Comparative legal analysis of associations laws and regimes in the EU. Country Report: Hungary

Executive summary

Under Section 3:63 (1) of the Civil Code, associations are defined as follows: an association is a legal person established by at least ten natural persons, legal persons, and/or organizations without legal personality for the continuous realization of the common, permanent aim of the members, as stated in the statute of the association.

We can find the term “civil organization” used for associations, foundations, public benefit organizations, as well as special forms of organizations created on the basis of the right of association.

There are no specific types of associations. Association is the registered legal form, which can be established for various purposes, such as leisure, sport, culture, political purpose (political parties), representation of rights and interests (alliances, trade unions) etc.

One of the main characteristics of associations is that they cannot be founded for the purpose to carry out economic activities. However, not all economic activities are prohibited. Associations are allowed to pursue economic activities but only if the economic activity is directly linked to the objectives of the association that are defined in its statute. It is an important safeguard, however, that the profit gained from such activities cannot be distributed among the members since they must contribute to the main objectives of the association.

Some associations can qualify for "Public Benefit Organizations" (PBOs) status1. Specific requirements exist for the acquisition of this status. The foremost of them is that the organization must undertake a public benefit activity. “Public benefit activity” is considered an activity that directly or indirectly serves the completion of a public task (at governmental or local government level) ( see Act CLXXV/2011 Section 2(20)).

Several legal acts regulate the associations in Hungary. Among the important ones are: Fundamental Law of Hungary; Act V/2013 on the Civil Code; Act CLXXV/2011 on the Freedom of Association, Public Benefit Status, and the Operation and Support of CSOs; Government Decree 350/2011 (XII.30) on of CSO Financial Management, Fundraising, and Public Benefit Status.

Associations with a PBO status can qualify for VAT exemption (Act CXXVII/2007 Section VI.) The income from public benefit activities is also exempt from corporate income tax. Hungary taxes income generated from any "entrepreneurial activities" of the associations. According to Act LXXXI/1996 Section 1(1)) among them are "economic activities aimed at or resulting in the acquisition of income or property".

Associations are governed by the general meeting, the representative, the administrative management and the supervisory board. There is no fee for the establishment of an association. Associations cannot be established with the aim to perform economic activities. However, they are allowed to conduct economic activities that are directly related to the realization of their purpose as defined in their statute (Act V/2013 Section 3:63(2)-(3)).

In 2020, the total number of associations in Hungary was 31 596. Their number is decreasing slowly compared to 2019 (31 774) and 2018 (31765)2 . In 2020, associations had 3,512,916 members. 3. The total amount of revenues of the associations in 2020 was 1 462 645,63 EUR. The economic weight of the revenues of the associations is 3.7% of the GDP in 20204. In 2020, non-profit organizations had 127 681 full-time employees and 311 357 volunteers.5

Contents

REGULATORY FRAMEWORK

1. Definition, types of associations and characteristics

2. Sources of law founding associations

3. Formation requirements and constitutive acts and elements

4. Registration requirements

5. Administration costs

6. Liability

7. Legal personality

8. Definitions of public interest

9. Membership regimes

10. Economic activities permitted

11. Governance, operating rules and bodies

12. State supervision

13. Reporting and transparency

14. Resources and assets management

15. Liquidation

16. Fundamental decisions

17. Taxation regimes

LANDSCAPE OF ASSOCIATIONS

1.Number of Associations

2.Number of members

3. Activities covered

4.Revenues

5.Economic weight

6.Share between voluntary and paid work

7.Cross-border activities

References


REGULATORY FRAMEWORK

1. Definition, types of associations and characteristics

Under Section 3:63 (1) of the Civil Code, associations are defined as follows: an association is a legal person established by at least ten natural persons, legal persons, and/or organizations without legal personality for the continuous realization of the common, permanent aim of the members as stated in the statute of the association. The term “civil organization” is used for associations, foundations, public benefit organizations, as well as special forms of organizations created on the basis of the rights of association.6

There are no specific types of associations. Association is the registered legal form, which can be established for various purposes, such as leisure, sport, culture, political purpose (political parties), representation of rights and interests (alliances, trade unions) etc.

