Hungary

*Updated October 2017*

Quick links

• Legal system
• Inheritance and succession
• Estate planning
• Property, estates and probate
• Taxation
• Other relevant information

Introduction

History and background

Hungary is a parliamentary republic. Following the collapse of the communist system and restoration of full sovereignty in 1989, the legal and economic system was radically reformed. The country joined the European Union on 1 May 2004.

The population is just under 10 million. The capital city is Budapest, which is also the largest city and administrative, political and economic centre of the country with around two million inhabitants. The currency of Hungary is the Forint (HUF).

Legal system

Hungary is a civil-law jurisdiction with German and Austrian influences predominating. However, new legislative concepts are incorporating some common-law solutions.

top

Inheritance and succession

Succession

In common with other civil-law jurisdictions, Hungary has forced heirship rules. The relevant legislation is contained in the new Civil Code (see above) which just decreased the rate of forced heirship from the previous 50 per cent to 30 per cent. Hungarian law contains deemed heirship provisions that apply in the absence of a will or in the case of an incomplete will. The basic rule is that the national succession law of the deceased person applies to that estate. Hungarian international private law applies the concept of renvoi, but does not recognise the choice of governing law when applied to succession.

Probate process

There is no concept of probate and connecting institutional infrastructure (e.g. probate court) in Hungary in the Anglo-Saxon sense. Instead, a two-level law enforcement regime provides legal remedies. On the first level, the public notaries are entitled to transfer the estates either to the legal heirs or those whose succession is based on a will, considering also the forced heirship rules. However, the public notaries cannot exercise any formal control over wills. If the will fulfils every formal legal requirement, the public notaries cannot refuse to transfer the estate. They cannot decide on disputes between heirs. However, they can legalise agreements between heirs regarding the distribution of the estate. Any legal dispute will be decided by the court on the second level. These courts are ordinary civil courts which do not deal only with ‘probate’ cases i.e. no ‘probate court’ regime exists in Hungary.

The new element of the probate law is the introduction of the ‘provisional transfer of the estate’ if any third-party claim is filed against the estate and the heirs in the first level (‘notarial’) procedure. In this case the public notary will transfer the estate but only with limitations in right of disposal. The final transfer can be requested only from the court in the lack of agreement between the heirs and third-party creditors of the estate.

top

Estate planning

Trusts

The Hungarian legal system is getting acquainted with the concept of trusts. The new Civil Code, which came into force in March 2014, introduced the concept of English-type trust, and also the ‘asset manager’ type of private foundation. These new legal instruments have been creating the structural fundaments of the private asset management and family office industry.

The adaptation of basic civil-law rules into the fields of tax law and succession and probate law has also been taking place. Hungary is not yet a party to the Hague Convention on the Law Applicable to Trusts and on their Recognition, 1 July 1985.

No court case is known that would confirm that the Hungarian courts may occasionally recognise foreign trusts. Nonetheless, even such precedents would not be binding and should not be relied upon.

Usually, foreign trusts create a legal entity recognised by Hungarian law, such as a partnership or a limited company, to own assets in Hungary. The introduction of the trust to the Hungarian legal system has been changing this practice.

Although Hungary has had a continental legal system, it implemented the English-type trust to its legal system as  the expressed trust. The Civil Code contains the trust section and the Trustees Act deals with the detailed rules of the trustees’ activities and responsibilities. The type of the Hungarian trust is the expressed trust. The main characteristic of the Hungarian trust is that the trustee is the legal owner of the trust asset but, based on the law, the trustee owns it for the benefit of the beneficiaries. The trust is regulated as a contract; therefore, it is a very flexible legal solution. The trust rules are mainly dispositive; therefore, the settlor may differ from the rules with the exception of a few obligatory rules (any deviation is null and void).

The obligatory rules are that:

• The trust deed must be in written form;

• The trustee can’t be sole beneficiary;
• The separation of the trust assets from the trustee’s own assets and other managed assets;
• The settlor and the beneficiary can’t instruct the trustee; and
• The trust period can’t be longer than 50 years.

