In recent years, we have worked with an increasing number of businesses where the company and its branch office operate in different countries – whether it’s a foreign company with a branch in Hungary or a Hungarian company with a branch abroad. The same question comes up in both scenarios: what must be reported where, and how much influence should the “head office” have over the figures?

What We See in Practice

Many foreign parent companies tend to treat their Hungarian branch merely as an administrative outpost, with revenues and costs dictated “from above.” Likewise, we often see Hungarian companies try to apply simplified accounting approaches to their foreign branches. While this may seem convenient, it can create serious tax and legal risks if the financials do not reflect the branch’s actual economic activity.

The Legal Framework

Whether it’s a foreign branch in Hungary or a Hungarian branch abroad, the rules are clear:

• A branch is not a separate legal entity, but it must keep its own accounting records and prepare local financial statements based on the activities carried out in that country.
• For tax purposes, the permanent establishment principle applies: the branch’s taxable base must be determined as if it were an independent enterprise.
• Transactions between the head office and the branch must be accounted for at arm’s length prices, regardless of whether they are within the EU or involve a third country (including jurisdictions with limited transparency).

How Is a Branch’s Profit Determined?

The profit attributable to a branch must always be based on its real activity and use of resources:

• Who performs the services or sales, and who manages client relationships?
• What risks does the branch bear (market, credit, warranty)?
• What assets, personnel, and know-how does it employ locally?

These factors drive how much profit should be allocated to the branch – and therefore how much tax it should pay. Simply assigning figures from the head office without proper justification is not compliant and may be challenged by tax authorities through transfer pricing adjustments.

Why the Right Structure Matters

A well-designed internal allocation system not only ensures regulatory compliance but also provides transparent operations across the group. Time and again, we see branches that were initially regarded as “just administrative” quickly evolve into key business drivers – and tax authorities pay close attention to that transformation.