstrates that another value of the arm’s length range (deviating from the median) appears more suitable for the transaction under review, in which case this value can be applied as the arm’s length price instead of the median.

Transfer pricing adjustments are to be applied irrespective of other tax base increasing and decreasing items.

Download our 2024 transfer pricing overview for Hungary, or read more below

Applicable legislation

The transfer pricing rules are determined by different legislations in Hungary, as well as by the Double Tax Treaties.

Act LXXXI of 1996 on Corporate Income Tax (CIT) determines the description of affiliated companies and the tax base modifying items related to the arm’s length principle. When applying the arm’s length principle, the CIT Act refers to the OECD Transfer Pricing Guidelines as the basis of the legislation.

The rules of Advance Pricing Agreement (APA) are included in Act CL of 2017 on Taxation, together with the sanctions applicable in case of missing transfer pricing documentation. The details regarding the submission of APA request can be found in Decree No. 48/2017 of the Ministry of Finance on Advance Pricing Agreements.

The details of requirements on transfer pricing documentation are included in Decree 32/2017 (X.18.) of the Ministry of National Economy on TP Documentation Requirements.

Also, Double Tax Treaties include necessary information when preparing transfer pricing documentation, as they define the place of taxation of the concerned entities.

Arm’s length principle

Comparables

Local comparables are preferred. However, if the reliability of these comparables is not sufficient or limited data is available from the region of Hungary, the use of pan-European comparables deriving from similar economic circumstances are acceptable as well. The tax authority also uses the same database as applied by the taxpayer for its reviews.

Arm’s length Range

Section 18 of the Corporate Income Tax Act was modified as of January 1st, 2023, to make the application of the interquartile mandatory for comparable searches based on a public database.

According to the legislation for FY2023, the interquartile range must be used if it is applied to publicly available data stored in a public database or from other public sources (also accessible by the tax authority) – i.e., they are not comparative data available from the affiliated companies’ independent transactions. The definition of the interquartile range remains unchanged, i.e., the first and last 25% of the sample should be eliminated.

Cost-benefit principle

The Decree assigns that the taxpayer is obligated to consider all facts and conditions available during contracting, modification of the agreement and at the time of fulfilment, which are relevant for determining the arm’s length price.

However, the legislation defines the cost – benefit principle, based on which the taxpayer cannot be expected to bear disproportionately high costs related to completing the records. It is worth being aware of this principle, because the taxpayers have the possibility to refer to the abovementioned principle in case a fact or a circumstance was not detailed deeper in the documentation due to its high cost burden.

The above does not exempt, however, the taxpayer from the transfer pricing record keeping obligation.

Exceptions from transfer pricing

According to the Decree no. 32/2017 on transfer pricing documentation requirements, a company is obliged to prepare transfer pricing documentation if it had transactions with related parties within the given tax year.

There are some cases when the company has no transfer pricing documentation preparation liability, even though there was fulfilment with related party:

  • the transaction was made based on agreement with an individual
  • the company is considered as small-sized enterprise (according to the Act on CIT)
  • the arm’s length price was determined by the tax authority in the form of a resolution as provided by the Rules of Taxation (in the framework of the so called “Advance Pricing Agreement” (APA) – if there was no change in the facts fixed in the APA resolution
  • recharge of consideration for the sale of product or service in the same amount to related party or parties – if the seller or party bearing the cost is not affiliated company
  • free cash transfer and takeover between associated companies
  • transactions performed on stock exchange being subject to the Act on Capital Market, and for applying other official price or the fixed price specified by law
  • the arm’s length value of the transaction (excluding VAT) between associated companies does not reach HUF 100 million (~ EUR 250,000) within the tax year (the contracts which may be consolidated are to be considered together)
  • for intercompany transactions between members of a Corporate Taxpayer Group, following the establishment of such a Group (The opportunity to create a Corporate Taxpayer Group for corporate income tax purposes is available for Hungarian resident taxpayers from 1 January 2019)

When calculating the limit set by the Decree it is important to know that if the annual report is prepared in foreign currency, the exchange rate of Hungarian National Bank valid on the last day of the tax year is to be used to determine the value of related party transactions in Hungarian Forint.

Methods

According to the Hungarian transfer pricing regulations, the designated methods are:

the comparable uncontrolled price (CUP) method

the resale price method

the cost plus method

the transactional net margin method (TNMM)

the profit split method

Hungarian rules rely on the principle of “the most appropriate method”, meaning that the designated methods are equal. Although, there is no hierarchy between the methods, CUP method is preferred against the others (if comparable uncontrolled prices are available, those shall be examined in the first instance). Other methods may be used after the listed ones have been eliminated.

Documentation

As of January 1st, 2018, taxpayers may choose to prepare documentation based on the “master file – local file” concept. The documentation regarding FY 2017 can be prepared based on the former rules as well. Applying the new concept is, however, obligatory from FY 2018.

For low value adding services, simplified documentation may be prepared if certain conditions are met.

As of 1 January 2020, based on an amendment of the CIT Act, transfer pricing rules shall be applied in the event of a capital increase as a result of contribution in kind provided by a shareholder, who prior to the contribution, did not have majority ownership in the company, but acquires majority ownership through the contribution. The application of transfer pricing rules is also required in case of repurchasing of own shares, or transfer of such shares free of charge.

Documentation requirements

Consolidated transfer pricing documentation

According to the Decree, as a general rule, companies are obliged to prepare transfer pricing documentation for each transaction separately.

However, the Decree gives the possibility for taxpayers to prepare consolidated documentation on transactions meeting the following requirements:

  • the subject matter of the agreements and the relevant conditions of the fulfilment of the subject is the same and pre-recorded, or the differences of the conditions are not significant, or
  • the agreements are closely related, provided that the consolidation does not jeopardize the comparability.

In case of choosing the preparation of consolidated documentation, the company shall present the reason for the consolidation in its documentation.

Updates and modification of the documentation

There are no specific rules under the Hungarian regulations regarding the annual updates, however, based on the general rules, the transfer pricing report must be updated if certain conditions have changed in the tested financial year, and those changes influence the pricing mechanism.

Regarding the benchmarking analysis, the Hungarian tax authorities prefer database search updates on a yearly basis.

Retrospective modification of the documentation was allowed without limitations before the Decree 32/2017 entered into force. From FY2018, making changes in the transfer pricing documentation is allowed only in the case if an error affecting taxes or arm’s length prices was detected in a completed document.

Deadlines

Documentation does not have to be submitted to the tax authorities, however, it should be provided immediately upon request. The statutory deadline for the preparation of transfer pricing documentation is the filing date of the corresponding year’s corporate income tax return.

