Pursuant to Article 2 of the Act on Branch Offices, a branch office is an organizational unit of a foreign company, without legal personality, vested with financial autonomy and registered as an independent form of company. (A commercial representative office is also an organizational unit registered as an independent form of company, however, as opposed to a branch office, a commercial representative office does not conduct independent entrepreneurial activities, and as such does not constitute a subject of the Accounting Act.)
As far as purchases and sales activites are concerned, in the course of its operation, a branch office may proceed in accordance with the general rules. This also applies to transactions conducted with foreign-registered companies and another Hungarian branch office of the foreign-registered company. It is important to note, however, that in each case only an invoice that is in compliance with Hungarian legislation may serve as an accounting document.
The branch office shall state the capital permanently provided by the foreign-registered company (which may be liquid assets or other assets) as subscribed capital as per the Accounting Act. Due to accounting as subscribed capital, the capital being permanenty provided shall be documented accordingly in the case of branch offces.
There are special rules in place as to the accounting treatment of receivables and liabilities outstanding in respect of their registered office. Any receivables and liabilities in respect of the registered office that are not to be settled financially shall be consolidated at year-end, and the balance shall be shown in the result of financial transactions.
It is important that business transactions related to the branch office must be properly ducomented. It is important to bear in mind that as to the relationship between the branch office and the headquarters, as far as transaction sare concerned, one must proceed from the aspect of corporate taxation as if the transaction took place between two independent enterprises. Therefore, transfer pricing is a key issue in this regard as well.
In the course of keeping its accounts, the branch office shall be entitled to choose an accounting and reporting currency other than HUF, and they shall be entitled to select a business year other than the calendar year. This creates the condition for the branch office to be easily adjusted also to the business year followed by the foreign-registered parent company.
Both the Accounting Act and the Act on Branch Offices contain provisions as to the preparation and the publication of the financial report of the branch office. Subject to size limits, the branch office may prepare annual reports or simplified annual reports. Should the foreign-registered company have more than one branch office in Hungary, then each shall be subject to the submission of separate reports.
Based on Articles 153 and 154 of the Accounting Act, as a general rule, the branch office shall deposit their own report on the last day of the fifth month calculated as of the acceptance thereof. At the same time, pursuant to Article 12 (2) of the Act on Branch Offices, the foreign-registered company shall deposit and publish their report within 60 days calculated as of the acceptance thereof.
However, according to Article 154/A of the Accounting Act, companies with a registered seat in an EU Member State shall be exempt from the obligation to deposit and publish a report in respect of their own Hungarian report, except for Hungarian branch offices of financial institutions and insurance companies. However, in such case the report by the foreign-registered company shall be published in Hungarian.
As of 1 January of this year, also those Hungarian branch offices of foreign-registered companies shall be exempt from the obligation to deposit and publish reports whose registered seat is not in an EU Member State, but the obligations specified by the laws of the state concerned regarding the preparation of annual reports, auditing, depositing and publishing of reports are in harmony with the relevant EU legislation. The list of those states is published by the Minister at the Uniform Government Portal.
As a general rule, branch offices must be subjected to annual audits. However, those branch offices shall be exempt from the obligation to have their accounts audited which based on Article 154/A of the Accounting Act are exempt from the obligation to deposit and publish reports, i.e. their registered seat is located in an EU Member State, or their headquarters are located in one of the states contained in the list referenced above.
According to practical experience, the lack of proper documentation and incomplete general ledgers not reflecting all items are issues arising in general. A typical error by branch offices is that the transfer of functions performed by headquarters (IT, administration, marketing, etc.) is not adequately documented, and is only based on a single allocation. For taxation purposes, related receivables and liabilities, interest or even the lack of interest are in general areas requiring special focus.