One of the main characteristics of associations is that they cannot be founded to carry out economic activities. However, not all economic activities are prohibited. Associations are allowed to pursue economic activities but only if the economic activity is directly linked to the objectives of the association as defined in its statute. An important requirement is, however, that the profit gained from such activities cannot be distributed among the members since they must contribute to the main objectives of the association.

Another characteristic of associations is that they can qualify for "Public Benefit Organizations" (PBOs) status. This particular legal status is regulated by Chapter VII of Act CLXXV/20117. Specific requirements exist for the obtention of this status. The foremost of them is that the organization must undertake a public benefit activity. “Public benefit activity” is considered an activity that directly or indirectly serves the completion of a public task (at governmental or local government level) ( see Act CLXXV/2011 Section 2(20)).

2. Sources of law founding associations

Several legal acts are relevant to the work of the associations in Hungary.

According to its article VIII:

(1) Everyone shall have the right to peaceful assembly.

(2) Everyone shall have the right to establish and join organisations.6

(3) Political parties may be formed and may operate freely on the basis of the right of association. Political parties shall participate in the formation and expression of the will of the people. Political parties may not exercise public power directly.

(4) The detailed rules for the operation and management of political parties shall be laid down in a cardinal Act.

(5) Trade unions and other interest representation.

3. Formation requirements and constitutive acts and elements

According to the act Act V/2013, at least ten persons are required to form an association. Legal persons, organizations without legal personality and/or civil groups can be members of an association. 9

Associations cannot be established with the aim to perform economic activity. However, they are allowed to conduct economic activity that is directly related to the realization of their purpose as defined in the statute (Act V/2013 Section 3:63(2)-(3)).

In addition, according to Act CLXXV/2011 Section 3(3)-(5) and the Fundamental Law of Hungary Section C (2)), an association cannot be formed for criminal, military, or unlawful purposes, to violate the rights and freedoms of others, or to undertake a public task which is reserved for state bodies.

As already mentioned, there are no specific types of associations. Association is the registered legal form, which can be established for various purposes, such as leisure, sport, culture, political purpose (political parties), representation of rights and interests (alliances, trade unions) etc.

The statute is the constitutive act of associations. It guarantees the operation of the entity on the basis of the principle of self-government in accordance with the objectives defined. In addition, it guarantees the enforcement of the rights and obligations of the members.

The statute has to include the following elements:

While the Civil Code prescribes certain minimum requirements with regards to the statutes, the members have the right to amend and expand the content of the statutes. In addition, the members of the association are allowed to determine the membership fee, the organizational structure, the method of electing the officials, etc10.

4. Registration requirements

A request for registration must be submitted to the Court of Registration having competence on the territory where the association has its seat.

According to the specific provisions of Act CLXXXI/2011 on the Registration of Non-Governmental Organizations and their Rules of Procedure, the following documents must be attached to the application for a registration: the designation of the relevant court; the name, place of residence (registered office) of the applicant; the name of the organization, the seat of the organization,  the name and address of the organization’s representative, the scope of the right of representation and the manner of exercising it, the purpose of the organization, the classification of the organization according to its purpose, the date of the memorandum and Statute of association, type of organization11.

Registering the association is obligatory as the legal personality of the association is acquired upon registration.

5. Administration costs

There is no fee for registration of associations. (see: Act XCIII/1990).

6. Liability

The general regime of liability of legal persons as laid down under the rules of legal persons in the Civil Code applies to associations, too. Therefore, legal persons are liable for their obligations to the extent of their assets; the members and founders are not liable for the debts of the legal person as laid down under Section 3:2 of the Civil Code.

If a member or a founder of a legal person has abused his limited liability and thus certain creditor claims remained outstanding upon the termination without succession of the legal person, the member or the founder concerned should have unlimited liability for those debts12.

In addition, the Civil Code stipulates the following specific requirements:

“Section 3:85 [Distribution of the remaining assets] (1)5 If the association is dissolved, assets remaining after settlement of all debts shall be transferred to a public-benefit organization established for a purpose that is identical or similar to the association’s objective laid down in the statutes. The court of registry shall assign the assets to an organization designated by law, if the statutes do not provide for the assets of the dissolved association, or if the public-benefit organization designated in the statutes refuses to accept it, or cannot acquire it. (2) The court of registry shall provide for the distribution of the remaining assets of the association in its decision on dissolution.”