The deadline for finalizing the corporate income tax return is May 31st for calendar year taxpayers. For non-calendar year taxpayers, the filing deadline is the last day of the fifth month following the balance sheet date of the financial year.

If the taxpayer has prepared the Local file until the deadline, the term for the preparation of the Masterfile may be prolonged until the foreign parent company’s documentation deadline but no later than 12 months following the last day of the financial year.

Statute of limitation

The statute of limitation is five years from the last day of the year when the concerning tax return is due.

Language

Transfer pricing documentation and supporting documentation may be compiled in languages other than Hungarian, but the taxpayer is liable to present a Hungarian translation of documentation prepared in languages other than English, French, and German, at the tax authorities’ request, by the deadline specified.

Masterfile-local file concept

Hungary adopted the OECD’s Masterfile-local file concept, which can optionally be used for FY2017, but obligatory from FY2018, meaning that from 2018 it is no longer possible to prepare standalone documentation. Hungarian legislation basically follows the OECD recommendations on this two-tier documentation structure, but the Decree 32/2017 (X.18.) of the Ministry of National Economy specifies some additional requirements which shall be met by the structure and substance of the Hungarian transfer pricing documentation.

Regarding the purpose of the documentation, the Masterfile presents the common characteristics of the group’s general business strategies and operations and the comprehensive functional analysis, and a Local file presents the local subsidiary’s contractual details and elaborates on the arm’s length price of its intra-group transactions.

Documentation of low value-adding intra-group services

Simplified transfer pricing documentation can be prepared for transactions with low value-adding if the requirements determined by the Decree are met.

The conditions are as follows:

  • The arm’s length value of the transaction does not exceed HUF 150 million (~ EUR 430,000) in a tax year and
  • The revenue from the transaction does not exceed 5% of the sales revenue of the service provider.
  • The cost of the transaction does not exceed 10% of the operational costs and expenses of the service recipient.
  • The arm’s length remuneration is established upon the cost-plus method.
  • The applied mark-up is in the range of 3-7% (This constitutes an arm’s length mark-up).

Mandatory data provision

General information

Based on the 2022 amendment of Act LXXXI of 1996 on Corporate Tax and Dividend Tax, in addition to the previous documentation (transfer-pricing documentation) obligation related to the determination of the arm’s-length price, taxpayers will also have to meet a new data provision obligation as part of the annual corporate tax return.

Scope of the data provision

The detailed rules are included in the amended Decree 32/2017, which defines the scope of transactions subject to the data provision, which can be divided into three categories:

Exemption from the data provision

  • Transactions where the aggregated annual value not exceeding HUF 100 million (at an arm’s-length price)
  • Stock-exchange transactions
  • Transactions applying a fixed price determined by authorities/laws

Limited data provision

  • Transactions that the taxpayer concluded with individuals not in the capacity of private entrepreneur
  • Recharge of independent third-party costs in an unchanged amount and value
  • Transfer of liquid assets without consideration

Full data provision

  • Transactions that do not belong to the above-mentioned categories,
  • Transactions covered by an advanced pricing agreement (APA) resolution

The data provision obligation must first be fulfilled for corporate tax returns filed after 31 December 2022. For FY2023 (ending by 31 December 2023), recharges of independent third-party costs in an unchanged amount and value are not subject to this obligation yet.

Content elements of the data provision

The provision of data per transaction or, where appropriate, per consolidated transaction, includes the following:

  1. Designation of the type of the related-party transaction, based on a predefined list
  2. Assignment of the most appropriate NACE code
  3. Tax number and tax residency of the related parties involved in the transaction
  4. The net annual value of the transaction determined in HUF, per related party
  5. The value of CIT base adjustment in respect of the transaction, per related party
  6. The transfer pricing method selected for the determination of the arm’s-length price of the transaction
  7. Additional transaction-specific information (e.g. profitability indicator, etc.) in some cases, depending on the selected TP method or the type of the transaction
  8. Accounting standard used for the financial analysis of the company selected as the tested party
  9. Arm’s-length price (value/range) determined for the transaction
  10. The transfer price applied in the transaction, also considering the tax base adjustments

All the above requirements are to be complied with in the case of full data provision obligation, while only points 1-5 should be applied for limited obligation.

These changes also have significant implications for the timing of preparing the documentation; from then on, not just the data provision must be compiled by the submission date of the CIT return, but the preparation deadline of the transfer pricing documentation will also be strictly enforced.

Advance Pricing Agreements (APA)

General information

Advance Pricing Agreements (APAs) are determined by the Rules of taxation and have been available since January 1st, 2007. The taxpayer has the possibility to request the tax authority to define the method to be applied, considering the facts and conditions and range of prices to determine arm’s length price to be used between the related parties in the future.

The tax authority includes the outcome of the examination in the resolution.

The term of the resolution is a fixed term of three to five years. But it could be extended by an additional three years, based on the request of the involved related parties.

APA filing fee

As per the modified legislation, effective from 1 January 2023, the fee for an APA with the Hungarian Tax Authority has been increased to 5,000,000 HUF for a unilateral procedure. In the case of bilateral or multilateral procedure, the fee is 8,000,000 HUF.

In case of rejected filing, or in case of withdrawal of the request the 85% of the fee is payable.

In case of request for prolongation or modification of statement the fee is 50% of the originally paid fee.

Fee of personal consultation is HUF 500,000.

The detailed rules are included in Act CL of 2017 on Taxation.

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Penalties

If the tax base adjustments required by the tax authority based on transfer pricing rules result in tax default, the standard assessments — tax penalty and late payment interest — will be due in accordance with the general rules.

Furthermore, the default penalty for violating the TP documentation requirements or missing the obligation is up to HUF 5 million (~EUR 12,500) per documentation (Masterfile and Local file qualifies as two separate documentations). In the case of repeated infringements, the maximum default penalty can be HUF 10 million (~EUR 25,000).

Late payment interest may be levied based on the additional tax assessed by the tax authority. No late payment interest should be assessed on default penalties levied due to not having appropriate transfer pricing documentation.

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As with previous years, our tax experts have prepared a comprehensive tax guideline for Hungary.

Our material shall provide you with the necessary information about Hungarian business environment and its statutory framework.

Download our 2024 tax guideline for Hungary, or read more below

Legal forms of business

The Act V of 2013 on the Civil Code sets the types of business associations that can be established for business purposes. In the next table we have compiled the most commonly used types of business associations in Hungary with their basic information.

The form of business Required subscribed capital Information Required number of founders
English Hungarian
Limited partnership Betéti társaság (Bt.) None At least 1 member bears unlimited liability.

Useful when funds are not available for forming a LLC (Kft.)

