Some important laws applicable to
Foreign entrepreneurs may conduct their business in Hungary by opening a branch office in the country. Such a branch office is a separate organisation unit of the foreign business association without legal personality registered by the Hungarian court of registration. Through their branch offices, foreign business associations are entitled to carry out business activities in Hungary and are represented towards the authorities and third parties by their branch offices.
Each branch office shall be registered to the company registry. Branch offices may be represented by natural persons employed at or assigned to the branch office or with a permanent contract of employment and a domestic place of residence. Representatives of branch offices and their close relatives may only conclude transactions within the activities of the branch office if the deed of foundation of the branch office or the foreign business association approves it. The foreign company’s approval is needed if the person authorised to represent the branch office intends to acquire shares in another business association conducting the same business activities as the branch office, excluding the buying of shares in public limited companies.
The laws applicable to companies with domestic registered offices apply to the business activities and the domestic business behaviour of branch offices, and its books shall be kept in accordance with the Hungarian laws on accounting. Special rules apply to the branch offices of foreign businesses conducting financial activities. The employees of the branch office are in employment relationship with the foreign business association and employer rights are exercised by the foreign business association through its branch office.
The foreign business association shall continuously provide the assets necessary for the operation of the branch office and the settlement of its debts. No permit is required for a business association registered in an EEA member state to purchase real estate required for the business operations of its Hungarian branch office. In all other cases a permit is required unless otherwise specified by an international agreement or no such property may be purchased based on the principle of reciprocity.
The foreign company and the branch office bear joint and several liability for debts incurred during the activity of the branch office. When judicial enforcement to collect debts is initiated against the foreign company, all its assets in Hungary become subject to enforcement. Enforcement procedure may also be initiated directly against the branch office, and creditors can enforce their claims even in a liquidation procedure initiated against the foreign business.
The branch office is terminated by being deleted from the company register. Deleting a branch office does not in all cases require its being free from public debt, the publication of an announcement about the termination, or verification that there are no authority or court procedures in progress against the foreign company in Hungary with regards to its activities conducted through the branch office. If the country of registration of the foreign company and Hungary have signed an international agreement on the competences of courts, the enforcement of court rulings and the collection of public debts for civil and commercial cases, or in the event such issues are governed by EU community laws.
Commercial representative office is an organisational unit of a foreign company without a legal personality, which can operate from the time it is registered in the company register. The scope of activities of commercial representation offices are limited to mediating and preparing contracts and carrying out information, advertising and propaganda activities on behalf of the foreign company.
In their own names, commercial representative offices may not conduct business activities that yield profits or other proceeds; however, they can conclude contracts related to its operation in the name and for the benefit of the foreign company.
The same employment rules apply to commercial representative offices as to branch offices.
The primary act of law in Hungarian company law is Act 4 of 2006 on Business Associations (hereinafter Companies Act). In addition to business associations, the Companies Act also covers a special professional form of business association called “interest grouping” (“egyesülés” in Hungarian). The main types of business associations under the Companies Act are identical to those regulated in EU countries. However, there are some others under EU law, such as the European Economic Interest Grouping (EEIG) regulated in Act XLIX of 2003 on the basis of Council Decree no. 2137/85/EEC, and the European Company (Latin original: Societas Europaea) regulated on the basis of Council Decree no. 2157/2001/EEC. The procedures on founding, implementing changes in data and winding up of Hungarian associations are primarily governed by Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings (hereinafter: Company Procedures Act).
Under the Companies Act, business associations may be founded by non-resident and resident natural persons, legal persons and business associations without legal personality (hereinafter: business association). Hungarian laws do not provide an exhaustive list of legal persons but, on the basis of the Civil Code, state, municipal, business, social and other organisations may have legal personalities. International treaties may contain regulations in derogation from these provisions in respect of the participation of non-residents in Hungarian business associations.
In most cases, business associations are founded to conduct economic activities but they can be founded and regulated in any company type regulated under the Companies Act for purposes other than common economic activities (non-profit business association). Non-profit business associations may only engage in business operations in the form of ancillary activities; the profit from these operations may not be distributed among the members (shareholders).
