There is a long-standing and yet unresolved debate within the European Union on how to best provide the freedom of movement and establishment for legal entities under the Treaty on the Functioning of the European Union while, at the same time, protecting the interests of public policy or security at national levels, e.g., creditors or local regulators.
Apart from a couple of legal entities the operation of which is harmonized under European law, such as societas Europaea, uniformity between national corporate laws is lacking. Due to their complexity, such harmonized company forms are rarely used by stakeholders, despite being free to move within the EU. Beyond these, it is currently not possible to transfer a Hungarian company’s registered office to another member state without first winding up the company in Hungary and then re-registering it in the other member state. This is because Hungarian corporate law applies the domicile (real seat) theory, meaning that companies acquire the nationality of the state where they maintain their seat. At the same time, Hungarian courts do not register or recognize foreign companies as Hungarian law-governed entities because they transferred their headquarters to Hungary without conducting a standard company establishment procedure ensuring compliance of the company’s operations with Hungarian corporate law.
However, to provide some flexibility, Hungarian law allows for companies to designate their place of effective management – where the company’s decisions are actually taken – to a place other than their registered office, even if that is in another EU member state. This does not result in losing the company’s Hungarian nationality but does mean that the company’s Hungarian tax residency is moved to that other EU member state. In some cases, migrating the place of effective management outside of Hungary may result in a dual residency or nationality provided that the new place of effective management will make the entity subject to the laws of the destination state as well.
In light of the foregoing, currently, the only tool for a Hungarian company to migrate its operations to another EU member state – without having to wind up and restart its activities – is participating in a cross-border merger procedure under the relevant EU directive. Such mergers, however, are available for limited liability companies only within the European Union and require another company to be registered in the member state of destination, acting as the surviving company taking over all assets and liabilities of the terminating Hungarian company by way of legal succession.
As of September 1, 2022, if a Hungarian LLC or PLC wishes to re-domiciliate to another EU member state, it will also be able to do so by converting its legal form into a limited liability company form governed by the laws of the destination member state while retaining its legal personality and without being dissolved. This will eliminate the need to establish a company in the country of destination prior to starting the cross-border migration, if not already having one available there within the company group, to participate in the complex procedure applicable to cross-border mergers. By this, cross-border conversion procedures are expected to be simpler and more cost-effective compared to a merger procedure – since only one company will have to complete the compulsory tasks of cross-border transformations detailed below.
The new law on cross-border conversions will come into force to implement the relevant provisions of EU Directive 2017/1132. This directive, among others, introduces cross-border demerger procedures as well and orders similar provisions to govern cross-border conversions and demergers to those already applicable to cross-border merger procedures, which are also subject to some amendments. In our experience, cross-border mergers in Hungary may take up to six-eight months and require significant external and internal resources to complete all procedural tasks, such as the preparation of corporate and financial documentation, publications to third parties, applications with the registering authorities, etc. Further delays in completing cross-border transformations may be expected as, under the new regime, the registering authorities will be explicitly required to examine whether the proposed transaction was set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes. This will end up in several other authorities getting involved in approving these cross-border transformations, which may add an extra one or two months to their timeline.
By Ivan Sefer, Managing Partner, and Denes Csoba, Manager, Vamosi-Nagy Ernst & Young Law Office
This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
