HUNGARIAN COMPANIES ACT CHANGED – ONLINE LLC FORMATION FROM AUGUST 2022

15 September 2022

Due to the recent amendment of the Companies Act with effect from 1 August 2022, EU citizens and companies can form a limited liability company or a branch office in Hungary fully online, in a fast-track registration procedure. The new provisions make it easier and faster to start a business in Hungary, even if there is minor restriction in relation with capital contributions. In this article we sum up the most important new rules.

1. Background

According to the Digital Directive of the EU[1] Member States shall ensure that the company formation can be completed online in its entirety without the necessity for an applicant to appear in person before any authority or person or body.

The Hungarian company law has already ensured the above requirement of the Digital Directive, i.e. it was already possible to form a company fully "online" without paper documents.

However, the Digital Directive also sets out additional requirements regarding the time required for the online company formation procedure, which have not yet been adapted into the Hungarian legal system.

2. Company formed online

In view of the above, to fully comply with the Digital Directive, the lawmaker introduced the concept of the company formed online in the Companies Act[2] as of 1 August 2022. Due to the new rules, the Company Court will register the company within a shorter timeframe instead of the general procedure when the company has been formed entirely online, as explained below.

3. Who can form an online company?

Online company formation is only available to

1. a national of a Member State of the European Union; or
2. legal persons or other entities registered in a Member State of the European Union.[DSR1] 

4. What kind of companies can be formed online?

Only the following types of companies can be formed online:

1. a limited liability company ("LLC"), or
2. a branch office in Hungary of a foreign company ("Branch") established by a company registered in a Member State of the European Union[DSR2] .

5. Conditions for forming an online company

1. No personal appearance

The online company formation requires that the person(s) making a declaration in connection with the company formation (founder, managing director) do(es) not have to appear in person before the acting legal representative or other organisation.

According to the legislative reasoning of the online company provision[3] ("Reasoning"), the requirement of the physical presence of the applicant may arise under the provisions of the Digital Directive if the legal representative has doubts about the identity, capacity or right of representation of the person concerned.

However, this reason cannot be considered as an "effective" condition, as the Reasoning also underlines that, despite this personal appearance, the procedure can still be considered as an online formation under the Digital Directive.

Based on the above, the lawmaker has made it possible for the founder to request the application of the rules applicable to an online company formation even if the founder has in fact appeared in person before the lawyer who has assisted in the company formation for the reasons set out above.

2. Remote client identification

A further condition is that the founder(s) are identified in such a way that

1. client identification by electronic means of communication in accordance with the Act on the Prevention and Combating of Money Laundering and Terrorist Financing[4]; and
2. verification of identification pursuant to the Act on the Activities of Lawyers

are carried out together.

According to the rules applicable to lawyers[5], the use of Microsoft Teams, Skype, Google Meet, among others, may be appropriate for the above client identification.

3. Electronically certified company documentation

An additional requirement for online company formation is that the electronic documents (including various company documents, e.g. articles of association, register of members, etc.) containing the declarations of the person making the declaration(s) during the incorporation:

1. shall be provided with the qualified electronic signature or seal, or advanced electronic signature or seal based on a qualified certificate of the declarant, or
2. authenticated by the declarant by the document authentication service that is traceable to identification.

In addition, all other documents (e.g. auditor's acceptance statement, foreign founder's company extract) attached to the application for registration that do not originate from the founder shall also be in electronic form and shall be electronically certified as described above.

In view of the above, it is essential for online company formation that the person making the declaration obtains an appropriate electronic signature or seal from a service provider prior to formation.

Furthermore, it is also necessary that other persons or organisations involved in the company formation (e.g.: seat service provider, foreign company registrar, auditor) issue the necessary documents as electronic documents and with such electronic signature or seal.

4. Exclusivity of the money contribution in the case of a limited liability company

A further condition is that in the case of an LLC established online, the share capital of the company shall consist exclusively of a money contribution.

In other words, this means that the founder cannot provide an in-kind contribution (e.g. transfer of physical assets, assignment of rights ,etc.) to achieve the share capital minimum of HUF 3 Million of the LLC.

6. Shortened time limits for forming a company online

If a company formed online complies with the above requirements, the Company Court will act within the following shorter time limits compared to the general time limits for the registration of such a company.

The Company Court shall issue an order rejecting the application for registration without a deficiency procedure on the first working day after receipt of the application instead of 3 working days under the general rules, and the order requiring a deficiency procedure on the 5th working day after receipt of the application instead of 8 working days.

In addition, the Company Court will decide on the application for registration of a company formed online within 10 working days of receipt of the application, instead of 15 working days under the general rules.

However, it should be noted that in the case of a simplified company procedure where a standard form contract is used, the application for registration of the company will be decided by the Company Court within 1 working day, even without the online incorporation.

Based on the above, the rules for online company formation can speed up the formation process if the founder(s) wish to use a bilingual deed of foundation or articles of association instead of a monolingual model contract, e.g. with regard to foreign founders or foreign parent companies.

7. Other issues

If any of the documents attached to the application for company registration do not meet the requirements of the Companies Act and therefore online formation is not possible, the Company Court will not reject the application but will proceed according to the general rules without issuing a separate order.

8. Summary

The recently introduced concept of a company formed online will speed up the formation of a LLC Branch in Hungary if it is done entirely online.

The rules on online formation can only be requested by a citizen of an EU Member State or a company incorporated in the EU and can [DSR3] only be applied to an LLC or a Branch in Hungary.

For the rules on online company formation to apply, the following conditions must be met

1. the person making the declaration does not have to appear in person at the lawyer's office;
2. remote client identification of the person making the declaration of rights and client verification must be carried out electronically and at the same time;
3. all documents required for company formation should be created as electronic documents with an appropriate electronic signature and seal;
4. in the case of a limited liability company, the company's share capital should consist exclusively of money contribution.

A company formed in accordance with the above shall be registered by the Company Court within 10 working days at the latest, instead of the 15 working days normally required.