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The Ecovis network lawyers assist clients in Hungary and many other countries. For companies looking to expand in China, German lawyer Richard Hoffmann, founder of Ecovis Heidelberg, can provide support. 

With years of German and international experience, Richard Hoffmann has successfully assisted hundreds of companies in navigating the complexities of legal, tax and compliance issues in China, with his special knowledge of the Chinese business environment. The following is an English translation of Richard Hoffmann's article on the fight against corruption in China, published in English and translated with permission.

"In recent years, there has been an increasing number of cases of businessmen and celebrities getting into trouble for financial crimes or corruption. Examples are often in the news and often involve tycoons or people in the entertainment industry. 

As China tightens regulations and penalties increase, foreign and multinational companies based in China need to be careful in the way they do business. Internal corruption and inadequate safeguards can make companies liable for crimes committed by their employees. Therefore, companies need to keep a number of things in mind and be aware of the different types of behaviour that lead to commercial corruption.

This section provides an overview of the basic legal framework in China and the different types of commercial corruption, and then provides useful insights for companies that are dealing with or trying to prevent corruption.

Under the chairman of the anti-corruption campaign, Xi Jinping

In 2012, when Xi Jin-ping first took office, he introduced and implemented the largest organised anti-corruption campaign China has ever seen, with the aim of cracking down on "tigers and flies" (a term used to refer to high-ranking officials and local civil servants). Since then, more than 4.5 million people have been investigated and more than 200,000 officials have been suspended pending trial, according to the Central Commission for Discipline Inspection (CCDI). 

The public sector was initially the most affected by the start of the campaign, but slowly the crackdown on corruption in the private sector and foreign companies has been stepped up. In 2014, a major British pharmaceutical company was fined half a billion dollars for bribing doctors and hospitals to promote its products. This policy and the crackdown on corruption will continue, as President Xi Jinping said after the 20th Party Congress report that he will continue to pursue and root out corruption in China.

What are the different types of trade corruption in China?

Passive bribery, extortion and embezzlement by a company employee

The following conduct is punishable:

-taking unlawful possession of company money,

-Unlawful acceptance of money or property in exchange for favours.

Penalties for accepting bribes range from three years' imprisonment to a fixed term for "relatively large" amounts. In serious circumstances, up to 10 years' imprisonment can be imposed, while "particularly large" offences can carry a life sentence. All penalties include a fine.

Bribery of a company employee

Article 164 of the Chinese Criminal Code states that it is illegal to give money or property to a company employee and is punishable by up to three years' imprisonment, and in some cases up to 10 years' imprisonment, depending on the offence.

Bribery by a company

In the case of a company bribing an employee, Article 164 of the Chinese Criminal Code stipulates that the company and the person(s) directly committing the offence may be fined and imprisoned for a fixed term. Even if the activity does not result in a criminal offence, the company may still be held liable and fined between 10,000 and 200,000 yuan.

How can I prevent corruption in my company?

Of course, there are steps and procedures that need to be put in place in a Chinese company to reduce the risk of corruption among employees. Examples include:

-A clear policy on reimbursement 

Employees should know what types of expenses are reimbursable and how the process works. Reimbursement strategies can help identify suspicious behaviour such as corruption or fraud. Details should be included in the staff handbook so that all employees have access to it.

-Corporate seal management

As they have a very strong legal basis in China, company seals can easily be misused by employees or third parties by signing contracts, permits, etc. without the company's knowledge. In addition, it is advisable to distribute the responsibility for the management of company seals (not giving too much power to one person). In foreign companies, the legal representative usually manages the seal, which makes it difficult for the company to maintain its independence as to how the seal is used.

What can I do as a company if the worst happens?

What to do depends on the seriousness of the infringement. However, there are several things and steps that a Chinese company should be aware of. An independent investigation should be carried out by an internal audit/compliance team or by a trusted external third party. Depending on the outcome, several types of action are possible:

-Persuading the employee to resign,

-Termination by the employer for the reasons involved (e.g. breach of contract, code of conduct, etc.),

-terminate the contracts of the suppliers concerned,

-Implement crisis management once the situation has been made public.

The consequences of non-compliance

In preventing corruption, it is essential for Chinese companies to build up their own defence mechanisms and learn how to deal with these circumstances when any form of corruption occurs. Bribery committed by an employee is considered as the company's own act and therefore subject to civil and criminal liability. An exception is when the employee's conduct does not promote competitive advantage or business opportunities.

If government agencies are involved in the investigation, Chinese companies must cooperate and provide the requested information. Concealment or obstruction can lead to more severe penalties (such as higher fines and penalties for those involved).