The law may require a special permit from the authority for the foundation of a business association (foundation permit), such as companies with an interest in financing, insurance or capital market activities, which may only be founded with approval from the Hungarian Financial Supervisory Authority (PSZÁF). Where authorisation by the authority is prescribed as mandatory by law to engage in a certain economic activity, the business association may only begin and pursue the activity in question when in possession of such authorisation. Activities subject to qualification may only be pursued by business associations if there is at least one person among its participating members, employees, or persons working for the benefit of the company under a permanent civil law contract concluded with the business association who satisfies the qualification requirements set out in the legal regulations.
The provisions of the Civil Code of the Republic of Hungary (hereinafter: Civil Code) shall be applied in respect of the financial and personal relations of business associations and their members (shareholders) not regulated by the Companies Act.
The Companies Act regulates the following types of business association:
General partnership (Kkt.): a business association whose members jointly undertake the obligation to engage in business operations with unlimited and joint and several liability. Kkt-s do not have a legal personality, which, however, does not mean that they cannot be subject to rights and obligations or that they are transparent in terms of taxation. The lack of legal personality only refers to the Kkt.’s personal collective (rather than capital collective) nature.
Limited Partnership (Bt.). At least one member (general partner) has unlimited liability for the obligations of the business association, while the liability of other, at least one member (limited partner), is limited to the amount of its contribution.
Limited Liability Companies (Kft.) are business associations founded with an initial capital (subscribed capital) consisting of capital contributions of a pre-determined amount, in the case of which the liability of members to the company extends only to the provision of their capital contributions, and to other possible contributions as set forth in the articles of association. With the exceptions set out in the Companies Act, members are not liable for the liabilities of the company.
Companies limited by shares (Rt.) are business associations founded with a share capital (subscribed capital) consisting of shares of a pre-determined number and face value, in the case of which the obligation of members (shareholders) to the limited company extends to the provision of the face value or the issue price of shares. With the exceptions defined in the Companies Act, shareholders shall not bear liability for the obligations of a limited company. Limited companies may be established privately or be open to the public and, consequently, they may operate in the form of a public (Nyrt.) or private (Zrt.) limited company.
A grouping is a co-operative society vested with legal personality, founded by members in order to facilitate the success of their business activities and to co-ordinate such business activities, as well as to represent their professional interests. The purpose of a grouping is not to make a profit for itself; its members shall bear unlimited, joint and several liability for debts in excess of the grouping’s assets.
A business association is founded by the founding members signing the articles of association (statutes, for sole member companies deed foundation), which is drawn up in an authentic instrument prepared by a notary public, or in a private document countersigned by a lawyer or the legal counsel of the founder.
General partnerships, limited partnerships, limited liability companies, single member companies or private limited companies may be founded in a simplified procedure by enclosing with the application for the registration of the company the deed of foundation drawn up on the basis of a template in the annex of the Company Procedures Act. In the latter cases, the deed of foundation is required to be prepared in a notary deed and countersigned. In the case of this simplified procedure, the business association is registered by the court of registration within one working hour of the receipt of the notice regarding the establishment of the tax number. The tax authority shall establish the tax number in the tax registration proceedings within one working day. If, as a result of the examination conducted on the basis of the tax identification number(s) disclosed by the court of registration it can be assumed that the establishment of the tax number has an impediment specified in the act, the tax authority shall pass its decision regarding the establishment or refusal of the tax number within a period of 8 working days. In the event the establishment of the tax number is refused in a non-appealable manner the court of registration shall reject the application for registration.
The articles of association must include the following for all business associations:
the corporate name and registered office of the business association;
the data of the members of the business association (name, place of residence, registered office, company registration number or registry number of legal entities or business associations without legal personality,) In accordance with the provisions of the Companies Act coming into force as from 1 March 2012, in case of natural persons the natural identification data (place and date of birth, mother’s name at birth) and the address, in case of legal entities the name (corporate name), registered office and company registration number or registry number) must be given;
the business association’s activities which the company intends to indicate in the register of companies (in accordance with the provisions of the Companies Act coming into force as from 1 March 2012 the main activity and all the activities of the company);
the subscribed capital of the business association, the financial contribution of each member, and how and when the subscribed capital is made available;
the mode of representation and the method of signing for the company;
the name and address (registered office) of the first executive officers appointed by the members (shareholders), and of the first appointed supervisory board members and auditor where applicable, and for legal persons and business associations without legal personality their (company) registration number;
the duration of the business association, if established for a limited period of time; and
any other information required by the Companies Act for the various forms of business associations.