2
Limited liability company Korlátolt felelősségű társaság (Kft.)

HUF 3,000,000

(ca. EUR 7,600)*

Limited liability for members – liable only up to their contribution as declared by the law. 1
Private company limited by share Zártkörűen működő részvénytársaság (Zrt.) HUF 5,000,000

(ca. EUR 12,900)*

Shares not listed on stock exchange.

Recommended for owners who want to distribute rights and shares by their own preferences.

1
Public company limited by share Nyilvánosan működő részvénytársaság (Nyrt.) HUF 20,000,000

(ca. EUR 51,600)*

Can only be formed from an existing Zrt.

Shares need to be subscribed publicly.

Advised to use when company needs public funding for its activities.

2

* Applied exchange rate: 392 HUF/EUR

All of these business associations are legal persons. The amount of liability varies, as well as the required subscribed capital and the number of founders.

Companies limited by shares (Rt.) are business associations operating either as private company limited by shares (Zrt.) or public company limited by shares (Nyrt.) depending on their shares’ availability on the stock exchange.

General partnership (Kkt.) is not mentioned in the table as it is uncommon to use. Its advantage is that no minimum initial capital is required to start this type of business, but this is certainly one of the riskiest forms. Members of a Kkt. assume unlimited and full liability for the company’s obligations.

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Personal income tax and social contributions

In Hungary flat rate personal income tax applies: 15%. The following contributions are generally payable:

Payable by employee 
Social security contribution 18.5%
Payable by employer
Social contribution 13%

The total tax burden (tax + contribution) in case of normal salary is 33.5%, so the general level of net salary is 66.5% of gross salary. The net to total company cost ratio is 58.8%.

Passive incomes (such as dividends or capital gains) and the benefits in kind for employees become subject to 13% contribution, too. However, in case of capital incomes, there is an upper limit of tax liability, hence, social contribution tax is only payable until the natural person’s income (both from non-independent and independent work and capital gains) reaches twenty-four times the mandatory minimum wage (which is HUF 266.800 per month in 2024).

Corporate income tax

General information

Tax rate is 9% of the positive amount of the tax base.

The tax base both for domestic and foreign businesses is the pre-tax profit modified by items declared in Act LXXXI of 1996 on corporate income tax such as loss carried forward, provisions, depreciation, declared share, declared intangible good, dividends, received royalties, research and development, costs incurred that are not in relation with the business’ interests, imposed penalties, thin capitalization, CFC.

Business associations need to submit their CIT returns by May 31st following the tax year. For taxpayers with a different tax year, the filing deadline is the last day of the fifth month following their business year.

Taxpayers with Hungarian residence have to pay corporate tax on their worldwide income (unlimited tax liability), while non-resident businesses only need to pay tax on the income from their Hungarian activities (limited tax liability).

Hungary grants tax credits related to funding film making, certain spectacle team sports, for business growth, for energy efficient investments, for R+D projects, and for small and medium businesses.

Income minimum

Should a company make no profit, it still may have to pay corporate income tax on the income minimum as tax base. If the pre-tax profit or the tax base – whichever is higher – fails to reach the profit minimum, the taxpayer either has to make a statement of its cost structure in its tax return or apply the income minimum as tax base (generally 2% of the total revenue).

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Transfer pricing

The Hungarian transfer pricing rules are in line with OECD Transfer Pricing Guidelines. Accordingly, price setting of intra-group transactions has to follow the arm’s length principle.

In Hungary, there are no provisions on which particular transfer pricing method is preferred. However, certain methods are listed in the CIT act and the law declares that other methods may only be used after the listed ones have been eliminated.

Hungary introduced the CbC reporting obligation in autumn 2017. First financial year affected is 2016.

In Hungary the related party transactions are to be documented properly; otherwise, the tax authority imposes harsh penalties for each missing or incomplete documentations ranging up to HUF 5 million for the first time, and even up to HUF 10 million for repeated defaults regarding the same transfer pricing documentation.

Hungary implemented the Master file – Local file concept in the lay out and content requirement of TP documentation. FY 2017 can be documented according to the former rules either, but from FY 2018 the new concept is obligatory.

As of 1 January 2023, Hungary introduced data provision obligation for related party transactions, to be disclosed in the CIT return of each taxpayer who is subject to the transfer pricing documentation obligation. FY2022 was already affected by this rule.

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Taxes on individual income

Personal income tax (PIT)

Tax liability affects the total revenues of resident taxpayers, the revenues obtained in Hungary by foreign individuals or other incomes that are taxable by law, in Hungary.

Taxpayers could be both residents (Hungarian citizens with exception of dual citizens without Hungarian residence, EEC member state citizens with more than 183 days of staying, third country citizens with residence permit and persons only with Hungarian residence) and non-residents (if they earn income from Hungary or according to an international convention, they earn income that is taxable in Hungary).

Hungary has a personal income tax rate of 15% of the tax base. For resident taxpayers, the tax base is their whole income, while in the case of non-resident taxpayers it represents their locally taxable incomes.

Simplified contribution to public revenues

Writers, journalists, artists, directors, actors, musicians, circus artists, professional athletes or trainers – under certain conditions – may choose this favourable tax form.

This tax exempts from the personal income tax, social security contribution and social contribution tax excluding taxes and contributions on the minimum wage. Its tax base is the individual’s revenue reduced (if the private person is liable to pay it) with the value added tax.

The applicable tax rate in this case is 15% for private individual and 9.5% for pensioner.

For private individuals covered by social security in an EU member state, the EKHO rate is 9.5%. The payer is no longer obliged to pay EKHO.

Value-added tax (VAT)

General information

The VAT general tax rate in Hungary is 27%. Nonetheless, there are three reduced VAT rates in use: 0%, 5% and 18%.

VAT returns are required to be submitted monthly, quarterly or yearly. Deadline for filing the return is the 20th day of the month following the given period.

The yearly VAT return has to be submitted by February 25th following the given tax year.

Intrastat: in case a taxable person has EU transactions, Intrastat statistical reports must be submitted as well. The threshold for arrivals is HUF 270 million, while the threshold for dispatches is HUF 150 million in 2024.

With the beginning of 2024, the eVAT system has been introduced, which means that the tax authority offers draft VAT returns and administrative benefits for the taxpayers on an optional basis from this year forward.

The OSS system and its application has been extended since 2021 with distance selling and all the services provided for non-taxpayers where the place of performance is in the Member State where the consumption took place. Taxpayers involved in distance selling may register in the one-stop shop system and settle their tax liabilities in respect of several Member States simultaneously. Tax returns must be filed electronically in the EU and non-EU one-stop shop system on quarterly basis.

For B2C distance sales of goods from outside the EU, the Import One-Stop-Shop (IOSS) scheme is applicable.

