Incorporation of Companies in Hungary: General Regulations and Corporate Legislation

In order to harmonize the national law with the respective EU regulations as well as to establish a modern and comprehensive regulation of business entities, Hungary implemented substantial changes to its corporate law in 2013.

The new Hungarian Civil Code (Act V of 2013 on the Civil Code) came into effect on 15 March 2014 that incorporates the fundamental regulations and obligatory rules for all economic entities.

The Act V of 2006 on Public Company Information, Court Registration Proceedings and Dissolution Procedures – Registration Act) gives an expedient and flexible legal regime.

According to the existing laws, no special permit is required to set up a commercial enterprise in Hungary. Companies can be founded by natural or legal entities, both Hungarians and foreign nationals. Even a single person can found a company limited by shares (limited corporation or Rt. in Hungarian) or a limited liability company (LLC, or Kft. in Hungarian).

The Civil Code determines five different corporate forms that may serve for investors as a basis to carry out business activity in Hungary. All of these forms can exclusively be established and operated by foreign owners and management:

        unlimited partnership (Kkt.)

        limited partnership (Bt.)

        limited liability company (Kft.)

        company limited by shares which may be privately founded (Zrt.) or publicly founded (Nyrt.)

Companies duly formed and registered under Hungarian law may undertake obligations and acquire rights in their own name (i.e. they have the right to acquire property, may conclude contracts, file lawsuits or be subject to actions brought against them). As a general rule, companies may freely pursue activities; however, a license of the competent Hungarian authority is required for certain activities.

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

The articles of incorporation must specify the following:

        company name;

        location of headquarters;

        a list of the company’s members, with their respective addresses, date of birth, personal tax number and their mothers’ maiden names;

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

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

        representation of the company, the method of signing in the name of the company;

        names, addresses, places of birth and personal tax number of the company’s officers as well as their mothers’ maiden names;

        the duration of the company, if founded for a fixed period of time;

        all other items of information relevant to the given form of corporation as required by the prevailing act of law.

Corporate legislation

The Company Act determines four different corporate forms that may serve for investors as a basis to carry out business activity in Hungary. All of these forms can exclusively be established and operated by foreign owners and management:

        – unlimited partnership (Kkt.)

-limited partnership (Bt.)

– limited liability company (Kft.)

– companies limited by shares (Rt.).

Unlimited partnership (Kkt.)

In an unlimited partnership, the liabilities of its members are joint and unlimited for the partnership’s obligations. No minimum initial capital requirement is set forth by law and its

members are not required to take part personally in the activities of the partnership. 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 partners, 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 an unlimited partnership.

Limited partnership (Bt.)

In a limited partnership the minimum number of members is two, of which at least one, the general partner bears unlimited liability. The other partners’ liability is limited to the amount of their capital contribution. Only the unlimited 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. No minimum capital is required to found and operate a limited partnership.

Limited liability company (Kft.)

A limited liability company is established with a predetermined amount of initial capital that is HUF 3.000.000,- provided by its founders, and may have only one member (a sole-member Kft). The liability of its members is limited to the provision of the company’s initial capital (and, if so stated in the articles of association, other contributions). As a general rule, members are not otherwise responsible for the company’s liabilities. Members of the limited liability company may not be recruited through public offerings. The members’ rights and their title to the company’s assets are represented by quotas in the company. No securities may be issued in respect of the quotas, which may be (i) ordinary quotas (quotas providing identical membership rights) or alternatively (ii) preferred quotas (only if the company’s articles of association so provide), which may entitle their holders to, for example: dividend preference, preference in voting rights etc.

The limited liability company is the most popular form of the operation of companies in Hungary. Because of this fact, we collected the frequently asked questions concerning the incorporation of a Hungarian kft.

 Companies limited by shares (Rt.)

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

There are two types of stock companies: (i) private limited company and (ii) public limited company.A stock company may be established via a private offering (its shares are offered only to its founders) or a public offering (its shares are offered to the public). The difference must be indicated in the company’s name as “Zrt” (private) or “Nyrt” (public).

A private limited company 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,-. The liability of its members is limited to the provision of the nominal or issue value of the shares.

Shares are securities that embody a shareholder’s membership rights in the company. Only private limited companies may issue printed share certificates, public limited companies may only have dematerialized shares (registered in the shareholders security account held by a financial institution).

Shares may be (i) ordinary shares, (ii) employee shares, (iii) interest-bearing shares, (iv) redeemable shares. or (v) preference shares, which have the following sub-categories:

          dividend preference shares;

        preference with respect to the liquidation ratio;

        preference with respect to voting rights;

        (only in the case of private limited companies) preference with respect to the appointment of executive officers or members of the supervisory board;

        (only in the case of private limited companies) shares ensuring pre-emption rights.

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