Members’ (shareholders’) contributions may be cash or contributions in kind. A contribution in kind may be any marketable thing of value or intellectual work, any intangible property, or any claim that is acknowledged by the debtor or that has been granted by a final and definitive court decision. Any member (shareholder) providing a contribution in kind shall accept responsibility towards the business association for a period of five years from the provision of the contribution in kind, to the effect that the value indicated in the articles of association does not exceed the real value of the contribution in kind as effective at the time of its provision.
As of the date when the articles of association is countersigned or executed in an authentic instrument, the business association may operate as the pre-company of the business association, i.e. a company under registration. The pre-company may obtain rights and responsibilities but can only carry out business activities after the establishment of the tax number of the business association. With certain limitations (e.g. shares / business quotas may not be transferred), the same rules apply to pre-companies as to registered business associations. The pre-company period ends when the business association is registered in the company register and all legal transactions signed in the pre-company phase become the legal transactions of the business association. Under the effective regulations, business associations are required to file a separate report and tax return for the pre-company period provided that the company started its business activity in the pre-company period or the company is registered in the business year of its establishment.
In most cases, the highest body of business associations is the meeting of the members, which has different names for specific forms of business associations (e.g. members’ meeting, general meeting). In the case of sole member companies, the only member has the powers otherwise vested in the supreme bodies of other business associations. The supreme body makes decisions in strategic matters of the company. Matters rendered under the exclusive competence of the supreme body are defined by the law for the specific company forms.
In most cases, members (shareholders) attend the meeting of the supreme body in person but they can also delegate proxies. The articles of association may allow members (shareholders) or their proxies to exercise their membership rights by means of electronic communications instead of attending the sessions of the supreme body in person. Decisions may also be made in writing. In this case, the articles of association need to specify matters in which members can make decisions without holding a meeting. The possibility of attendance by means of electronic communications as wells as the written decisions provide foreign owners with flexibility in exercising their rights.
For the purposes of the Companies Act, ‘management’ means the passing of decisions other than those under the competence of the supreme body or other company organ, and which are necessary in connection with the company’s operations.
The executive officers or a board made up of executive officers shall conduct the management of the business association pursuant to the provisions governing the specific forms of business associations. The management of general partnerships (Kkt.) and limited partnerships (Bt.) are handled by the member or members entitled thereunto in the capacity of executive officers. Management of business associations is exercised by the general manager(s) for limited liability companies (Kft.) and by the management or a board of directors for companies limited by shares (Nyrt. and Zrt.), except for private limited companies where management is performed by a single person, thechief executive officer.
With the exception of general partnerships and limited partnerships, executive officers must be natural persons. Executive officers must discharge their duties relating to the company’s internal affairs and its bodies and other officers in person; no representation is allowed. Executive officers may act on behalf of the company under company law and employment law.
Executive officers discharge their duties independently and are superseded only by legal regulations, the articles of association, and the resolution of the company’s supreme body and, with the exception of sole member companies, may not be instructed by the members (shareholders) of the business association. The company’s supreme body is only allowed to reduce the powers of executive officers or the management body in relation to the management of the company where so authorised by the Companies Act or under the articles of association.
Providing they are not subject to disqualifying factors, executive officers may be appointed for an indefinite term, or definite period no longer than 5 years, and may be recalled at any time. No person who has been sentenced to imprisonment by final verdict for the commission of a crime until relieved from the detrimental legal consequences related to his criminal record, who has been banned from accepting an executive office or from performing the main activity of the business association, who served as an executive officer in a business association terminated in cancellation proceedings (for a period of three years after the cancellation of the business association) and whose managerial and member’s responsibility for the claims of other companies the court established in the course of the winding-up proceedings may be an executive officer of a business association.
In addition, if a new company is founded, or there is a change in the owners or the position of executive officers, it is considered an excluding factor if the executive officer or majority owner has long-term outstanding taxes, or if he is or used to be the executive officer or member of another business association that has accumulated or failed to settle significant amounts of long-term outstanding taxes, or if the tax number of the business association has been deleted. In such a case the tax authority shall refuse the establishment of the tax number of the company, thus the performance of the economic activity may not be commenced or pursued with the participation of such a member or executive officer.
