What are cross-border contracts?
Cross-border contracts are commercial agreements between parties residing in different countries — in this case, Italy and Hungary. They regulate supply, consultancy, licensing, distribution, or employment relationships between Italian and Hungarian entities, and require particular attention to the choice of applicable law and competent jurisdiction.
Applicable Law: Rome I and Rome II
Within the European Union, cross-border contracts are primarily governed by Rome I Regulation (contractual obligations) and Rome II Regulation (non-contractual obligations). These regulations allow parties to freely choose the law applicable to the contract, with some limitations to protect consumers and workers.
For B2B contracts between an Italian company and a Hungarian KFT, it is common to choose:
- Hungarian law (advantageous for the KFT)
- Italian law (more familiar to the Italian party)
- The law of a neutral country (e.g., Switzerland or England for high-value contracts)
Competent Jurisdiction and Arbitration Clauses
The choice of competent jurisdiction is crucial in case of disputes. The main options are:
- Italian court: more accessible for the Italian party
- Hungarian court: faster and more cost-effective for local disputes
- International arbitration: preferred solution for high-value contracts (e.g., International Chamber of Commerce in Paris)
Most Common Contract Types
Intercompany Services Agreement
Widely used between companies of the same group (e.g., Italian holding company and Hungarian operating KFT). It must comply with the arm's length principle (transfer pricing at market values) to avoid tax disputes by NAV or the Italian Revenue Agency.
License Agreement
Used for the transfer or granting of trademarks, patents, or know-how between Italian and Hungarian entities. Royalties paid by the KFT to the Italian company are deductible in Hungary and subject to withholding tax according to the tax convention.
Distribution Agreement
Regulates relationships between Italian manufacturers and Hungarian distributors (or vice versa). It is important to clearly define territory, exclusivity, sales targets, and termination conditions.
Cross-border Employment Contract
For employees working in both countries or seconded from Italy to Hungary. Requires attention to social security (EC Regulation 883/2004) and tax regulations of both countries.
Transfer Pricing
One of the most delicate aspects in relationships between related Italian and Hungarian companies is the correct determination of transfer prices. Both Italy and Hungary follow OECD guidelines and require intercompany transactions to occur at market conditions. Adequate documentation is mandatory for companies exceeding certain turnover thresholds.
How to Structure Contracts Correctly
To ensure the validity and effectiveness of Italy-Hungary cross-border contracts, it is essential to:
- Draft the contract in two languages (Italian and Hungarian) with a prevailing version defined
- Clearly specify the applicable law and the competent jurisdiction
- Comply with the formal requirements of both countries
- Adequately document transactions for tax controls
- Update contracts in case of regulatory changes
Specialized Legal and Tax Assistance
Elevate Advisory Group offers comprehensive support in drafting and reviewing Italy-Hungary cross-border contracts, with particular attention to tax compliance and the protection of client interests. Contact us for a consultation.
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