In line with EU provisions, the threshold for distance sales to non-taxable persons is EUR 10,000.

Reduced VAT rates

Certain products and services are the beneficiaries of lower VAT rates.

The 0% rate applies to daily papers (issued at least 4 times a week) from 2024.

The 5% rate applies to some type of milk, poultry meat, fish fillets and other fish meat, fresh eggs, medicine, books, magazines, specific large live animals, district heating services, instrumental live music performed by artists at private events, commercial accommodation services, restaurants and internet.

The 18% rate can be applied to dairy products, products made from milk, corn, starch and open-air events’ service providers.

Please note that VAT of certain group of services and products are not deductible, such as different types of fuels and motorcycles, passenger cars, taxis, parking services, food and beverages, catering services and residential properties and related activities to renovation of these buildings.

Domestic reverse charge mechanism

When both the buyer and the seller are taxable persons and not exempt from VAT, domestic reverse charge mechanism is to be applied with regard to certain services and product supply. Instead of including VAT in the invoice, the seller should state in the invoice, that the transaction is subject to the reverse charge mechanism; hence the buyer will have to pay VAT to the competent tax authority.

Domestic reverse charge VAT can be applied to services that require a building permit, construction work in connection with expanding, restructuring, demolition of buildings, maintenance, sale of certain metal products, grain, collateral assets, sale of real estate, trading greenhouse gas emission rights – when the vendor opts for taxability, and labour hire relating to specified construction and other installation works.

Live invoice data reporting

The legislation requires an immediate and automated data upload to the Hungarian Tax Authority’s online invoice system, integrated to the invoicing software of taxpayers. As of 1 April 2021, the scope of live invoice data reporting was extended to almost all outgoing invoices issued under HU VAT ID. Not meeting with this obligation may pose significant default penalties.

Property taxes

Transfer duty

Purchasing real estate through an asset or share deal is subject to transfer tax obligations. The assessed tax base will be the gross market value of the real estate by the tax authorities’ practice.

The transfer tax rate is 4% up to HUF 1 billion and 2% for the rest of the amount. The total amount of transfer tax payable per property is limited to HUF 200 million.

Local business tax

Tax base for permanent activities performed in the jurisdiction of the local government is the net sales revenue reduced by costs of sold goods, value of mediated services (or above a certain amount of sales revenue by the proportional share of the above mentioned), subcontractor fees, material costs and direct value of research and experimental development. The tax rate is determined by the local government but cannot be higher than 2%.

The tax on temporary business activities is abolished. In the case of construction activity exceeding 180 days the tax on permanent business activity shall continue to be paid.

Building tax

Regardless of what they are intended or utilized for, both residential and non-residential buildings and structures may set building tax obligations for the taxpayer depending on the decision of the local government.

The owner on January 1st is subject to tax.

Should there be more owners, they need to pay tax according to their proportions of shares in the building.

Depending on the local government’s decision, building tax is either calculated by the useful space in m2 (maximum tax rate is HUF 1,100/m2/annum) or adjusted market value (maximum 3.6% of the adjusted market value of the building).

Land tax

The owner on January 1st may be subject to land tax. Depending on the local government’s decision, land tax is either calculated by the land’s area in m2 (maximum tax rate is HUF 200/m2/annum) decreased by the structure’s space on the land itself, or the adjusted market value of the land (capped at 3%).

The right of taxation of local governments includes the right to define the tax rates in observation of the upper limits prescribed by the Act but increased according to changes in the KSH consumer price index published. The upper limit plus the increment is to be called the “tax ceiling”.

Both building and land taxes’ rates are heavily affected by the local government’s decisions, so it is advised to obtain the necessary information regarding which method is being used.

Customs duties

The National Tax and Customs Administration of Hungary is the competent authority for customs duties. Since Hungary is a member state of the European Union, no customs procedures are required as free movement of goods is ensured between member states, unless you exceed the non-commercial quantity declared in the Hungarian Excise Act.

Goods purchased for non-commercial purposes are exempt from customs procedures as well. However, transport of specific goods or items such as alcohol, tobacco, weapons, medicines and pets are subject to restrictions depending on the country of origin and means of transport.

Passengers carrying goods from third countries that are outside the EU face more solid restrictions on these products if they depart from another member state.

In addition to the above goods, passengers are exempt from customs duty and taxes for goods imported

up to the value of EUR 300

and up to the value of EUR 430 if travelling by air

The import VAT exemption for imported goods below EUR 22 has been abolished, customs declaration is required for these goods as well. This means that import VAT is payable on imports of consignments regardless of their value. However, in case of import of goods of a value of under EUR 150 the customs exemption remained unchanged i.e. if the value of the goods will be below EUR 150, the consignment will be exempted from customs duty but VAT must be paid on the full value of the consignment.

Investment incentives

Both refundable and non-refundable incentives are available to investors coming to or expanding in Hungary. The main types of incentives related to investments are:

  • cash subsidies (either from the Hungarian Government or from EU Funds)
  • tax incentives, low-interest loans
  • land available for free or at reduced prices.

The regulations on incentive opportunities are in accordance with EU rules. As tax incentives are the most popular and commonly used form of incentive, we will expand on them further.

In Hungary there are two groups of corporate income tax allowances related to investments:

one of them is decreasing the tax base,

the other has decreasing impact on the calculated tax liability.

Tax base decreasing items

Investment allowances of small and medium enterprises

This type of allowance is applicable by entities considered as small or medium enterprise at the end of the financial year and has only private person member(s). According to the allowance the enterprise is entitled to decrease its profit before taxation with the amount of investment related to new assets not capitalized during the financial year. The amount of allowance cannot exceed the amount of profit before taxation.

Development reserve

Entities have the possibilities to create development reserve while decreasing the retained earnings for future asset investments. The amount shown as development reserve at the end of the financial year is tax base decreasing item according to the Act on CIT.

As of 1 January 2021, the HUF 10 billion cap on the companies’ development reserve will be abolished, thus higher corporate tax base reduction is available from 2021. However, the maximum amount of the tax base deduction is still limited by the profit before tax for the tax year.

Investment related to historical buildings

In case of cultural heritage related investment projects on monuments, buildings recorded as historic value, property qualifying under special protection, the double of cost of renovation (investment) of the property can be taken into account as tax base decreasing item. There is the possibility that the cost will be utilized at the related company of the investor. The amount of the allowance on the level of calculated tax cannot exceed the HUF equivalent of EUR 100 million.

Tax allowances

Tax allowance based on interest on investment loan

Small and medium enterprises are entitled to tax allowance based on interest on loan requested from financial institute for fixed asset investment. The tax allowance available in given year equals with the interest amount paid during the financial year.