The responsibility of executive officers primarily covers the following:
company foundation, announcement of any changes in the data registered in the company register and submittal of the annual report to the court of registration;
upon request by the members, the executive officers have to provide information concerning the affairs of the business association, and allow inspection of its books and documents.
exercise employer’s rights over the employees of the business association;
representation of the company before third parties, authorities and courts.
Executive officers have to conduct the management of the business association with the level of care generally expected from persons occupying such positions, and give priority to the interests of the business association. In the event of an imminent threat to the business association’s insolvency, the executive officers have to conduct the management of the business association giving priority to the company’s creditors.
In addition to the executive officers, an employee of the business association may be appointed as company manager. The company manager may be authorised to sign independently for the company.
The supervisory board shall consist of at least three and at most fifteen members. In some cases, a supervisory board is required, while in others it is only an option. The supreme body of a business association that is supervised by a supervisory board may adopt a decision concerning the annual report only if in possession of the written report of the supervisory board.
Establishment of a supervisory board is mandatory:
for public companies limited by shares except for public limited companies that are controlled by the one-tier system, i.e. the board of directors also performs the duties of a supervisory board;
for private companies limited by shares if requested by the founders or members (shareholders) controlling at least five percent of the total number of votes;
irrespective of the form and operational structure of the company, where prescribed by law with a view to the protection of public assets or to the activities in which the company is engaged;
if the annual average number of full-time employees employed by the business association exceeds two hundred, one third of the supervisory board is made up of employee representatives.
The auditor shall be responsible for determining as to whether the annual report of the business association is in conformity with legal requirements, and whether it provides a true and fair view of the company’s assets and liabilities, financial position and profit or loss.
All undertakings keeping double-entry books must select an auditor, save for the cases specified in Act C of 2000 on Accounting (hereinafter Accounting Act) and in other legal regulations. According to the Accounting Act the auditing of books shall not be compulsory for the undertakings if the following two conditions are jointly met:
the annual net sales (calculated for the period of one year) did not exceed HUF 200 million on the average of the two financial years preceding the financial year under review, and
the average number of people employed by the undertaking did not exceed 50 people on the average of the two financial years preceding the financial year under review.
If the business association is not obliged by any legal regulation to select an auditor it may still do so at any time. If the company selects an auditor, it is the supreme body of the company that defines the essential content of the contract to be concluded with the auditor. The auditor shall be included in the Memorandum of Association and registered with the court of registration, too. The auditor may not create such rapport with the management of the company that could jeopardize the impartiality of the audit.
Members (shareholders) having at least 5 percent of the votes have certain minority rights. These minority rights include the option of these members (shareholders) at any time to request the management to call a meeting of the supreme body of the business association, and request the court of registration to order the auditing of the annual report or any other event in the management history of the past two years if such request has been refused by the supreme body of the business association or no decision has been adopted in the matter.
(5) If the supreme body of a business association has refused the request to enforce a claim against the members, executive officers, supervisory board members or auditor of the business association, or, if the business association’s supreme body failed to adopt a decision regarding a proposal that has been properly presented, the members (shareholders) with minority rights may enforce the claim themselves on behalf of the business association in court proceedings.
In certain cases, the Companies Act excludes limited liability of the members (shareholders). In the event of the termination of a limited liability company or a public or private company limited by shares without legal successor, the member (shareholder) who has abused his limited liability may not rely on his limited liability. Any members (shareholders) of limited liability companies and public or private company limited by shares who have abused their limited liability or the company’s legal personality to the detriment of the creditors, have to bear unlimited and joint and several liability for the unsatisfied obligations of the defunct business association.
If a business association does not have sufficient own funds to cover the subscribed capital prescribed for its form of business association over two consecutive financial years, the members (shareholders) of the business association have to provide for the necessary own funds within three months of the approval of the annual report prepared pursuant to the Act C of 2000 on accounting (Accounting Act) for the second year. If the business association fails to do so, it has to adopt a decision for transformation into a different business association, or for its termination without succession.