 On the other hand, active cooperation can reduce the severity of the punishment or even eliminate it altogether under Chinese criminal code sections. Chinese companies are advised to focus on communication and support among all stakeholders to fully cooperate with the authorities during the investigation process.

Our useful advice

All in all, no one wants to find evidence of corruption in their own Chinese company. If it does happen, you need to know what the next steps are. Putting in place a detailed compliance system from the start is a good foundation and a significant step towards preventing corruption. Understanding and implementing the legal framework of Chinese law within the company and communicating this to employees is essential. It makes sense to employ an expert to oversee and ensure the company's compliance, with significant knowledge of the Chinese legal system, language and culture."

If you are looking to expand your company in China, contact Dr György Zalavári, lawyer at Ecovis Hungary Legal's international contact.

Dr. György Zalavári LL.M.
Ecovis Zalavári Legal Hungary
Lawyer | Mediator | Corporate Law and Data Protection Specialist
gyorgy.zalavari@ecovis.hu

The answer is simple: yes, you can. Although the Hungarian Civil Code has allowed this possibility for many years, in practice we find that this solution is more often used in the structures of foreign companies.

According to Hungarian law, it is possible for a company to have a legal entity as its managing director, but in this case the legal entity is also obliged to appoint a natural person to act as managing director on its behalf.   

In relation to this natural person, the legal provisions and restrictions that would otherwise apply to the appointment of a natural person as a managing director should also be examined.

In the case of Hungarian companies with a foreign parent company, it also happens that the managing director of the foreign company is another company, and the managing director of this other company is also another company.In such a case, not only the company certificate of the foreign parent company but also the company certificate of the company of the managing director of the foreign parent company must be submitted in the Hungarian company procedure when the Hungarian company is established. 

This is necessary because the application for company registration must be accompanied by the document from which the right to represent the foreign member can be established, and this also applies to the other company representing the foreign company.

 Although this document is not listed as a mandatory attachment in the Act on Company Procedure, it is a requirement that can be deduced from the general rules. 

Based on the practical knowledge of the lawyer Dr. György Zalavári, the author of this article, it is important to note that the prosecutor's office investigating the proceedings of the commercial court will pay attention to this element and, in case of its absence, will bring an action against the registration order even if the commercial judge has decided on the registration of the company without it.

However, it can create an unpleasant situation in the life of the company if bankruptcy or liquidation proceedings are initiated against the other company representing it, because it is then recommended to take immediate action to change the company's representation. Otherwise, it may even happen that the bankruptcy trustee or liquidator of the other company becomes the natural person entitled to act on behalf of your company. 

Therefore, if another company is the managing director of our company, it is important to keep a close eye on its legal status and operation and, if necessary, to take swift and timely action to change the representation.

Dr. György Zalavári LL.M.
Ecovis Zalavári Legal Hungary
Lawyer | Mediator | Corporate Law and Data Protection Specialist
gyorgy.zalavari@ecovis.hu

The acceleration of company registration procedures has reduced the importance of the pre-incorporation phase, but it is a necessary stage in the life of any company. 

The pre-company is created by the signature of the founders of the memorandum and articles of association and countersigned by a lawyer, and is dissolved by registration in the Trade Register or by the final refusal of an application for registration or the withdrawal of the application for registration.

Although the pre-company is formed as described above, it may not commence commercial activities until the application for registration has been filed with the Commercial Court. 

The tax authority will then establish the tax number for the pre-company, stating that this is not otherwise a necessary condition for carrying out the economic activity, but that care must be taken in the economic activity carried out at this stage in order to ensure that the tax deduction is exercised in a lawful manner. [KGD.2008. 176] If, however, the tax authority refuses to issue a tax number, the founders are jointly and severally liable for the tax obligations of the pre-company. [Art. 22]

The pre-corporate nature of the company must be indicated in the company's documents and declarations; failing this, a declaration made by the pre-corporate company is, if the company is not registered, a declaration made jointly by the founders.

A pre-company is not a separate legal form: it is governed by the rules applicable to the company which it is intended to set up, except that there can be no change in the members except by operation of law, i.e. the shares cannot be transferred; it cannot form or become a member of a company; it cannot be the subject of proceedings to exclude a member; and it cannot be the subject of a transformation, merger, division or dissolution without succession. In the pre-company stage, the articles of association may not be amended, except upon request of the court of registration and the body competent to grant official authorisation, but the Civil Code does not preclude the members of the pre-company from amending the articles of association, with the amendment taking effect on the day following the registration of the company. [BDT2006. 1453.]