The trust asset is completely separated from the trustee’s own asset and other trust assets. The creditors and the successor of the trustee cannot claim anything from the trust asset. The general type of the trust is the revocable trust, and it is also possible to create discretionary trusts. It is allowed for the settlor to be the trustee. The trust may be set up with private or public documents. The trust may be for private purposes, charity or both. The trust asset may be anything: cash, tangible or intangible asset, rights or claims.

	professional licensed trustee	ad-hoc trustee
Type of trust	Revocable, testamentary or inter vivos, discretionary or non-discretionary, private or charity	Revocable, testamentary or inter vivos, discretionary or non-discretionary, private or charity
Who can be settlor	Anyone (corporate or private, local or foreign)	Anyone (corporate or private, local or foreign)
Limitation of the trustee	No	One case/year
Who can be a beneficiary	Anyone (corporate or private, local or foreign)	Anyone (corporate or private, local or foreign)
Number of trustees (min.)	One	One
Co-trustees	Yes	Yes
Citizenship/registration/form of trustee	European Economic Area only, company limited by shares may be professional trustee	Any nationality or registration, any form, may be individual or corporation
Registration of the trust	No	Taxation of the trust’s income distribution from the trust to corporate entities
Corporate trustee	Only corporate trustee may be professionally licensed	No requirement
Professional responsibility insurance	Yes, up to EUR5 million	No
Type of the transferable trust asset	Any (cash, portfolio investment, intangible or tangible asset, rights or claims)	Any (cash, portfolio investment, intangible or tangible asset, rights or claims)
Asset separation	Yes	Yes
Time limitation	50 years	50 years
Protector	May be applicable	May be applicable
Registered seat	Must be maintained in Hungary	Must be maintained in Hungary
Public accessible records	No	No
Annual return filing	Yes, with the Inland Revenue Service	Yes, with the Inland Revenue Service
Public accessible annual returns	No	No
Bookkeeping	In HUF or EUR	In HUF or EUR
Audit requirements	No	No
VAT number	Not subject of VAT	Not subject of VAT
Taxation of the trust income	The trust is a corporate taxpayer. It is subject to 9% CIT	The trust is a corporate taxpayer. It is subject to 9% CIT
Taxation of transfer of assets from the settlor to the trust	Tax free, no hidden taxation	Tax free, no hidden taxation
Taxation of the capital distribution from the trust to private individuals	Capital distribution is tax free for Hungarian tax resident individuals. In the case of a foreign tax resident individual, the tax rules of beneficiary’s residence are applicable. No WHT on capital distribution in Hungary.	Capital distribution is tax free for Hungarian tax residents. In the case of a foreign tax resident individual, the tax rules of beneficiary’s residence are applicable. No WHT on capital distribution in Hungary.
Taxation of the trust’s income distribution from the trust to private individuals	Trust income distribution is treated as dividend and it is taxed with 15% PIT in the case of Hungarian tax resident individual. If the beneficiary is a foreign tax resident individual, WHT may be applicable but the Hungarian DTT network may reduce it to zero. The individual may receive tax credit or tax exemption in the place of her/his residence.	Trust income distribution is treated as dividend and it is taxed with 15% PIT in the case of a Hungarian tax resident individual. If the beneficiary is a foreign tax resident individual, WHT may be applicable but the Hungarian DTT network may reduce it to zero. The individual may receive tax credit or tax exemption in the place of her/his residence.
Taxation of the capital distribution from the trust to corporate entities	Hungarian tax resident companies may pay CIT on capital distribution. In the case of foreign entity, there is no WHT on capital distribution in Hungary.	Hungarian tax resident companies may pay CIT on capital distribution. In the case of foreign entity, there is no WHT on capital distribution in Hungary.
Taxation of the trust’s income distribution from the trust to corporate entities	Hungarian tax resident companies receive the income distribution tax free. If the beneficiary is a foreign corporation, there is no WHT in Hungary.	Hungarian tax resident companies receive the income distribution tax free. If the beneficiary is a foreign corporation, there is no WHT in Hungary.