If any member (shareholder) of the private or public limited company acquires an influence ensuring qualifying holding over 75% after the company is established, the owner of this qualifying holding has to announce this fact to the court of registration. Unless excluded by a unanimous decision of the members in the articles of association, any member (shareholder) of the company may request the owner of the qualifying holding to purchase his business share (share) at market price but at least at the rate proportionate to the business share (share) to the own capital of the business association.
In the event that any member acquires over 50% of the votes, has the right to designate or dismiss the majority of the executive officers of the other company or has the power (direct management) to assert major influence over the decisions of the other company by merger or acquisition, this member is deemed to fall under the scope of Act LVII of 1996 on the Prohibition of Unfair Trading Practices and Unfair Competition (hereinafter: the Competition Act) and in certain cases may need to request permission from the competent authority.
Business associations may be terminated with or without a legal successor. Cases of termination without a legal successor:
the period of time specified in the articles of association expires or any other condition of termination is realised;
the company’s supreme body has adopted a decision for the company’s termination without succession (voluntary winding-up or liquidation);
the number of members of the business association keeps decreasing, except for limited liability companies and companies limited by shares;
it is terminated by the court of registration for reasons provided for in the Companies Act;
it is required to do so by law.
If the business association is terminated by liquidation, the provisions of Act XLIX of 1991 on Bankruptcy and Liquidation Proceedings shall apply.
A business association is terminated with succession in the case of conversion, merger and demerger (hereinafter: transformation). ‘Merger’ means the operation whereby two or more business associations are wound up without going into liquidation and the companies combine as one legal entity. ‘Demerger’ of a business association is when the business association is split into two or more business associations.
The rules for transformation are contained in the Companies Act and the Accounting Act. A business association created by transformation has no pre-company period, as the legal successor business association may start its activities after being registered by the court of registration. Until the changes are registered, the predecessor company continues its activity unchanged.
The business association established by way of transformation is the universal successor of the business association transformed. The rights and obligations of the predecessor business association shall be transferred upon the successor business association. In the event of a division, the demerger agreement has to divide the rights and responsibilities of the business association being transformed; however, the successor business associations will bear joint and several liability for the obligations that have not been divided.
In the event of a transformation, draft statements of assets and liabilities and draft inventories of holdings will be prepared for the company undergoing transformation and its successor company. The draft statements of assets and liabilities and the draft inventories of holdings will be approved by an independent auditor, who may not be the auditor of the business association undergoing transformation.
In the event of a merger, the provisions of the Competition Act also have to be observed, and in accordance with this, in certain cases permits from the competent competition authority and the European Commission also have to be requested.
In accordance with Act CXL of 2007 on cross-border mergers of limited liability companies, limited liability companies and companies limited by shares may pass decisions about cross-border mergers with a business association established in the European Union. The abovementioned act is designed to help compliance with Directive 2005/56/EC, supports flexible merger of business associations within the European Union and provides an opportunity for planning finances and taxes.
As a result of its limited liability and simple formal requirements, the limited liability company is the most widely used form of business association in Hungary.
In addition to the data to be included in the deed of foundation of any business association, the deed of foundation (articles of association) of a limited liability company has to include the material contributions of all members, as well as their voting rights.
Performance of capital contributions and other services
The subscribed capital of limited liability companies is composed of the capital contributions made by the members. The minimum amount of subscribed capital is HUF 500 000 (approx. EUR 600). If a member is making a contribution in kind, the value of the contribution is determined by themselves and accepted by the other members. If the business association does not use an independent auditor to evaluate the contribution in kind, the criteria for evaluating the contribution need to be defined.
The value of the capital contributions of the members may not be lower than HUF 100 000 and must be divisible by 10 000. Each member may only have one capital contribution but one capital contribution may have multiple owners.
In addition to making their capital contributions, the members of the business associations also undertake to fulfil certain other services of value (hereinafter: ancillary services) in the articles of association. Members may be entitled to remuneration for such ancillary services.
In order to cover losses, the articles of association may authorise the members’ meeting to order an obligation upon the members to provide supplementary capital contributions. The maximum amount payable by members on this basis, the method, frequency and timing of performing supplementary capital contributions, and the order of repayment must be specified in the articles of association. The amount of supplementary capital contributions shall not comprise a part of members’ initial contribution to the capital. Capital contributions not needed to cover losses must be repaid to the members.