Section 3:86 [Liability of executive officers in the event of dissolution without succession]

(1) If the association has been dissolved, claims for damages may be brought against the executive officers within a period of one year following the time of deregistration of the association by the court of registry. The reason for this could be losses resulting from their activities performed in that capacity by the members with membership at the time of de-registration, or any person to whom the association’s assets remaining at the time of dissolution had to be transferred or should have been transferred had there been any assets remaining.

(2)6 If the association is dissolved, creditors may request a compensation for the damages against the association’s executive officers on the grounds of non-contractual liability, should the executive officer affected fail to take the creditors’ interests into account in the event of an imminent threat to the association’s solvency.

Section 3:87 [Arbitration] In accordance with the statutes of the association or under an agreement between the parties concerned, any dispute arising out of or in connection with membership or from the relations of the bodies and members of the association shall be settled by way of permanent or ad hoc arbitration.”13

The legal personality of the associations is defined by the Civil Code:

Legal personality is acquired upon registration. As already mentioned, a request for registration must be submitted to the Court of Registration having competence on the territory where the association has its seat.

In terms of legal personality, it is also important to point out that an association can not be transformed to another type of legal person. It can merge only with another association or can be divided into associations only as stated under Section 3:84 [Termination with succession]. As regards dissolution, the following rules apply: Section 3:84 [Reasons for dissolution without succession] Apart from ordinary cases of dissolution of a legal person without succession, an association shall be dissolved without succession if: a) the association has fulfilled its purpose, or if achieving the association’s objective is no longer possible, and a new objective has not been determined; or b) the number of members of the association remains below ten for six consecutive months.”14

8. Definitions of public interest

In Hungary, there is no exact definition of public interest. Nevertheless, it serves as a benchmark for legal interpretation (as laid down in the Constitution of Hungary) and as a basis for conferring a specific legal status for organisations pursuing activities of public interest. Therefore, organizations, which carry out such activities are labelled as public benefit organizations (PBOs). This status has many advantages. One of the most notable ones is that individuals are entitled to donate 1 % of their income tax to PBOs.

Associations qualify for public benefit status if they fulfil certain criteria. The most important one is that the organization must pursue a public benefit activity. This activity must contribute directly or indirectly to the realisation of a public task (at a state or local government level). Moreover, the organization must have adequate resources as well as social support.

In order to qualify for "Public Benefit Organizations," (PBOs), the organization must meet at least one condition as listed in the two following groups of criteria (see Act CLXXV/2011 Section 32(4)-(5)):

One of the following conditions must be met (based on the previous two closed fiscal years):

Requirement for average annual income: must exceed HUF 1,000,000 (EUR 2500).

Requirement for after-tax results: the after-tax result of the last two years must not be negative;

or

Requirement for Personnel expenditures: except for the compensation of executive officers, personal expenditures can only account for 1/4 of the total expenditures.

The value of volunteer work can also be considered as personnel expenditure as of September 1, 2017 (as prescribe by Act LXXXVIII/2005 on Volunteer Activities of Public Interest)

Requirement for income tax: The 1 % of income tax that individuals can designate to certain NPOs and other institutions must be 2 % of the total income; or

Requirement for costs and expenditures arising from the public benefit activity : The costs and expenditures arising from the public benefit activity must reach 50 % of the total costs and expenditures on average over the two years; or

Requirement for volunteers` participation: minimum 10 volunteers should support the public benefit activity of the organization (as stated in the Act on Volunteer Activities of Public Interest (Act LXXXVIII/2005)).

9. Membership regimes

Members of an association can be natural persons, legal persons, and/or organizations without legal personality. To ensure transparency, a list of the members of the association must be kept. However, there is no uniform legally required standard on the format of this list. The management of the association can adopt an individual approach. The data collected can be stored only with the consent of the members. 17.

10. Economic activities permitted

The Civil Code provides that associations cannot be founded for the purpose to carry out economic activities. However, not all economic activities are prohibited. Associations in Hungary are allowed to pursue economic activities but only if it is directly linked to those objectives of the association that are defined in its statute. Therefore, all those activities are allowed, which contribute to realizing the main objectives of the association, such as those activities, which finance its operation. There is an important requierment that the profit gained from such activities cannot be distributed among the members since they must contribute to the main objectives of the association.