Property, estates and probate

In common with other civil-law jurisdictions, Hungary has forced heirship rules. The relevant legislation is contained in the new Civil Code (see below) which just decreased the rate of forced heirship from the previous 50 per cent to 30 per cent.Hungarian law contains deemed heirship provisions that apply in the absence of a will or in the case of an incomplete will.

The basic rule is that the national succession law of the deceased person applies to that estate. Hungarian international private law applies the concept of renvoi, but does not recognise the choice of governing law when applied to succession.

The Hungarian Probate Law strikes a balance between the traditional German/Austrian legal traditions and the Anglo-Saxon probate solutions.
There is no concept of probate and connecting institutional infrastructure (e.g. probate court) in Hungary in the Anglo-Saxon sense. Instead, a two-level law enforcement regime provides legal remedies. On the first level, the public notaries are entitled to transfer the estates either to the legal heirs or those whose succession is based on a will, considering also the forced heirship rules. However, the public notaries cannot exercise any formal control over wills. If the will fulfils every formal legal requirement, the public notaries cannot refuse to transfer the estate. They cannot decide on disputes between heirs. However, they can legalise agreements between heirs regarding the distribution of the estate. Any legal dispute will be decided by the court on the second level. These courts are ordinary civil courts which do not deal only with ‘probate’ cases i.e. no ‘probate court’ regime exists in Hungary.

The new element of the probate law is the introduction of the ‘provisional transfer of the estate’ if any third-party claim is filed against the estate and the heirs in the first level (‘notarial’) procedure. In this case the public notary will transfer the estate but only with limitations in right of disposal. The final transfer can be requested only from the court in the lack of agreement between the heirs and third-party creditors of the estate.

Other forms/entities

The most popular Hungarian legal entity that trustees of a foreign trust incorporate is the limited liability company (korlátolt felelőségű társaság or Kft.) This has a minimum share capital requirement of HUF3,000,000 (approximately EUR10,000 or USD12,500), which must be paid up in full (in cash or by contribution in kind or by combination of both) upon incorporation. There can be a single member (quota holder), either an individual or a legal entity, and there are no restrictions as to nationality or residence.

Management of a ‘Kft.’ is the responsibility of the manager (ügyvezető), who must be an individual, although there is no restriction as to citizenship or residence. The minimum number of members and managers is one. The new Civil Code increased the personal liability of the manager who can be easily responsible with the company itself jointly and severally.

There can also be a supervisory board (felügyelő bizottság), although this is becoming more and more unusual.

The members’ meeting is the supreme authority of the company, and this can be held anywhere. In the case of a ‘single member company’ the founder and sole owner of the company fulfils the role of the members’ meeting.

Shelf companies are available from corporate service providers and some law firms. To set up a limited liability company, the company memorandum and articles of association (társasági szerződés) must be signed in front of a legal professional (lawyer or public notary) who has to countersign (ellenjegyzés) the instrument as well. This is then filed at the appropriate branch of the Court of Register (Cégbíróság), which immediately provides not only the company registration number (cégjegyzékszám) but also the state statistical number (KSH szám) and taxpayer identification number (adószám). According to the company registration rules, the company has to be registered – in the case of a complete application form – in 48 hours. The bank account may be opened before the application form is filed, but it will be blocked until the registration is affected.

The amendment, some years ago, of the Company Registration Act drew back from the quick and easy registration policy, and introduced new compliance duties to registration professionals. Currently the registration of a new company or the amendments of an old one takes around 15 days.

top

Taxation

Introduction and developments

The Hungarian taxation system is quite sophisticated. Several very competitive tax planning elements and an emerging tax-planning-friendly administrative environment may lift Hungary into the relatively small group of countries that provides interesting holding, capital gain, royalty and group financing structures inside the EU. The recent developments help the country to compete with other traditional EU tax-favourable legislations (e.g. Cyprus, Malta, Luxembourg).