The pre-company may therefore conclude contracts after the application for registration, which are considered legal transactions of the company after registration. If, however, the registration of the company is finally refused or the application for registration is withdrawn, the pre-company must cease to exist without delay and the obligations entered into must be met out of the assets made available to the company being formed. 

The founders shall be jointly and severally liable to third parties for any claims that cannot be settled. If, in the company being formed, the liability of the member for the obligations of the company has been limited and there remain, despite the member's liability, unpaid debts, the directors of the company being formed shall be jointly and severally liable to third parties for such debts.

Dr. György Zalavári LL.M.
Ecovis Zalavári Legal Hungary
Lawyer | Mediator | Corporate Law and Data Protection Specialist
gyorgy.zalavari@ecovis.hu

The provisions of Act XXXIX of 2023 amending Act CLXXVI of 2013 on the transformation, merger and division of certain legal entities, and amending Act XXXIX of 2023 on the amendments to the law in order to increase the competitiveness of the economy have created a new legal possibility in company law in relation to the transformation of companies.

 The provisions of the Civil Code (Civil Code), the Companies Act (Companies Act) and the Accounting Act (Accounting Act) have also been amended accordingly in connection with the rules of this new legal institution of transformation.

 A spin-off is effected by the survival of the original legal entity and the creation of a successor company with certain assets, of which the original legal entity becomes the sole member. The original company thus becomes the parent company of the new company. 

In the case of a demerger, the court will not remove the original going concern from which the company being demerged is being removed from the register when the demerger is registered.

 In the case of a demerger, only the original, predecessor company can change ownership, so only a preliminary assessment is required to determine whether a new member will join or whether a former member will cease to be a member of the company.

 In the case of a separation, all members of the original legal entity remain members of the predecessor company, unless they cease to be members at the time of the separation.

In determining the subscribed capital of the remaining legal person, the shareholding of the legal person created by the divorce shall not be taken into account.

It is important to note that a demerger cannot be interpreted as a transformation of a beneficiary, and therefore a liability to pay duty may arise in relation to tangible assets that are transferred in return for consideration in the process.

It is interesting to note that a demerger is an exception to the prohibition of division in the case of public limited companies.

Dr. György Zalavári LL.M.
Ecovis Zalavári Legal Hungary
Lawyer | Mediator | Corporate Law and Data Protection Specialist
gyorgy.zalavari@ecovis.hu

Act XXV of 2023 on complaints, whistleblowing and whistleblowing rules and the European Parliament and Council (EU) Abuse Reporting Directive 2019/1937 requires that businesses with more than 50 employees and a number of specified activities, including accountants, auditors, tax advisers, tax consultants, lawyers, law firms and head office providers, must have an abuse reporting protection system in place.

The system and other means of reporting should be made available to those who are entitled to complain through it.

For a number of professions, the professional chambers have undertaken to operate a central whistleblowing protection system for their members. This has also been the case for the lawyers' and accountants' advocacy organisations.

Dr. György Zalavári, attorney at law, also points out that a complaint under the Complaints Act can typically be filed orally, by telephone or in person, in writing, by postal letter or e-mail, and even through a special online filing interface.

The channels for reporting can be made known to the affected parties through online, electronic and offline paper-based solutions. A good solution is to publish it on the company's website or send it by e-mail. It is essential that some form of acknowledgement of the obligation is provided to the obliged company by the data subject. For those with whom the company has personal relations, the simplest form of accountability is to hand over the paper and sign a receipt. But an electronically signed reply message is now easily obtainable.

Who can make an anonymous or named declaration? Who should be notified?

We have tried to bring together the stakeholders entitled to lodge a complaint below:

(a) employees employed by the undertaking or persons employed under a contract of agency or a contract for work on behalf of the undertaking,

(b) an employee whose employment relationship with the undertaking has been terminated, 

(c) a person wishing to enter into an employment relationship with the undertaking in respect of whom the procedure for the establishment of such a relationship has been started, 

(d) a self-employed person, a sole proprietorship or a sole proprietorship if it has a contractual relationship with the undertaking, 

(e) a person who holds a participation in the undertaking and a member of its administrative, management or supervisory body, including a non-executive member,

(f) a contractor, subcontractor, supplier or person under the supervision and control of a trustee who has entered into a contractual relationship with the undertaking, or who is or has been in a contractual relationship with the undertaking, 

(g) trainees and volunteers working with the undertaking, 

(h) a person who wishes to enter into a legal relationship or contractual connection with the undertaking within the meaning of points (d), (e) or (f) and in respect of whom the procedure for the establishment of such a legal relationship or contractual connection has been initiated, and 

(i) a person who has ceased to have a legal or contractual relationship with the undertaking within the meaning of points (d), (e) or (f).