A definition of economic activity is provided in Act CLXXV/2011 under Section 2. 1118:

“11.  *  economic and business activity: an economic activity carried out on a commercial basis for the purpose of obtaining or generating income and assets, except from the following:

a ) acceptance of donations (gift),

(b) activities carried out for the purpose specified in the memorandum and Statute of association (including activities in the public interest),

c) placement of funds in deposits, securities, company shares,

(d) the acquisition, transfer and assignment of immovable property”

11. Governance, operating rules and bodies

The structure and internal organizational order of associations in Hungary are regulated by the Civil Code19. 

The internal organization must be in line with the goals, the number of members and the targets of the association. 

The organizational model of associations is the following:

Supervisory Board: Not all associations have a Supervisory Board. It is required only in specific circumstances. The Civil Code provides that establishing a Supervisory Board is compulsory only if half of the members are not natural persons or if the association has more than 100 members. In all other cases, it is left to the member`s discretion whether to set up one. The Supervisory Board is in charge of supervising compliance with the law, especially whether the functioning of the association is in line with the objectives defined in its statute. It also supervises whether the association`s decisions are duly carried out by its addresses. .

12. State supervision

The following bodies are in charge of supervising and controlling the associations: 2021

  1. Court of Registration: The court where the association was registered is in charge of the association`s general supervision.

  2. National Tax and Customs Administration – it is in charge of tax audits. The tax authority is competent depending of the seat of the organization;

  3. State Audit Office - this entity is entrusted to supervise the control over the use of budget support;

  4. Prosecution - legality check - the prosecutor may initiate legality review proceedings in court. Due to its special powers over public benefit organizations, he may request the court to delete the organization from the public benefit register.  22

13. Reporting and transparency

The accounting and reporting rules for associations are laid down in Government Decree No. 479/2016. (XII. 28). According to the Decree, associations must prepare their annual reports depending on the activity carried out by the organization, the amount of revenue from its main purpose, and the method of accounting.23 24 25 26 27 The report must be prepared by the Management and verified by the Decision-Making Body of the association. In order to ensure transparency, the report may be reviewed by an auditor, who is authorized to inspect the association`s files, books, contracts, financial statements and documents, and may also request further clarification from the Management of the association, its employees or from the members of the Supervisory Board.

14. Resources and assets management

The Government Decree on NGO management, fundraising and public benefit 350/2011 (XII. 30.) provides for the resources and asset management of associations. The annual budget plan of the non-governmental organization is to be approved in accordance with Decree 224/2000 on the specifics of the reporting and bookkeeping obligations of certain other organizations. In order to ensure the sustainability of services of a non-governmental organization, the entity must act in accordance with the principle of sound management, on the basis of which its annual budget shall be based on its expenditures and revenues (donations, budget support, other revenues).

Resources of associations may stem from the following : membership fee, financial support, donations, heritage, funds and the assets made available by the founder, the amount of a personal income tax allocated in accordance with the taxpayer's order, the compensation for the activity performed under a public service contract. . Part of the activity according to the main purpose is a public benefit activity. The revenue of a non-governmental organization is, in particular, the interest received from credit institution. A loan or repayable grant may be granted to a non-governmental organization only if the loan or the repayable grant does not exceed the available assets of the non-governmental organization. When calculating the value of voluntary work per hour in accordance with the Act on Voluntary Activity in the Public Interest, the mandatory minimum monthly wage shall be taken into account.”28 

15. Liquidation

In accordance with Act V/2013 Section 3:85(1) the assets remaining after the dissolution of an association are to be designated to a public benefit organization that was established for the realization of the same or similar purpose.

Nevertheless, the assets are given to the National Cooperation Fund when the statute contains no provisions regarding assets management. The assets will be utilized to support the non - profit organizations in Hungary.

Lastly it needs to be noted that, any remaining assets should be reported to the Council of National Cooperation Fund. Subsequently, an open tender procedure will be organized; any artistic works or collections are donated to the state; the property management of a public art collection is selected through a tender procedure. A specific legal Act CLXXV/2011 under Section 10/A(1)-(4)) provides for the use of lands falling under the scope of the Law on the National Land Fund.