Business quota and transfer of business quotas
Following registration of the company, the rights of members and their share from the assets of the company are embodied by their business quotas. In most cases, the business quotas of the members are consistent with their respective capital contributions. The articles of association may, however, invest certain business quotas with membership rights that differ from those of others. Accordingly, business quotas with different rights may grant rights to more favourable dividends or voting rights.
Business quotas may be transferred by written agreement, but only to a third person if the member concerned has paid his capital contribution in full. The members, company or person designated by the members’ meeting shall have pre-emption rights for the transfer of a business quota by a contract of sale, but this right may be excluded or limited in the articles of association. The right to pre-emption is non-transferrable.
Members may render any transfer of business quotas to non-member parties subject to the consent of the company. The transfer of business quotas based on legal grounds other than a contract of sale may be excluded or restricted in the articles of association.
Disbursements by business associations
The company may effect a disbursement from its equity to a member, on account of his membership and in accordance with the Companies Act and the Accounting Act, with the exception of the reduction of the share capital, from the taxed profit for the current year, or from the profit reserves or capital reserves. No disbursement can be made if the company’s equity capital is below its share capital or would be reduced to below the share capital if the payment was made.
Members are entitled to receive a share of the company’s taxed profit, according to the annual report, in the percentage consistent with their business quota (dividend). The members’ meetings may pass a decision on the disbursement of interim dividends if the interim balance sheet verifies that the business association has the financial collateral for it and the members agree to pay back the interim dividends if there were no legal grounds for the disbursement of dividends on the basis of the subsequent annual report.
Scope and operation of the members’ meeting
The members’ meeting is the supreme body of the limited liability company. It has to be convened at least once a year.
The following specifically fall within the exclusive competence of the members’ meeting:
approval of annual and interim reports; decisions on the disbursement of dividends and interim dividends;
order and repayment of supplementary capital contributions;
exercising pre-emption rights on behalf of the company; designation of a person for the right to exercise pre-emption rights;
granting of consent for the transfer of any business quota to a third person;
resolution for initiating the expulsion of a member;
the election and removal of the managing directors and the establishment of their remuneration (unless those rights have been transferred to the Board of Supervisors);
the election and removal of the members of the Supervisory Board and the auditor and the establishing of their remuneration;
approval to conclude contracts which take place between the company and one of its members, its managing director or their close relatives or domestic partners;
enforcement of claims vis-à-vis members, managing directors, supervisory board members and the auditor;
ordering of the examination of the company's report, management and financial operations by an auditor;
decisions on termination without succession or transformation of the company;
amendments to the articles of association, including an increase or reduction of the equity capital and related rights;
all issues which are assigned exclusively to the competence of the general meeting by law or the memorandum of association.
As a general rule, the members’ meetings are convened by the managing director at the registered office of the Company. In accordance with the Companies Act, the members’ meetings may be held in such a way as to allow the members to participate not in person but by way of proper electronic means of communication, designed to handle dialogues between members and providing adequate facilities for debate without any restrictions whatsoever.
The articles of association may contain provisions to allow for the option of adopting resolutions without a meeting. In this case, the draft resolution needs to be sent to the members who cast their votes in writing or any other verifiable manner. The resolution shall be considered adopted on the day following the day when the last vote is received.
A company may be founded by a single meber, or a single-member company may be established in such a way that the ownership of all business quotas of an already operating company is acquired by one member. In single-member companies, the decisions falling within the competence of the members’ meeting are adopted by the sole member. A critical formal requirement for a contract concluded between a single-member company and its sole member to be valid, is that such contract shall be drawn up in an authentic instrument or in a private document representing conclusive evidence.
The rules of labour law are currently included in Act XXII of 1992 (hereinafter Labour Code), which will be superseded by Act I of 2012 as from 1 July 2012 (hereinafter New Labour Code).