It is important to note that the company's customers do not belong to the above group, they have other procedures and channels for reporting their comments and complaints.

Dr. György Zalavári LL.M.
Ecovis Zalavári Legal Hungary
Lawyer | Mediator | Corporate Law and Data Protection Specialist
gyorgy.zalavari@ecovis.hu

Once a company has been set up, there are many situations in the life of a business where it may be necessary to register changes to company details. These changes can be, for example, a change in the name, address or principal activity of the company, or an increase or decrease in the subscribed capital or even the cancellation of the company.

The business register contains the date of the change in the company data. The change of data may differ in terms of when it takes effect (from when it is effective) and when it is actually registered by the court. In the absence of an indication of the date of the change or in the case of contradictory information, the date of the change in the business register is normally the date of the underlying decision.However, there is one exception: the company cannot determine the date of the reduction of the share capital in advance, the date of the change being the date of registration with the court. 

The company may, with certain exceptions, specify the date of the change in advance in the application for registration of the change. However, this may not be earlier than the date of the decision giving rise to the change. In a typical case, this would be the planned date of registration of the transformation.

A frequent source of uncertainty for company directors is whether the new data (e.g. new company name, registered office) can be used in the company's affairs after the decision on the change of company data has been taken, but before it is registered. At that time, the new information is not yet included in the business register as part of the registered data, but can be found in the business database only by means of the remark "under registration".

In connection with the data registered retroactively to the date of the amending, company ownership resolution, Dr. György Zalavári, lawyer, recommends that both the old and the new data be entered in the official documents during this transitional period.

If you have any legal questions regarding company law, please contact the author of this article, Dr. György Zalavári, lawyer.

Dr. György Zalavári LL.M.
Ecovis Zalavári Legal Hungary
Lawyer | Mediator | Corporate Law and Data Protection Specialist
gyorgy.zalavari@ecovis.hu

Whether a company or other organisation is being established, an application for the organisation's tax number must be submitted to the state tax and customs authority at the same time as the application for registration is submitted to the registration authority.

If the VAT liability of the organisation being established is not excluded, given that it does not carry out any economic activity within the meaning of the VAT Act or carries out only activities of public authority, it must declare how the VAT liability is to be determined. The VAT liability can be established on the basis of the general rules, but under the VAT Act there are also a number of other options available.

It is often the case that the optimum form of taxation for the business is not fully developed when the business is set up, or that new activities are added to the business, which justify a different form of taxation. However, it is not usually possible to change the way in which VAT is calculated until the first day of the year following the year in question.

The possibility to amend the declaration made at the time of filing is provided for by Section 257/F of the VAT Act to eliminate the failure to file a declaration at the time of establishment or even the failure to file a declaration at the time of establishment: 'The taxpayer may initiate the amendment of the declaration made at the time of filing by means of a correction request submitted to the state tax and customs authority prior to the commencement of the subsequent tax audit of the returns, within the limitation period for the right to tax assessment, in accordance with Section 20 (5), Section 30 (4), Section 45/A. § 80(2)(b), § 80/A(1), § 88(1), § 192(1), § 196/G(1), § 197(1), § 212/A(1), § 218(1), § 220(1), § 224. § (1), provided that the amendment does not affect the amount of the taxable amount, the tax payable and the input tax deductible which he has determined and declared."

The request for rectification may be made to amend declarations relating to intra-Community acquisitions of goods, the place of supply of services, the assessment of the taxable amount in forints, the taxable amount of supplies and leases of immovable property, the exemption from taxable persons and the choice of cash accounting, and the taxable person and reseller status of agricultural activity.

The possibility to submit a request for correction is therefore not unlimited in time: it is possible to do so within the limitation period for the right to assess tax, provided that the amendment does not affect the amount of the tax base established and declared by the taxpayer, the amount of tax due and the amount of input tax deductible.

The request for correction may be submitted on form 20T201T, provided that proof of either ad hoc or permanent right of representation (EGYKE) is provided to the NAV prior to submission; otherwise the request submitted will be considered invalid by the NAV.

Dr. György Zalavári LL.M.
Ecovis Zalavári Legal Hungary
Lawyer | Mediator | Corporate Law and Data Protection Specialist
gyorgy.zalavari@ecovis.hu