16. Fundamental decisions

The fundamental decisions of the associations (like deciding on the amendments of the statute) are made by the Decision-Making Body, which can either take the form of a General Assembly or an Assembly of Delegates.

The Decision-Making Body has to be convened when it is deemed necessary, but at least once a year. 

29.

17. Taxation regimes

In Hungary, several tax exemptions exist for associations. Among them are namely:

VALUE ADDED TAX EXEMPTION

In Hungary, many activities of public interest are exempt from VAT. In order for an activity to be exempted from VAT, it has to be carried out by an entity designated for public service. However, associations can also qualify for VAT-exemption if they have a public benefit organization status (PBO status). See: Act CXXVII/2007 Section VI.

CORPORATE INCOME TAX EXEMPTION

The revenues from public benefit or other mission-related activities is exempt from corporate income tax for those associations that operate in Hungary. In addition to that, there is a threshold on income generated from entrepreneurial activity.

Hungary taxes income generated from any “entrepreneurial activities” of the associations (according to Act LXXXI/1996 Section 1(1)). Among them are "economic activities aimed at or resulting in the acquisition of income or property".

Donations, mission-related activities, deposits, security, or company share, and the purchase of real estate, and transfer of its use, are not considered "entrepreneurial activities" and any associated income is exempt from corporate income tax. See Act LXXXI/1996 Section 9(1a) and Act CLXXV/2011 Section 2 point 11.

The tax-exempt threshold on income generated from entrepreneurial activity of associations without PBO status, with the exception of advocacy organizations is 26 719 EUR, as prescribed in Act LXXXI/1996 under Section 20(1a)). If the association has obtained PBO status, the tax-exempt threshold is 10 % of the total income of the organization30.

OTHER TAX DEDUCTIONS, CREDITS, AND REBATES

Donations made to Hungarian associations with a PBO status are tax-deductible for companies under certain conditions. Tax reductions for donations to the National Cultural Fund, the National Relief Fund, the Damage Mitigation Fund, and higher education institutions are also subject to tax reductions (Act LXXXI/1996 Section 7(1)(z), 7(7)). Individuals, however, are not entitled to any tax deductions if they donate to associations.

The following tax reductions are available:

Individuals are entitled to donate 1 % of their income tax to one of those associations that carry out activities of public benefit.

TAX ON IMMIGRATION-RELATED ACTIVITIES

In Hungary, a special tax is levied to immigration-related activities that affect associations and their donors (Act XLI/2018).

The law stipulates that all individuals are required to pay special tax if they contribute financially to any activities that support immigration in Hungary or when such a contribution is made to an organization with a seat in Hungary. Activities that may be taxed include any campaigns picturing immigrants in a positive way. These include for instance: media campaigns, coalition- and network-building and , making propaganda that directly or indirectly depicts immigration in a positive light (Act XLI/2018 Section 34. 253. §. (2)).

LANDSCAPE OF ASSOCIATIONS

1.Number of Associations

In 2020, the total number of associations in Hungary was 31 596. It is decreasing slowly compared to 2019 (31 774) and 2018 (31765).31

2.Number of members

In 2020, the members of the associations in Hungary were 3,512,916.32

3. Activities covered

Among the associations operating in 2020, the biggest share are active in the following areas: leisure (22%), sports (22%), cultural (17%)33.

4.Revenues

In 2020, the total amount of revenues of the associations was 1 462 645 EUR 34.

5.Economic weight

The economic weight of associations has been slowing down since 2017, reaching 3.7% in 2020.35

6.Share between voluntary and paid work

In 2020, non-profit organizations had 127 681 full-time employees and 311 357 volunteers..36

7.Cross-border activities

No data available

References

  1. According to the latest data of the Central Statistical Office from 2020, 21 percent of NPOs have public benefit status in Hungary (https://www.ksh.hu/docs/hun/xftp/stattukor/nonprofit/2020/index.html)↩︎