Energy efficient investments

The taxpayer is entitled to tax allowance based on investment for energy efficiency. The available tax incentive is up to 45% of the counted costs related to the investment, but at most HUF equivalent to EUR 30 million. The tax allowance can be used in the tax year following the year when the investment was placed into operation – or in the same tax year at the taxpayer’s discretion – and in the following five tax years.

Development tax incentive

The taxpayer is entitled to development tax credit if:

  1. it performs investment amounted to at least HUF 3 billion (on present value), or
  2. it performs investment amounted to at least HUF 1 billion (on present value) in certain designated areas, or
  3. it performs investment amounted to at least HUF 100 million (on present value) related to previously occupied facility used for zoogenic food production, or
  4. it performs investment amounted to at least HUF 100 million (on present value) related to environment protection, or
  5. it performs investment amounted to at least HUF 100 million (on present value) related to R+D, or
  6. it performs investment amounted to at least HUF 100 million (on present value) related to only film and video production, or
  7. investment related to job creation, or
  8. it performs investment amounted to at least HUF 100 million (on present value) within 3 years following enter of stock exchange; or
  9. on present value
    • investment amounted to at least HUF 50 million performed by small enterprises,
    • investment amounted to at least HUF 100 million performed by medium enterprises, or
  10. investment amounted to at least HUF 100 million (on present value) performed in free entrepreneurship zone or
  11. for investments of strategic importance for the transition towards a zero net emissions target economy.

The rules of such tax credit are determined also by the given government decree beside the Act on CIT. There are different criteria for each tax credit. The main criteria for utilization of the tax credit are that related request has to be submitted to the Minister responsible for Tax Policy.

The tax credit can be utilized in 13 financial years (firstly in the financial year following the capitalization of the investment or based on decision right in the financial year of capitalization) but not later than the 16th financial year following submission of the request.

The taxpayer has reporting obligation related to the investment details in the financial years when the tax credit will be taken into account. The report is part of the annual corporate income tax return.

In general, domestic citizens and companies with foreign owners are allowed to purchase and sale real estates in Hungary. Additionally, the following entities are also entitled to own real estate with the same conditions as domestic citizens:

Find out all you need to know about real estate transactions in Hungary: formal requirements of real estate purchase contracts, compulsory elements of contract of sale, what is considered as a contract of sale, payment of the purchase price, usual scenario of the real estate transaction and fees, limitations over the acquisition of the real estate, real estate transfer taxation and much more.

Download our eBook on real estate transactions in Hungary, or read more below

General information about the real estate transfer process

Formal requirements of real estate purchase contracts

The most important formal requirements of property (building site, apartment, house, agricultural land etc) sales:

The contract of sale shall be valid only if it is concluded in writing; and

It shall be drafted and countersigned by a Hungarian attorney, counsel or public notary.

Compulsory elements of contract of sale

To register the ownership, the contract of sale must include the following, amongst other things:

  • Personal data of the parties
  • Private persons: full name, date of birth, name of mother, postal address, personal ID number
  • Organizations: name, seat, statistical number, Court registration number, tax number
  • Clear identification of the concerned property (name of town, plot number) as well as the proportion of the ownership interest to be transferred;
  • Statement on the nationality of the contracting parties
  • Unconditioned and irrevocable statement of the registered owner on the consent to the transfer of his title
  • Place and date
  • In case of a multiple-page document, the signature of the contracting parties, the contract maker and the counter signers on every page

What is considered as a contract of sale?

The court can consider an agreement with a minimum content as a contract of sale, if it includes the following elements, what are the mandatory elements of the valid sale contracts:

Contracting parties

Expression of their will on the transfer of the ownership of the real estate

Indicating the real estate and the exact compensation

Payment of the purchase price

A typical real estate deal would be sealed with the payment of earnest money (in Hungarian: ‘foglaló’) which is a special form of advance payment and usually amounts to 10% of the total purchase price. This money serves as a guarantee for the parties and is paid (typically in cash) to the seller at signing. If the deal is closed, the earnest money will be deemed as advance payment. If the dissolution of the deal is not attributable to any party, the earnest money shall be repaid in full. If the dissolution is attributable to the buyer, the seller shall keep the earnest money. If the seller is liable for the dissolution, he shall pay twice the earnest money to the buyer. A critical point of negotiations is therefore, who is liable for a dissolution caused by a third party (e.g. the bank rejects to provide the loan)?

In case the purchase price is paid in two or more instalments, there are two typical scenarios regarding the transfer of title. The first option is when the parties submit the request for registration but the seller places his consent to the transfer of title in the escrow of the representing attorney and they request the suspension of the process (in Hungarian: ‘függőben tartás’) immediately. The attorney will submit the consent of the seller to the land registry only once he has seen evidence of the payment of the total purchase price. This option is preferred usually by banks because the buyer will acquire the property in a legal status on the day of the submission, thus, any burden that would be registered after the date of the first submission, will be disregarded. However, the process may be suspended up to 6 months only, so the deal shall be finished within such period.

The other option is the sale of the property under applying a retention of title clause. This means that the land registry will finish its process and register the buyer but will also register that the title will be transferred only upon full payment of the purchase price. Unlike when the procedure is suspended, the land registry will confirm upon submission that the documents are lawful and complete. Therefore, the transfer of title (and so the payment of the full purchase price) can be postponed to a date later than 6 months, which is a favourable option in case of bigger projects. However, there is a risk on the buyer’s side that the property will be encumbered during such long period.

Usual scenario of the real estate transaction and fees

According to the Hungarian Civil Code and in line with the established practice for real estate transactions in Hungary:

 

The seller bears the costs related to the transfer of possession and the expenses related to the correction of the status recorded in the land-register

The buyer shall pay the cost of the takeover of the real estate and the registration of the change in ownership.

The parties can differ from the above-mentioned cost bearing rules and can agree on that one of the parties will pay the lawyer (in particular, if that party insists on the personage of the lawyer), but it is important to highlight, that the seller cannot be compelled to pay the lawyer fees, while the buyer cannot be compelled to let the contract prepared by a lawyer appointed by the seller. No matter who pays the lawyer, he/she shall advise and represent both parties and explain the details of the transaction to them both.

The lawyer fee shall be set by free agreement between the parties, in practice it is usually between 0.5-1.5% percent of the purchase price, although lawyers usually apply a minimum fee of HUF 50,000.

Limitations over the acquisition of the real estate

Non-EU/EEA citizens are completely excluded from acquiring agricultural land in Hungary. Agricultural land can be acquired generally by Hungarian or EU/EEA citizen farmers (with at least 3 years of experience) and – to certain extent – by churches, local government and credit institutions. Domestic or EU/EEA citizens who do not qualify as farmers may acquire agricultural land only if, as a result of such acquisition, the total area of agricultural land owned by them does not exceed 1 hectare.