Regarding the form, employment contracts, any modification thereof, and the termination of employment must be incorporated in writing. The employment contract and all employment related documents may be inspected by the tax and labour authorities at any time. The labour law regulation is very similar to the labour laws of other European countries in that it has only minimum requirements as to the content of employment contracts. Employment contracts are usually concluded for an indefinite period of time. At the beginning of the employment relationship, the parties may specify a probationary period for a maximum of three months, or in case of a collective bargaining agreement for a maximum of six months. This six-month probation period shall continue to exist with the coming into force of the New Labour Code, too. Employment contracts may also be signed for definite terms but the extension thereof requires the existence of the just economic interest of the employer, and the period thereof may not exceed 5 years together with the extension of the contract. The regulations coming into force in July 2012 basically contain similarly severe provisions, since definite terms may only be extended within a period of six months upon the termination of the contract in case of the existence of objective reasons which are independent of the organization of work. In the event that a definite-term employment contract is extended for an additional definite term, the competent labour court may declare it an employment contract for an indefinite term.
Termination of employment is usually based on mutual agreement of the parties or a unilateral ordinary notice given by one of the parties. Note that the employer is required to provide a reason for its termination of the employee’s contract and that the reason must be realistic and rational. Employees may terminate their employment by regular notice without the obligation to provide a reason. In case of an extraordinary notice, both the employer and the employee are required to provide a substantial and verified reason. Employees have a 30-day forfeit period for legal remedies if the reason provided for the ordinary/extraordinary notice is contrary to the law. With regard to the termination of the employment relationship the New Labour Code will not bring about any significant changes. However, considering its terminology it differs from the currently effective regulation in that the expression ‘ordinary notice’ will be changed to ‘notice’, whereas ‘extraordinary notice’ will be changed to ‘notice with immediate effect’.
Trade unions are designed to protect and represent employees’ rights and interests provided under the law. These unions are only strong in the public sector: national railway, public transport companies, airport and airline, healthcare professionals, etc.
Even though the law has provisions for part-time employment and distance working (“home office”), these methods are not yet widely used. Regular working hours are 40 hours per week, Monday to Friday. Working time conditions (e.g. the ceiling) and extra payment for overtime are strictly regulated by the law.
The annual paid holiday is 20 workdays, which increases with the age of the employee in categories with the maximum being 30 days. Pregnant women are entitled to 24 weeks of maternity leave. As of 1 January 2011, childcare benefit is available for up to 3 years. The labour law protects women on maternity leave and those receiving childcare benefit against regular termination of their employment. The age limit for the full old-age pension varies between 62 and 65 years depending on the date of birth.
With a few exceptions, foreigners need work permits to work in Hungary. The first question to answer is whether the employee is a citizen of an EU country or a third country.
Employment of foreigners from third countries (non-EU members)
With a few special exceptions, citizens of third countries may only be employed in Hungary with a work permit.
Individual work permits are usually valid for a maximum of 2 years with the option of extension for another 2 years. Officially, the employee applies for the work permit, but first the employer must state that they had already tried to fill the position with a Hungarian citizen with the help of the employment centre. Next, the employer submits an application for the work permit using certified copies of documents verifying the personal data and qualifications of the employee. Employers have to comply with strict regulations regarding the employment of foreign employees.
In certain cases, the law allows for the issue of a work permit for third country citizens without any investigation of the job market. These special cases include, but are not limited to, employment of a foreign national in a key position at a foreign interest company established in Hungary or when the majority of a business association is owned by foreign nationals and the percentage of foreign employees does not exceed 5 percent.
In other cases, third country citizens may be employed simply by making a formal announcement without the need for a work permit. These positions include the managing directors of branch offices and representations of foreign companies. The employer is responsible for making the appropriate announcement and issuing accurate documentation verifying the conditions of employment of foreign nationals without a work permit.
On the basis of their appropriate visas, foreign nationals are required to apply for a residency permit from the Office of Immigration and Nationality.
Non-EU citizens may only begin their employment in Hungary after they have obtained all permits and documents necessary for their employment.
Employment of citizens of EU member states
In general, since 1 January 2009, citizens of EU member states and their family members may be employed in Hungary without a work permit. The employer is required to report the employment data of EU citizens to the employment centre according to the general regulations. The employment centre registers this reported data for statistical purposes.
No residence permit is necessary for EU citizens who plan to spend more than 3 months in the country for employment purposes. Nevertheless, they are required to report the details of their extended stay to the Office of Immigration and Nationality and to apply for a residence card.