  2. https://www.ksh.hu/stadat_files/gsz/hu/gsz0014.html↩︎

  3. https://www.ksh.hu/stadat_files/gsz/hu/gsz0069.html↩︎

  4. https://www.ksh.hu/docs/hun/xftp/stattukor/nonprofit/2020/index.html↩︎

  5. https://www.ksh.hu/stadat_files/gsz/hu/gsz0069.html↩︎

  6. It is important to point out that not all associations are civil organisations in Hungary. Trade unions and political parties, for instance, are not considered to be civil organizations even if they are associations. See: 2. § (6) (b) of the Act CLXXV/2011 on the Freedom of Association, Public Benefit Status, and the Operation and Support of CSOs.↩︎

  7. According to the latest data of the Central Statistical Office from 2020, 21 percent of NPOs have public benefit status in Hungary (https://www.ksh.hu/docs/hun/xftp/stattukor/nonprofit/2020/index.html)↩︎

  8. Available at: https://hunconcourt.hu/rules/fundamental-law↩︎

  10. See more at:https://www.nonprofit.hu/tudastar/az-egyesulet-alapszabalya--mit-kell-rola-tudni↩︎

  11. See p. 7 § 20-22.https://net.jogtar.hu/jogszabaly?docid=A1100181.TV&celpara=↩︎

  12. https://uj.njt.hu/translation/J2013T0005P_20210701_FIN.PDF↩︎

  13. https://www.legislationline.org/download/id/6222/file/Hungary_Act%20V%20of%202013%20on%20the%20Civil%20Code_Part%20II%20Associations%20and%20Part%20VI%20Foundations.pdf↩︎

  14. https://www.legislationline.org/download/id/6222/file/Hungary_Act%20V%20of%202013%20on%20the%20Civil%20Code_Part%20II%20Associations%20and%20Part%20VI%20Foundations.pdf↩︎

  16. Based on the previous two closed fiscal years↩︎

  17. https://www.nonprofit.hu/tudastar/tagok-nyilvantartasa-mit-kell-rola-tudni↩︎

  18. https://net.jogtar.hu/jogszabaly?docid=a1100175.tv↩︎

  19. https://net.jogtar.hu/jogszabaly?docid=a1300005.tv↩︎

  20. https://www.nonprofit.hu/tudastar/milyen-szervek-ellenorizhetik-civilszervezeteket↩︎

  21. https://civil.info.hu/kezdolap/civiltudastar/kozerdeku_informaciok/kozhasznusag/index.html?TARANTULA_SESSID=↩︎

  22. Please keep in mind that these bodies (National Tax and Customs Administration, State Audit Office, Prosecution) are not the general supervisory authorities for associations but the general supervisory authorities for civil organizations. However, as already mentioned, not all associations qualify as civil organisations. Political parties, trade unions are notable exemptions. Therefore, the National Tax and Customs Administration, the State Audit Office, and the Prosecution are not authorized to supervise those associations, which do not qualify as civil organizations, such as trade unions or political parties.↩︎

  24. https://www.nonprofit.hu/tudastar/milyen-szamviteli-beszamolot-kell-kesziteniuk-civil-szervezeteknek↩︎

  25. https://www.nonprofit.hu/tudastar/kozhasznusagi-melleklet--mi-az↩︎

  26. https://birosag.hu/beszamoloval-kapcsolatos-tajekoztato/hasznos-tudnivalok2↩︎

  27. https://net.jogtar.hu/jogszabaly?docid=a1100350.kor↩︎

  28. https://net.jogtar.hu/jogszabaly?docid=a1100350.kor↩︎

  29. https://www.nonprofit.hu/tudastar/mi-az-egyesulet-donteshozo-szerve↩︎

  30. see Act LXXXI/1996 Section 9(7)↩︎

  31. https://www.ksh.hu/stadat_files/gsz/hu/gsz0014.html↩︎

  32. https://www.ksh.hu/stadat_files/gsz/hu/gsz0069.html↩︎

  33. https://www.ksh.hu/docs/hun/xftp/stattukor/nonprofit/2020/index.html↩︎

  34. https://www.ksh.hu/stadat_files/gsz/hu/gsz0014.html↩︎

  35. https://www.ksh.hu/docs/hun/xftp/stattukor/nonprofit/2020/index.html↩︎

  36. https://www.ksh.hu/stadat_files/gsz/hu/gsz0069.html↩︎