Non-EU/EEA citizens, business associations or other organizations may buy residential real estate only upon the approval of the regional government office and by presenting inter alia a clean criminal record. Since there is no constraint applicable for EU/EEA business associations regarding residential real estate, an option for non-EU/EEA citizens is to establish a company in Hungary or in other EU/EEA countries that may buy such property.

Real estate transfer taxation

Payable by the seller

According to the Civil Code of Hungary, the following costs will be charged to the seller:

Transfer related fees

These may include the basic expenses, what are necessary for the legitimate selling, such as the settlement of utility bills and mortgage liabilities, or the cost of real estate agents and their intermediaries, if the transaction happened this way.

Land register fees

The sale of a residential property is subject to the presentation of an energy certification (green card), the cost of which is typically borne by the seller. Also, it is usually the seller who pays the fees for obtaining actual title deeds and the property layouts. However, the parties can agree otherwise.

Personal income tax

In some cases of selling an apartment, house or any other real estate by private person(s), a personal income tax payment obligation arises on the income from the selling, regulated by Article 59-64 of Act CXVII of 1995 on Personal Income Tax.

The personal income tax rate on property selling is 15%, but the amount of required tax depends on several factors:

After selling a property, the first thing to do is to determinate the income; what should be calculated by deducting the following expenses from the selling price (i.e. the income):

  • purchase price of the property
  • value added investments (renovation, modernization – with restricitions)
  • other transfer costs (It is important to note that only costs proven with official receipt counts as eligible cost)

The value observed counts as income and the taxpayers should pay their taxes after this amount, with a rate what depends on the date of purchase:

  • If the selling is in the same year or the year after the buying: 100% of the calculated amount counts as income
  • If the selling is two years after the buying: 90% of the calculated amount counts as income
  • If the selling is three years after the buying: 60% of the calculated amount counts as income
  • If the selling is four years after the buying: 30% of the calculated amount counts as income
  • If the selling is five or more years after the buying: there is no PIT paying obligation
  • This write-off is available for every type of property since 2017.

Payable by the buyer

In case of acquisition of real estate transfer duty should be paid. The rate of this duty is 4% up to the transaction value of max 1 billion HUF, above this threshold the duty is 2% of the exceeding part of the value (max 200 million HUF per property).

Without attempting to be comprehensive, the duty allowances and exceptions in 2024 are the following:

Duty exemption

  • If the newly purchased property costs less than the property sold in the previous or following 1 year
  • Buying/selling between spouses
  • Buying/selling between direct relatives (including siblings)
  • In case of buying a building site, if there will be a construction within 4 years after the purchase
  • In case of so-called beneficial merger, beneficial share deal or beneficial branch deal.
  • In case of buying a new flat, if it does not exceed the HUF 15,000,000 limit

Discounted duty:

  • In case of buying the first own flat, 50% allowance from the duty is available if the buyer is less than 35 years old and the value of the property does not exceed HUF 15,000,000.
  • In case of buying a new flat over HUF 15,000,000 but not exceeding the HUF 30,000,000 limit, then the first HUF 15,000,000 in the final price is free of duty
  • In case of change of dwelling/shift (when less than one year passed between selling of the old flat and buying the new one) the margin of the two flats prices gives the basis of the duty.

In addition, it is typically the buyer who pays the registration fee (HUF 6,600), the registration fee of a mortgage (HUF 12,600) and the costs of drawing up notarial deed (required if bank loan is involved) during real estate transactions in Hungary.

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Other aspects

Legislation related to real estate transactions in Hungary

Act XI of 1998 on Attorneys at Law

Act V of 2013 on Civil Code

Act CXLI of 1997 on Real Estate Registration

Act CXXII of 2013 on the Transactions in Agricultural and Forestry Land

Thanks to its strategic geographic location, globally acknowledged human capital and generous investment incentives, Hungary is definitely on the list of countries to go to when thinking about entering the European market or expanding your business activities in the region.

New investments and R&D can benefit from a wide range of tax allowances, such as tax exemption on holding structures or 50% tax allowance on royalty incomes. Additionally, Hungary has a wide international treaty network with more than 80 double tax treaties.

Being home to approximately 700 automotive companies, Hungary has become a major player in the fields of autonomous driving related R&D activities and e-mobility in the CEE region. Similarly, the ICT sector has ranked no. 1 in the Quality of scientific research institutions in the CEE region.

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Industries

In Hungary, largest industries are the following:

Automotive

Business Service Centres (BSC)

Electronics

Pharmaceuticals and Medical Industry

ICT

Food Industry

Logistics and Transportation

As for the automotive industry, Hungary has become a major player in the CEE region in the fields on autonomous driving related R&D activities and e-mobility. This industry generates a significant part of total exports. More than a 100,000 people are active in this sector. There are production facilities of four large OEMs in the country: Suzuki, Audi, Opel and Daimler and also, serial production is taking place in Hungary. Altogether Hungary gives home for around 700 automotive companies.

The ICT sector with its 250,000 employees ranked no. 1 in the Quality of scientific research institutions in the CEE region. The sector has several R&D Centres in the country and has the most advanced IT outsourcing market in the CEE region as well. For the ICT sector Hungary can offer a large pool of exceptional professionals at reasonable cost. The ICT industry has several cooperation between higher education institutions and enterprises.

There are more than 90 BSCs in Hungary with more than 60,000 employees. Developed higher education with 67 institutions is a great base for this sector.

Hungary is also the most productive sector of electronics in Central Europe with more than 110,000 employees in this sector and by generating 5,3% of the GDP. Specialized education also corresponds with the needs of the industry.

The food industry is significant in the country as the geographical conditions are ideal with available quality ingredients being 100% GMO free. The climate and soil characteristics are also ideal for the food industry.

With 85 biotech companies and having 40% of Hungarian R&D spending owned, the sector of life sciences is the most innovative sector in Hungary. The higher education can fulfil the industry’s requirements and it currently has 14,000 direct employees. With a remarkable history of life scientists and high-quality education, a globally acknowledged human capital is available in the country at a reasonable cost.

Having the Pan-European corridors crossing Hungary, Logistics & Transportation is also a significant sector in the country with generating 6% of the GDP and employing 120,000 people around the country.

In Hungary, the strongest workforce belongs to the industries that are listed above.

In Hungary, around 63% of the workers are employed in sectors of services (ICT sector, BSCs, Logistics etc.) and 22% in manufacturing, such as in industries of automotive and electronics.

