Hungary is a civil law country, and as such it recognizes two traditional civil law forms of nongovernmental, not-for-profit organizations (NGOs) – the association and the foundation.
Hungary recognizes additional organizational forms, including nonprofit corporations and public chambers. The nonprofit corporation (or "nonprofit company") is a new category, and it is the non-profit distributing version of a for-profit company form (e.g., general partnership, limited partnership, limited liability company, or shareholder company). [1] Nonprofit corporations are eligible to apply for PBO status under the same conditions as foundations or associations. Public chambers arise rarely, as these are formed by an act of Parliament. From 1994 to 2006, Hungarian legislation permitted the establishment of a public foundation (a foundation created by the Parliament, the Government, or the municipal council of a local government or a minority government in order to ensure the continuous performance of public duties), but this form was discontinued on August 24, 2006 [Act LXV/2006 §1 (1)].
In addition, Hungarian legislation enables NGOs to qualify as "Public Benefit Organizations," or PBOs. This legislation is Act CLVI of 1997. Many Hungarian organizations qualify for PBO status and because that status will bring the organization closer to being an IRC section 501(c)(3) equivalent, grantmakers should inquire as to whether an NGO is a PBO. According to the latest (2008) data of the Central Statistical Office, 52% of NGOs have public benefit status in Hungary.
For practical purposes, then, a potential grantee will likely be organized under Act IV/1959, as amended, as
an association,
a foundation, or
a nonprofit corporation.
Regardless of its legal form, the organization may have PBO status under Act CLVI/1997, as amended.
B. Tax Laws
An association or foundation’s income from any type of support, allowance, or membership fees is exempt from corporate income tax if it is allocated either to public benefit activities or other purposes of the organization as indicated in its charter document or bylaws.
Hungary also exempts from corporate income tax an association or foundation’s income derived from statutory or related economic activities, with unrelated economic income subject to tax under certain circumstances. Such a distinction does not apply to nonprofit corporations; thus, their economic activities are generally taxable. However, income of a public benefit or “prominent public benefit nonprofit corporation” is not taxed if it is generated from public benefit activities provided under contract with a state body. [2]
Hungary also subjects certain sales of goods and services to VAT, with a limited list of exempt activities.
The corporate income tax law provides tax benefits for donors. Hungary and the United States have entered into a double taxation treaty.
Association
An association (sometimes referred to as a "voluntary association," a "social organization," or a "society") is a self-governed, voluntarily established organization which is formed for a purpose defined by its articles of incorporation and which organizes its members’ activities in order to achieve its aim [Act IV/1959 §61]. An association has members – called a "registered membership" under local law. At least ten natural persons, legal persons, and/or business partnerships without legal personality are required to form an association [Act II/1989 § 2 (1) and § 3 (4)]. An association cannot be formed for the primary purpose of performing economic activities [Act IV/1959 §62 (3)], nor can it be formed for criminal, military, totalitarian, or unlawful purposes [Act II/1989 §2 (2), (3)].
Foundation
A foundation is an organization established through a founding statute by any natural or legal person or by a business partnership without legal personality. A foundation must be established for long-term (or long-lasting) public interest purposes [Act IV/1959 § 74/A (1)]. A foundation must have and disclose sufficient assets to achieve its purposes – or at least to start its operations – and an administering organ (i.e., a board) must be appointed [Act IV/1959 §74/A (1), §74/B (1)(c),(4), 74/C]. After establishing a foundation, founders may not maintain control over the foundation’s assets [Act IV/1959 §74/C (3)].
Nonprofit Corporation A nonprofit corporation is the non-profit distributing version of an otherwise for-profit company form (e.g., partnership, limited partnership, limited liability company, or shareholder company). In other words, all company forms can operate in a nonprofit manner. A nonprofit corporation may conduct ancillary economic activities, but its profits may not be distributed among its members [Act IV/2006 §4(3)].
Public Chamber (Public Body)
A public chamber is a self-governed organization with a registered membership, which is established by an act of Parliament. A public chamber fulfills a public task connected to its members or the activity performed by its members [Act IV/1959 §65 (1)]. Legislation may delegate certain public responsibilities to public chambers (such as certifying professional qualifications) and may prohibit non-members from engaging in those activities [Act IV/1959 §65(3, 4)]. Where not stated otherwise, the rules for associations apply to public chambers [Act IV/1959 §65(6)].
