Registered office providers not only ensure headquarters for their clients, but also company secretarial services such as storage of corporation records and performance of other administrative tasks. Therefore, many companies, for reasons of cost-effectiveness and efficiency, or because the nature of their business, choose to seek the help of a specialized establishment instead of maintaining a permanent office and staff. Topicality of this issue is thus due to the popularity of the area and the strict rules introduced in recent years, which have the undisguised aim of preventing possible tax evasion and abuse.
Legal compliance audit of establishments engaged in the provision of registered office services and those that use them was amongst the key areas of National Tax and Customs Administration of Hungary (NAV) in 2020. Although such companies have not received special focus in 2021, with the tightening of rules for the service area, not only NAV, but also Hungarian Financial Intelligence Unit are making demands on those carrying out the activity. Moreover, in many cases, the Unit also imposes fines on provider companies if it finds a deficiency.
Non-transparent and unlawful operations are no longer worthwhile, as those who do not comply may face serious consequences. Below is an overview of the evolution of relevant rules and requirements that office providers shall meet to operate legally. At the end of our article, we review the audit findings and fining guidelines of the Hungarian Financial Intelligence Unit.
I. REGULATION ON PROVISION OF REGISTERED OFFICE SERVICES
Following abuses, detailed regulation of the institution took place in 2017. Governing framework is set out in Regulation of Hungarian Ministry of Justice No. 7/2017 on provision of registered office services (hereinafter: “Regulation”), which lays down the necessary conditions for commencement of the activity as follows:
1.Requirements relation to the provider
Generally, a registered office may be a property which is exclusively owned by the service provider or for which the right of use has been registered in the land register. If above is not met, the activity may be carried out only with the written consent of the owner of the property and if one of the following conditions is met:
- principal and agent are related, significant holdings or other participating undertakings,
- the registered office provider is listed as a delivery agent of the company, or
- in addition to the registered office service, there is also a permanent accounting relationship between the parties.
2.Conclusion of contact
According to the Regulation, the companies involved must conclude a service agreement with each other to provide a registered office. The contract may only be concluded for an indefinite period (unless the principal’s operation is for a definite period) and the parties may not exercise the right of contractual termination within one year after the conclusion of the pact.
The mandatory content of the agreement is as follows:
- the name of the documents that the business intends to keep at the registered office,
- undertaking by the principal that the company’s sing is placed in a conspicuous place on the property, its documents and chattels are preserved separately from other documents and chattels and the register about them is always kept up to date.
3.Obligatios of principal
Principal business is obliged to notify the tax authority about the use of registered office service or of any change in the relating contract. The notification must be made within 15 days of the establishment or change.
4.Additional responsibilities of agents
Under the Regulation, the provider is also subject to additional commitments; these include the receipt of postal items addressed to the principal and the notification of the company. Notification duty also applies to official coercive measures affecting the principal.
II. NEW OBLIGATIONS UNDER PMT.
Service providers have been obliged to comply with the above rules since 2017, however, from 10 January 2020 commercial establishments will be also required to comply with Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing (hereinafter: “AML Act”). Pursuant to the AML Act, the intention to carry out the activity must also be reported to the Hungarian Financial Intelligence Unit, enclosing the agent’s internal regulatory documents.
In addition, companies must carry out client identification and due diligence procedure like banks and accountants in relation to their customers, i.e. the principal corporations. In doing so, they must, among others, identify the beneficial owner of their customers. Beneficial owner is, e.g. the ultimate natural person who owns or controls at least 25% of the shares or voting rights in a legal person or an unincorporated organization directly or indirectly (the exact definition can be found in AML Act).
III. SUPERVISORY ACTIVITIES OF NAV, AUDIT EXPERIENCES
Monitoring the compliance of service providers with the regulations of the AML Act is also ensured by the Hungarian Financial Intelligence Unit, just like at accountants and tax experts. Recently, there have been several audits throughout the country, with typical audit findings as follows:
- providers have not complied with their obligation to register under the AML Act;
- providers have not announce the so-called designated person (who fulfills the obligation to notify in accordance with the internal regulations of the AML Act) or the notification was incomplete,
- provider did not cooperate with the audit office,
- provider’s internal risk assessment or client identification and due diligence practice was incorrect, or
- provider has violated provisions of the Act LII of 2017 on the Implementation of Financial and Asset-related Restrictive Measures Ordered by the European Union and the UN Security Council
In most cases, the Hungarian Financial Intelligence Unit only warned businesses in connection with the above deficiencies, however, there were several cases where it imposed a fine of a few hundred thousand forints.
Therefore, when a business is looking for a reliable service provider, it is worth negotiating the above conditions, and even reviewing the decisions of the Intelligence Unit, as a company providing an already high-quality service may be more likely to be entrusted during a possible tax audit.
Special thanks to TruTax Kft. for the elaboration of the tax part of the article!
Please read further: What can a registered office provider do if a company vanishes?