1. Definition of foundations

According to Section 3 (378) Act V. of 2013 (hereinafter: Civil Code); “ Foundations are legal persons set up to pursue the long-term objective defined in the charter document. The founder shall define in the charter document the funds made available to the foundation and the organizational structure of the foundation.”

The foundation is established by the founder with the declaration contained in the charter document, but acquires its legal personality through judicial registration, so it is established at the time of registration. The organization of the foundation must be determined by the founder that is to say, the goals, the amount of the assets, the way of using the assets. These are the most important characteristics of the foundation.

A foundation can not only be established for public interest goals, with few exceptions, it can be established for any goal. Under this, a foundation may be established for private goals, this is conditional on lasting goals. The Civil Code also allows the establishment of a family foundation with this regulation.

The founder must also determine the organization of the foundation and the assets to be distributed to the foundation. With this in mind, there should be a decision-making body consisting of the founder or founders, an executive body, and, alternatively, the management control body, the supervisory board or even other bodies may be established by the founding body, such as a committee of beneficiaries, an audit committee, a panel of experts.

The foundation cannot be established without assets. The assets should be sufficient to achieve the foundation’s goal without any further fundraising. The law does not specify the minimum amount of the initial assets, it is examined by the court during the registration with regard to the purpose of the foundation.

2. Establishment step by step

Based on the above and the general rules for establishing legal entities, let’s go through the steps of founding.

The founder

• must prepare the charter document,
• must obtain a declaration of conflict of interest from the members of the board of trustees, representatives and members of the supervisory board, certified by two witnesses,
• must enclose the documents on the provision of the founder’s assets.
• must obtain: a declaration on the use of the registered office and a document certifying the title to the use, as well as a
• declaration of acceptance of the appointment by the person appointed to exercise the founding rights, if such a person is appointed, and
• the documents specified in a separate law authorization if necessary.

All of these documents must be accompanied by a statutory “foundation registration” application form (in Hungarian it is called “alapítvány nyilvántartásba vételi” form) completed and signed by the founder.

Foundations can choose to submit the application and to communicate with the court on paper or electronically. If the foundation wishes to register on paper, the documents may be submitted in person to the competent courts or sent by registered mail with return receipt. In case of electronic submission, the organization shall submit the application on the website www.birosag.hu. The application for registration shall be submitted by an electronic form and the other attached documents listed above shall be submitted electronically.

3. Limitations on the activities of foundations

Section 3 (379) of the Civil Code specifies certain activity restrictions.

• “A foundation may not be formed with the objective of performing economic activities.”

The goals and activities that can be achieved by the foundation are limited. A foundation may not be established for the purpose of economic activity, it may carry out economic activity only in the direct connection with the realization of its purpose, so to say, not primarily. Primary economic activity means, that the total annual income of the foundation from its economic activity reaches or exceeds sixty percent of its total annual income.

• “ Foundations are authorized to perform economic activities only if they are directly connected to the achievement of the foundation’s goals.

(3) A foundation may not be a partner with unlimited liability in another legal entity, may not set up another foundation, and may not join another foundation.

(4) Unless otherwise provided for in this Act, a foundation may not be established in the interest of its founder, any member current or future, any officer of the foundation, any member of a foundation organ, or the family members of these persons. This provision shall be without prejudice to the contractual remuneration of the foundation’s officers.”

The Civil Code does not state it separately, but even in the absence of a separate legal prohibition, it is obvious that a foundation cannot be established for activities that are illegal and contrary to good morals. This also follows from the general rules for legal persons.

4. Provision of funds

According to Section 3 (382) of the Civil Code the founder is obligated to provide the funds required for the foundation’s purpose as provided for in the charter document. When registering a foundation, the court examines whether or not the assets for the goals of the foundation are available. The question is not whether the foundation can start its activities with the assets, but whether the start-up assets are sufficient to continue the activity itself.

The founder shall place at the foundation’s disposal funds to cover at least the expenses for taking up operations at the latest by the time of submission of the application for registration. This rule seeks to force the founder to provide the assets necessary for the operation of the foundation. Within one year from the registration of the foundation, the founder shall place at the foundation’s disposal the whole of the committed assets. If the founder does not or only partially fulfills his obligation, the board of trustees shall call upon the founder to comply within the prescribed time limit. In the event of non-compliance, the court shall suspend the exercise of founder’s rights. During the period of suspension the court of registry shall exercise founder’s rights.

5. Which one is better? Closed or open foundation?

We distinguish between closed and open foundations depending on whether or not you can join it. The conditions for joining are determined in the charter document. If the charter document does not cover the possibility of joining, the foundation must be considered closed. Joining a foundation is basically a contract between the foundation and the contributor, the elements of which, in addition to the obligation to provide free property, are to determine the rights of the affiliate. It is not mandatory to grant access to the joiner, the founder may decide to do so in the charter document.

6. Beneficiaries

Section 3 (385) of the Civil Code specifies the beneficiaries legal status in the foundations;

“ Financial benefits may be provided from the foundation’s assets, consistent with the foundation’s objectives, to persons designated as beneficiaries in the charter document, or in the absence of such instruction, by the appropriate foundation organ. “

The beneficiary is the economic right holder of the foundation, the real recipient of the use of the foundation’s assets, the foundation’s service, payment, the subject of the use of the assets. The operation of the foundation is realized in the distribution of assets to the beneficiary. This transfer of assets can take place in various ways, from the distribution of cash in the form of a scholarship, free education or to any service that has a property value. It is not a condition for foundation to be free. It can be on a cost basis or it can even be a “loan”.

6.1 Founder and his family member named as beneficiary

According to 3 (386) (2)  of the Civil Code; “ The family members of the founder and any new member can be named as beneficiary if the foundation is established for the purpose of caring for the family member’s scientific, literary and artistic works, or the caring, nursing or maintenance of the family member, covering the family member’s medical expenses, and supporting his education by way of scholarship or otherwise.”

This new provision essentially makes it possible to set up a family foundation with a cross-generational purpose. With this, the maintenance, upbringing and schooling of family members can be ensured for several generations.

Questions concerning foundations in Hungary? Contact us! dr. Dobos István attorney at law – +36303088151 / dobos@doboslegal.eu