Public Benefit Organization – Any organization registered as one of the four general legal forms—and except for insurance associations, political parties, and interest groups of employees (i.e., trade unions) or employers—may register as a PBO in order to receive certain tax advantages [Act CLVI/1997 §2 (1)]. As of July 2006, a number of other forms have been added to the pool of potential PBOs. The current eligible forms are: association, foundation, public foundation, public chamber, national professional sports federation, nonprofit corporation, European groupings for territorial cooperation (EGTC) [3], non-budgetary (i.e. private) higher education institution, a social services cooperative conducting public benefit activities, water association, the Hungarian Higher Education Accreditation Committee, the Higher Education and Science Council and the Hungarian Rectors’ Conference. There are a number of requirements for PBO status. For an organization to register as a PBO, its charter must contain the following provisions:
A description of the activity of the organization and a statement that the organization does not exclude non-members from its services;
A statement that the organization pursues economic activity only in the interest of realizing its public benefit objectives, without jeopardizing them;
A statement that the organization does not distribute profits but rather utilizes such profits for the activities defined in its charter; and
A statement that the organization does not pursue direct political activity. It should also provide that it is independent from and does not provide financial aid to political parties [Act CLVI/1997 §4].
In order to qualify as a PBO, an organization’s charter must state that “the organization does not distribute profits, but spends them on the activity defined in its founding document” [Act CLVI/1997 §4 (1)(c)]. But this requirement is not broad enough to encompass all inurement possibilities. Situations may occur where inurement issues arise, most notably upon dissolution of certain kinds of organizations (see Section C, below).
Foundations and nonprofit companies can permissibly be formed such that founders retain a proprietary interest in the organizations. This is true even for organizations registered as PBOs, because Act CLVI/1997 does not preclude such interests. The founders of both foundations and nonprofit companies are entitled to reacquire their contributed assets upon dissolution as long as the founding documents contain such a provision (see C.2. and C.3., below). Any remaining assets must be distributed for public benefit purposes.
Founders do not retain proprietary interests in associations, but members may have reversionary interests in non-public-benefit associations. Public chambers and public foundations, which have state bodies or the Parliament as a founder, permit reversion of assets to the founder.
The general assembly or board of directors has the ultimate decision-making power over the dissolution or merger of an association [Act II/1989 §12 (1)]. If the articles of incorporation do not specify how the remaining assets are to be distributed, then the board of directors must decide how to distribute them. The only limitation is that the board must first pay creditors. Should the board fail to decide how to distribute the remaining assets, the government acquires the assets and uses them for public interest purposes [Act II/1989 §21]. The law permits non-public-benefit associations to distribute remaining assets to members upon dissolution.
2. Foundations
The founder of a foundation may reclaim donated assets. If the founding statutes do not specify how the remaining assets are to be distributed on dissolution, the court overseeing the dissolution will transfer them to a foundation with a purpose similar to that of the dissolved foundation [Act IV/1959 §74/E (5)].
3. Nonprofit Corporation
A nonprofit corporation can only transform, merge or split up into nonprofit corporations [Act IV/2006 § 4 (4)]. If a public benefit nonprofit corporation terminates without a successor, (1) the organization’s debts must be settled, (2) then the members of the company are entitled to receive the equity capital at the time of termination but not more than the amount of the nominal capital they contributed, and finally (3) any remaining assets will be expended by the court of registration for public benefit purposes in conformity with the provisions of the articles of incorporation. In the absence of such regulation the court of registration shall expend the remaining amount for the same or a similar public benefit purpose as the terminated organization [Act IV/2006 §4 (6)].
4. Public Chambers
The rules on dissolution of associations apply to public chambers [Act IV/1959 §65 (6)].
5. Public Benefit Organizations
The PBO law requires that when an organization loses its PBO status it must pay taxes and other debts owed to the state and fulfill its duties under contracts for the performance of public services [Act CLVI/1997 § 20]. If, however, the organization dissolves upon losing its PBO status, the rules governing dissolution are determined by its specific legal form (as described above); the PBO law does not impose separate rules.
In practice, the courts increasingly deny PBO status to a foundation or association if its charter does not specify another PBO with similar purposes that will receive the assets upon dissolution. This rule is not specified in the law but depends on the court that handles the case.
NGOs in Hungary are generally permitted to engage in all lawful activities, but they are restricted to the activities specified in their charters. Foundations must serve long-term public interest purposes; associations are not so restricted. PBOs, however, must undertake activities listed in the law.
