10 April 2017

As a foreign company who plans to do business in Hungary, it sounds a great idea to open a Hungarian branch office. The main reason for this is that you do not need to provide the minimum capital contribution. Even if at first glance, opening a branch office seems simpler and cheaper than founding a Hungarian LLC as subsidiary, yet there are strong reasons to do the latter. In these article we share with you these considerations.

1. Liability of the foreign company

In Hungary, a foreign company may found a limited liability company (LLC) as a subsidiary, in which it holds 100 % of the shares (so called single member LLC). In this case the mother company is only obliged to provide the subscribed capital of the LLC, which is HUF 3 Million (around EUR 10.000). As its name shows, the shareholder’s liability is restricted towards the creditors to the capital contribution.

Only in exceptional cases (eg. when the LLC was liquidated) is the shareholder with its own assets liable for the LLC’s debts.

On the other hand, in case of a branch office the mother company must ensure the assets that are needed for the operation of the branch office. Furthermore, the mother company has joint and several liability towards the creditors of the company.

To simplify the above: if a branch office has HUF 4 Million debt towards a creditor, the creditor can directly claim the debt from the mother company. However, if the LLC founded by the foreign company has a debt towards a creditor, the creditor may only sue the LLC itself and the shareholder mother company does not have direct, joint and several liability.

2. Representatives and signature rights

in order to be a CEO at a limited liability company, one has to fulfill several conditions. The CEO must have clean criminal records and he cannot be prohibited from being an executive officer in Hungary.

Besides these conditions the CEO may be also a foreign citizen and he does not have to be a resident in Hungary. The LLC can hire the CEO not only as an employee but also as a civil law agent, thus the parties have more contractual freedom. If the CEO is hired under a labour contract, then the contract has to be concluded between the CEO and the LLC.

In case of the branch office of a foreign company there are further conditions to be met by the CEO. The CEO may only be the employee of the branch office (technically the employee of the mother company) or a person who has long-lasting engagement contract with the branch office (mother company) and has a Hungarian residence.

To put it simply, an LLC with a foreign shareholder company may decide to hire his CEO who lives in the foreign country as an agent. The branch office of a foreign company cannot do that because the CEO must be hired either as an employee or if he is hired as an agent the he has to move to Hungary.

3. Operation and keeping the accounts

The Hungarian branch office of a foreign company must be treated in the same way as the other Hungarian companies, unless it is prescribed otherwise by the law.

And here we are: there are several legal provisions which result that in the practice, the operation of a branch office is more complicated than the LLC’s operation.

A good example is that in case of a branch office the annual report of the foreign company must be filed by the Hungarian Company Information Service, while in case of an LLC there is no such obligation.

In case a liquidation or an insolvency procedure has been started against the foreign company, its Hungarian branch office must inform the company court and publish the bad news in the Official Gazette.

If the shareholder company of a Hungarian LLC is under liquidation or insolvency, it does not need to be reported or published in Hungary.

If the mother company of the branch office is a credit institution or insurance company, further special provisions may apply because of protecting the creditors and consumers.