Investment incentives

One of Hungary’s competitive advantages over other countries in the region is the Government’s strong commitment to streamlining business processes and increasing the competitiveness of SMEs and large firms in Hungary. To help achieve this, Hungary offers wide-ranging incentives – both refundable and non-refundable – to facilitate foreign direct investments and reinvestments by local enterprises. The main types of incentives are:

Cash subsidies (either from the Hungarian Government or from EU Funds)

Tax incentives

Low-interest loans

Special incentives of the free enterprise zones

Most incentives are available regardless of the sector itself.

There is a wide range of tax allowances for new investments and R&D. Hungary provides tax exemption on holding structures, capital gains on shares and intellectual property under certain conditions are tax free, and a 50% tax allowance is applicable on royalty incomes. There is no withholding tax on dividends, interest and royalty paid by a Hungarian company to a foreign company. Hungary has a wide international treaty network with more than 80 double tax treaties.

The maximum aid intensity is 50% in Northern Hungary, Northern Great Plain, Southern Great Plain and Southern Transdanubia; 25% in Western Transdanubia; 35% in the Central Transdanubia region; and 0%, 20% or 35% in the Central Hungarian region. Parts of Central Hungary are ineligible to receive any funding because they are much closer to the EU average in development terms. The maximum available aid intensity decreases if the investment is a large investment (i.e., exceeds EUR 50 million).

In Hungary the government can provide subsidies based on individual government decision. The Hungarian Government considers asset investments, R&D projects and the creation or expansion of business service centres as priorities in the field of investment promotion. The subsidies aim at facilitating projects with high added value in Hungary.

One of the main objectives of the post-financed cash grant system is the promotion of R&D activity (industrial research and experimental development) of large enterprises and the creation of R&D centres in Hungary in accordance with the aim of increasing emphasis on “Invented in Hungary” type of investments. This provides opportunity to grant aid for R&D projects everywhere in the country up to the maximum aid intensity of 25%.

Hungary provides development tax incentives as well for the post-investment period which means an exemption for parts of the corporate income tax payable for 13 years following installation. In any given tax year, the tax incentive is available for up to 80% of the tax payable, but in total up to the state aid intensity ceiling. The minimum investment volume is HUF 3 billion and minimum of 50 new jobs, or HUF 1 billion and 25 new jobs in certain regions.

Further available subsidies are:

  • Workshop establishment and development subsidy
  • Training subsidy
  • Subsidies from EU funds

Company formation

In Hungary, limited liability company is the most common legal form of businesses (abbreviated in Hungarian as ‘KFT.’). Beside limited liability companies, several legal forms are available, however this is the one to be usually chosen. To form a ‘KFT.’ it is not required to be a Hungarian citizen, however the minimum contribution is HUF 3,000,000 altogether. The registration process is done by Company Court. The liability of its members is limited to the provision of the company’s initial capital. As a general rule, members are not otherwise responsible for the company’s liabilities, meaning that the private property of the members cannot be touched by the liabilities of the company, except few cases which are specified by relevant legislation.

Incorporation

The Tax Office provides a tax ID to the new company within 1 working day if there is no legal obstacle of the registration. In case of applying the simplified procedures the incorporation if done by the resolution of the Court within 1 working day after assessing the tax ID by the Tax Office. In case of general procedures, the decision on the incorporation shall be made within 15 working days after submission of the application. The bank account opening requires personal presence from the MD of the company.

The duty (official fee) for establishing such a legal form of business depends on the nature of the legal form of the company, however it is duty free in case of limited liability companies – both in simplified and regular proceedings. If a foreign person (who is not resident in Hungary) will be the member or executive officer or the shareholder of the company, a delivery agent shall be mandated by the person. The mandated person shall have a registered Hungarian address.

For establishing a limited liability company one shareholder is required. As for the maximum, there is no upper limit regarding the number of the members.

It is possible to appoint either one or more managing director in a ‘KFT.’. The managing director(s) can also be legal persons, in this case a representative shall be appointed who is entitled to act on behalf of the managing legal person.

Official company register in Hungary is open for public and can be accessible at  https://www.e-cegjegyzek.hu.

Corporate taxes

Corporate income tax

The corporate income tax rate is 9% of the positive amount of the tax base. The tax base both for domestic and foreign businesses is the pre-tax profit modified by items declared in Act LXXXI of 1996 on corporate income tax such as loss carried forward, provisions, depreciation, declared share, declared intangible good, dividends, received royalties, research and development, costs incurred that are not in relation with the business’ interests, imposed penalties, thin capitalization, CFC.

The tax period for CIT in Hungary is the calendar year or accounting year.

Business associations need to submit their CIT returns by May 31st following the tax year. For taxpayers with a different tax year, the filing deadline is the last day of the fifth month following their business year.

Tax residence

A company is considered a resident in Hungary for CIT purposes if it is incorporated in Hungary.

Foreign companies may also be considered as Hungarian tax residents for CIT if their place of effective management is in Hungary, or a permanent establishment is formed based on the Hungarian legal provisions or on the corresponding international treatments.

VAT

The general VAT rate in Hungary is 27% in accordance with the EU VAT directive. On specific goods, a reduced rate of 5% and 18% applies.

VAT registration

In Hungary, all resident taxpayers are obliged to register for VAT by law. Before starting any business activity, taxable persons must be registered at least for a VAT number. It is possible to register for VAT retrospectively, but it brings a penalty risk for delay. There is no threshold that makes the registration obligation applicable or non-applicable.

Non-resident companies are obliged to register for VAT in Hungary before doing any activities subject to VAT, and whose place of performance is in Hungary. Distance sale falls under exception.

Other taxes

Excise taxes

  • Excise is applied for energy products, alcoholic drinks and tobacco products in accordance with EU regulations.

Energy taxes

  • Energy tax is payable by the energy suppliers, the non-private energy users and commercial entities who produce energy. The amount of the tax is assessed based on the quantity sold, used or produced.

Property tax

  • General property is not taxed, however, motor vehicles are subject of taxation by the local governments based on their age and performance.

Road tax

  • Road tax exists in Hungary in form of road fees which must be paid after some vehicle category using designated (not only motorways) routes. The amount of the fee is paid by kilometres.

Real estate tax

  • Real estate tax is a tax paid to the local governments. All local governments must apply this tax, however the method of assessing its base can differ. The subject of this tax is the private or legal person owning real estate on the first day of the calendar year.

Wealth tax

  • There is no general wealth tax in Hungary.

Company car tax

  • Passenger cars owned by legal persons (or by private persons but subject of detailed cost reimbursement) are subject of monthly company car taxes. The tax payable is based on the details of the cat (environmental class and performance).

Retail tax

  • Hungarian retail activities are subject of retail tax. The tax is only payable when exceeding HUF 500 million revenue and only after the exceeding amount a year from retail activities (commercial activities to private persons). The tax is determined by a tax rate after the revenue (0,1-4,1% depending on the revenue itself).