2. Public Benefit Activities
The activities that PBOs may carry on are as follows:
maintenance of health, prevention of illness, medical care and health rehabilitation activities;
social activities, family aid, care of elderly people;
scientific activities, research;
education and instruction, development of skills, dissemination of general knowledge;
cultural activities;
preservation of cultural heritage;
protection of monuments;
preservation of nature, protection of animals;
protection of the environment;
protection of children and youth, representation of the interests of children and youth;
promoting equal opportunities for groups in a disadvantageous social position;
protection of human and civil rights;
activities related to national and ethnic minorities in Hungary and to Hungarians living beyond the borders;
sports, with the exception of sports activities pursued on the basis of employment or commission as defined by the civil law;
protection of public order and traffic safety, voluntary firefighting, rescue, and disaster prevention;
consumer protection;
rehabilitative employment;
promotion of training and employment for those with a disadvantageous position in the labor market, including the hiring-out of workers, and related services [Act XX/2004 added this purpose to Act CLVI/1997];
promotion of Euroatlantic integration;
services provided for and only available to public benefit organizations;
activities related to the performance of flood prevention and protection against ground water inundation [Act XIV/1998 added this purpose to Act CLVI/1997];
activities related to the improvement, maintenance and operation of roads, bridges or tunnels open to traffic [Act XIV/1998 added this purpose to Act CLVI/1997];
crime prevention and protection of victims [Act CI/2004 added this purpose to Act CLVI/1997];
the supply of electronic public services as basic services [Act LX/2009 added this purpose to Act CLVI/1997]. [4]
3. Economic Activities
The law in Hungary does not restrict NGOs from engaging in any economic activities. Thus, NGOs in Hungary may pursue any sort of income-generating activity (investment, trade, etc.) to help finance their operations. However, associations and foundations must not have as their primary purpose the performance of economic activities [Act IV/1959 §§ 62 (3) and 74/B (6)]. And none of the legal forms may distribute profits to any person – all profits must be used to carry out the purposes of the organization. This is required by law, in the case of PBOs [Act CLVI/1997 § 4 (1)(c)]; and by judicial practice, in the case of other NGOs. A nonprofit corporation may conduct ancillary economic activities, but its profits may not be distributed among its members [Act IV/2006 § 4 (3)].
For PBOs, § 26(c) of Act CLVI/1997 gives a definition of public benefit activity with an exhaustive list of preferred fields (see above). PBOs are barred from pursuing economic activities that do not advance their public benefit objectives [Act CLVI/1997 § 4 (1) (b)].
Under the corporate tax law, Hungary generally taxes an organization’s "entrepreneurial activities," defined as "economic activities aimed at or resulting in the acquisition of income or property" [Act LXXXI/1996 §1 (1)]. Associations’ and foundations’ income from economic activities is not taxed, and not deemed “entrepreneurial,” if the activities are related to the organization's public benefit activities or statutory purposes. Furthermore, the sale of intangible assets, tangible assets or inventories expended exclusively for the public benefit activities or the purpose of the organization also are not taxed. However, income from unrelated economic activities is subject to taxation as “entrepreneurial”.
Such a distinction does not apply to nonprofit corporations; thus, their economic activities are generally taxable. However, a public benefit or prominent public benefit nonprofit corporation’s income is tax exempt to the extent it arises from public benefit activities for which the corporation has a contract with a state body. Furthermore, the grant or support received in connection with the above activity also is tax exempt.
Act IV/1959, as amended, places no restrictions on legislative or political activities of NGOs. Foundations and associations may nominate and support candidates and legislation freely.
However, if the organization is registered as a PBO under Act CLVI of 1997, its charter must state that it does not pursue direct political activity, it is independent of political parties, and it does not provide financial support to them [Act CLVI/1997 §4 (1)(d)]. Under Act CLVI/1997 §26 (d), "direct political activity" includes "political party activity and nomination of candidates for Parliamentary and local governmental elections at the county level, including the city of Budapest." The prohibition does not apply to the nomination of candidates for local elections at the municipal level (including districts of the capital). Similarly, although PBOs cannot support political parties, political parties may support PBOs.
Act CXXV/2003 bars racial discrimination by any school that uses a state-accredited curriculum or that receives direct or indirect financial support from the government, which accounts for the vast majority of Hungarian schools.
In general, no restriction exists on the control of not-for-profit organizations by other organizations or persons. It is possible that a Hungarian NGO may be controlled by a for-profit entity or by an American grantor charity (which requires that the charity specifically so provide in the affidavit).