Tax system

Taxation of corporations

The regulations are set out in the Corporate Income Tax Act No LXXXI of 1996 as further amended. Companies incorporated in Hungary or with their management in Hungary are subject to tax on worldwide income. Non-resident companies are subject to tax only on Hungarian source income.
The dividends received are exempt unless originating from a CFC country.

There is no withholding tax on the dividend distributions to legal entities either. In other words, dividends distributed by a Hungarian Holding Company from operative trading, service or manufacturing companies can be paid without any tax to low- or non-tax jurisdictions very easily.
Capital gains on the sale of participations are also exempt if:

• the Hungarian holding company holds more than a 10 per cent participation, for a minimum of one year, and
• the acquisition of the participation was reported to the tax authority in 75 days (failure to report in 75 days cannot be excused).

The current corporate tax rate is only 9 per cent (one of the lowest in the EU). Corporations must also pay between 0 and 2 per cent local business tax on their net revenue.

Some years ago, the tax environment changed unfavourably for property owning or developing companies. Previously the developed property could be transferred without transfer duty, VAT or capital gains tax through transfer of shares in the project company. From 1 January 2010 transfer duty and also capital gains tax are levied on the transfer of the shares of those companies in which more than 75 per cent of the assets are represented by real property, unless the parties are related companies.

Hungary has thin capitalisation rules under which the debt equity ratio should not exceed 3:1. There are also comprehensive transfer-pricing rules dealing with connected party transactions. Losses may be carried forward for subsequent years without time limit. Quite comprehensive CFC regulation also has to be considered.

Taxation of individuals

The basic legislation is contained in the Personal Income Tax Act No CXVII of 1995 as further amended. A person who has their domicile in Hungary is subject to tax on their worldwide income, while a person who does not is subject to tax only on Hungarian source income. Residence determination provisions of double-taxation-avoidance agreements apply when two countries seek to simultaneously tax an individual.

In 2011, the new government introduced one-bracket taxation on any kind of personal income. The current rate of personal income tax is 15 per cent.

VAT

Hungarian VAT regulations are contained in the Value Added Taxes Act No CXXVII of 2007 as further amended. This law is fully compliant with European VAT legislation and in particular the Sixth Directive of the Council 77/388/EEC of 17 May 1977.

The basic VAT rate is 27 per cent (highest in the EU). Preferential rates of 5 and 18 per cent apply to certain goods and services.

Gift and inheritance tax

The provisions are contained in the Duties Act No XCIII 1990 as further amended. The main feature is the division of heirs and recipients into three groups for tax purposes: immediate family, distant family and others. The tax rates vary from 0 per cent to 40 per cent. From 1 July 2010 gifts and inheritance in favour of lineal relations and between spouses became fully exempt.

International issues

Hungary has more than 90 double-taxation agreements in place and several others are awaiting ratification. Many of those were concluded before 1990 and conform to the Organisation for Economic Cooperation and Development (OECD) model treaty.

There are some quite interesting opportunities available under these treaties, which may be used in international tax planning structures. Due to the lack of a limitation of benefits clause, the US treaty also offered some very exciting tax planning opportunities.

Upon US initiatives the treaty was, however, changed in 2010. The new treaty is already ratified, but has still not been approved by the 
US Senate (the Hungarian Parliament has already approved), i.e. the ‘old’ treaty is still in force and actively used by US investors.

top

Other relevant matters

Anti-money laundering

The Hungarian anti-money laundering legislation corresponds to international standards in all respects. Banks and other financial service providers and – with some limitations – legal professionals are obliged to record and report suspicious transactions. Corporate service providers do not, however, fall under the personal scope of these rules.

Transactions, either singly or linked, exceeding HUF3 million have to be recorded, and the clients concerned must be identified.

Key resources for further information

Websites

• www.mkogy.hu
• www.mokk.hu
• www.magyarugyvedikamara.hu
• www.bpbar.hu
• www.mkvk.hu
• www.amcham.hu

top

STEP branches in Hungary

There is one STEP branch in Hungary.

• STEP Hungary

Firms in Hungary

Find firms in Hungary using the Firm Search: Search now

Members in Hungary

Find STEP members in Hungary using the Member Search: Search now