Green tax

  • Green tax is due by the first Hungarian supplier or user after goods which are harmful for the environmental (e.g., plastic, packaging materials, tires, electronic appliances etc.). The tax is determined by the nature of the goods and by measure units. With July 2023 the Extended Producer Responsibility system was introduced within the EU, which show similarities regarding the products affected. The EPR obligation is to be paid after circular products by the manufacturer or the first distributor. When both EPR and green tax is affected, the green tax should be decreased by the EPR fee paid.

Public Health Product tax

  • Public Health Product Tax is to be paid by the first domestic supplier or the acquisitor after some consumable product based on their ingredients. The amount of the tax payable is determined by the nature of goods and by measure units.

Any type of local or regional income tax

  • Companies operating in Hungary are required to pay local business tax (LBT) at a maximum rate of 2% in addition to the 9% corporate income tax. The exact tax rate and whether to apply LBT at all is up to the corresponding local government. The tax is payable on entrepreneurial activities performed in the administrative area of the municipality on a permanent or temporary basis. The tax base is the net sales revenue less the cost of goods sold, intermediated services, subcontractor performance, direct cost of research and experimental development and material cost.

Labour law and employment

Entitlement to work

All Hungarian citizen above the age of 16 is entitled to work and also all foreigners who hold a permit for working (in case of EU workers a registration with the Immigration Office is required in accordance with EU regulations).

Employment contracts

Employment may be based on the general rules or atypical characteristics (such as part-time, remote working, definite time, occasional employment). The most important rules of employment are regulated in the Labour Code in order to protect both parties of the employee-employer relationship.

Employment must always be declared to the competent authorities and not being compliant with regulations may pose significant number of penalties and temporary termination of business.

There are essential items in the contract, which has to be included. The parties of the employment contract must agree, by all means, on both the personal base wage and the position of the employee – these terms are essential under Hungarian labour law.

Employee taxes and contributions

Taxes on personal income

15% is the applicable personal income tax rate without threshold. For resident taxpayers, the tax base is their whole income, while for non-resident taxpayers it represents only their locally taxable incomes.

For personal income tax purposes, the taxable period in Hungary is set as the calendar year.

The due date for filing a PIT return falls on May 20 with the possibility of extension, however, the tax office needs to be notified beforehand.

In Hungary, a tax resident is:

  • a person who is a citizen of Hungary (except for dual citizens)
  • a citizen of the EU who spends more than 183 days in a calendar year in Hungary
  • a third-country citizen with permanent residence status, whose vital interests are in Hungary
  • any natural person who has a permanent home (i.e., habitually resides in the country) or has a habitual stay in Hungary (where they stay for more than 3 months without an intention to leave)

Taxable income of an individual

Taxable income, that falls under personal income tax obligation in Hungary, is:

  • income acquired in Hungary – such as income from employment
  • income acquired abroad, provided that the individual is resident in Hungary.

Social security and health insurance contributions

The social security contributions rate paid by the employer is 13%. The social security contributions rate for the employee is 18.5%.

The health insurance paid by the employer or employee is included in the social security rate. However, employees must register for health insurance as an insured person.

Please find below our fresh analysis of the employment situation in Hungary at the time of governmental measures aimed at preventing the spread of the COVID-19 virus. The following scenarios are possible depending on the job description of the actual employee and on the actual state of the epidemic and restrictive governmental measures.

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Scenario 1: Downtime

This is the default arrangement for periods during which an employer cannot give work to an employee.

The base wage must be paid to the employee concerned, but no supplements, bonuses etc.

This option has the disadvantage that the base wage appears as a cost, but it is not challengeable from the legal point of view and it can also help in preserving the loyalty of the employees.

Legal conditions

The employer’s failure to provide work as contracted during the scheduled working time (Section 146 of Labour Code).

Typically applied in case of lack of raw material, lack of orders from customers etc.

In our opinion, this option should be chosen if the employer takes the decision not for compelling reasons but rather after its own evaluation of possible advantages and disadvantages of stopping the activity of the employees.

Scenario 2: Downtime in case of force majeure

This is a particular case in which the employer’s inability to distribute work to employees is caused by compelling external causes.

No wage is paid to employees (not even the base wage).

This option has the advantage of being the most cost-efficient for the employer. However, it is also the most likely to be challenged by employees who lose their income for an indefinite period. Another disadvantage is the loss of loyalty as the employees are incentivized to find another job as soon as possible.

Legal conditions

Unavoidable external reasons prevent the employer from providing work to the employees concerned.

In our opinion, this option should be chosen either:

Even in such circumstances, the job description of the employees and their actual tasks at the company should be carefully monitored. In fact, if they could be directed to perform other tasks or to work from home, the reference to force majeure would not be acceptable.

Scenario 3: Downtime based on agreement

The employer and its employees can agree upon the terms of suspending work for a planned period. In this case, the agreement regulates the wage and terms of payment. This allows the employer to lower or to reschedule the wage of the employee, provided that the employee accepts such arrangement.

This option gives the opportunity to the employer to elaborate a time and wage schedule fitting to its budget and it is not likely to be challenged by the employees (see however the exception detailed on the right). It also preserves loyalty of employees as they conceive that their interests are taken into account.

Legal conditions

If the employee is exempted from work by the employer’s approval, he is entitled to a salary for the missed working time on according to their agreement (Section 146 of Labour Code).

See however Section 7 of Labour Code which states that “abuse of rights is prohibited.” In means particularly that the employee cannot be coerced to accept such agreement, or the agreement cannot be used to circumvent the obligation paying a base wage in case of normal downtime.

Scenario 4: Home office

For the employees who can effectively perform their tasks from home, teleworking can be a viable option.

In such case, the main terms of the employment (wage, paid leaves etc.) are the same, with some modifications in work arrangement, control, etc.

Legal conditions

Employers are entitled to assign employees to a workplace other than that which is defined in the employment contract. In the present case, this “other workplace” is the home of the employee.

Section 53(1) of the Labour Code limits the cumulated period of assignment to “other workplace” in a maximum of 44 working days (or 352 hours) per calendar years. The employer has the obligation to inform the employee about the expected period of such assignment.

For longer periods spent in home office, the employment contract should be modified with a view of granting the possibility of teleworking (see Section 196 of Labour Code).

Scenario 5: Reorganising the working time banking

This particular case applies only for employees whose working time is scheduled within the framework of “working time banking”, e.g. their working time is distributed unevenly during a longer period.

In such case, working time banking can be modified with the view of distributing the work for a few weeks or months later.

Legal conditions

See Sections 93-94 of Labour Code, if applicable.

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