Hungary generally taxes an organization’s "entrepreneurial activities," defined as "economic activities aimed at or resulting in the acquisition of income or property" [Act LXXXI/1996 §1 (1)]. For a foundation or an association "the tax base … is the pre-tax result of its entrepreneurial activities” [Act LXXXI/1996 §9].
For associations and foundations all income related to their public benefit activities or statutory purposes is deemed non-entrepreneurial and therefore exempt from corporate tax. This exemption includes the income of these organizations from grants, donations, membership fees and related economic activities. Only income from unrelated economic activities is subject to taxation as entrepreneurial [Act LXXXI/1996 Schedule No. 6].
B. Tax Deductions, Credits, and Rebates for Charitable Contributions
Tax deductions and credits
Individuals are not entitled to any tax benefits for charitable donations. For companies, donations to Hungarian NGOs with PBO status are tax-deductible under limited conditions described below. To claim the deduction, the company has to be in possession of a certificate for tax purposes provided by the public benefit organization [Act LXXXI/1996 § 7(1)(z), § 7 (7)]. Donations to other organizations (with the exception of churches) are not deductible.
Companies may deduct up to 50% of the amount of a donation (including services as in-kind donations) provided to prominent public benefit organizations” with the purpose of supporting the performance of governmental services. Up to 100% of pre-tax income is deductible. If a company contracts for a “long-term donation”, i.e. multi-year support for at least four consecutive years with a PBO or a “prominent public benefit organization,” 20% of such donations are eligible for a tax deduction each year.
Rebate of individual taxes to charity
Individuals living in Hungary who pay income tax are also entitled to apply one percent of their income taxes to specific NGOs that carry on public benefit or public purpose activities [Act No. CXXVI/1996]. For a discussion of the requirements of this legislation, see ECNL’s paper "About Miracles and Misperceptions – Lessons from the “percentage mechanism” in Hungary."
C. Value Added Tax
Generally, all organizations engaged in economic activities are subject to the VAT. The standard rate is 25%, with some goods and services taxed at 18% and 5%.
Certain services are exempt if provided by so-called public service providers. The following organizations may be public service providers: budgetary organs, associations, federations of associations, public bodies, national professional sports federations, foundations, public foundations, churches, public benefit companies, nonprofit companies, and other organizations which obtained PBO status or perform their activities within the framework of a social security or other obligatory insurance relationship for the benefit of insured or other beneficiaries. Furthermore, organizations may be also considered as public service providers if the following conditions are met: 1) they do not systematically aim to make a profit in accordance with their charter; 2) their executive officers (including the board) are volunteers; and 3) they charge prices for the supply of goods or services in compliance with the Act on Price Control Regulations or the prices are lower than those charged on the market for similar goods or services. The exempt services include: health, social services, public education, child and youth protection, day care, psychological assistance, folk art, sports related services [Act CXXVII/2007 § 85 (1) and (4)].
Any product mailed or transported abroad may be exempt from tax if the receiver is an organization that performs a public benefit activity, uses the purchased product for its humanitarian, charitable or educational activity and can prove such use [Act CXXVII/2007 §100].
D. Double Tax Treaty
Hungary has entered into double tax treaties with a number of countries, including the United States. When such a treaty is in existence, dividends, interest, and royalties arising in one country and paid in another are subject to tax only in the country where paid.
Nilda Bullain
Executive Director
European Center for Not-for-Profit Law
Apaczai Csere Janos u. 17
1st Floor, Budapest 1052
Hungary http://www.ecnl.org.hu
361-318-6923 - fax 361-266-1479 nilda@ecnl.org.hu
Footnotes
[1] The nonprofit corporation replaces the former category of public benefit companies which no longer exists as of July 1, 2009.
[2] A subset of PBOs, known as “prominent public benefit organization[s]”, perform governmental responsibilities [Act CLVI/1997 §5].
[3] The EGTC is a new European legal instrument designed to facilitate and promote cross-border, transnational and interregional cooperation.
[4] According to the act on electronic public services, the administrative authorities are obliged to execute and ensure the electronic relations and other services through a central system. Furthermore, public utility suppliers shall make available their customer service through the central system as well and shall also keep in touch with the administrative authorities through this system. For example, the annual report may be submitted and the tax account can be checked through the customer site and even the procedure for acquiring a new passport or address card may be commenced.
