Principal forms of doing business
- Limited liability company.
- Private company limited by shares.
- Public company limited by shares.
Mergers and acquisitions (M&A) from a business and tax perspective
Mergers in Hungary are tax-free transformations if they qualify under the definition of preferential transformation set forth by the Hungarian CDTA, which is similar to the one detailed in the EU Mergers Directive.
In the case of a preferential transformation, the predecessor company does not have to amend its tax base by the difference between the tax book value and the accounting book value of the assets. Furthermore, if the transaction takes place at fair market value, then the gain (if any) realised during the revaluation of the assets would also not be subject to CIT at the predecessor. However, in this case, the tax book value of the assets remains unchanged, thus at a later a stage additional tax payment liability may arise at the successor company if the accounting book value of the assets is higher than their tax counterpart.
Furthermore, for the shareholder(s) of the merging entities, the income accounted in excess of the historical value of the shares they acquire in the preferential transformation is also not taxable for CIT purposes for as long as the shareholder holds its participation. Special rules apply to reported participations.
Note though that several formal requirements should be met in order to meet the requirements of the preferential transformation set forth by the CDTA, thus proper planning is required.
In any other case, Hungarian tax implications may arise on the transformation, especially on those transformations that take place at fair market value and/or where real property is transferred.
International Financial Reporting Standards (IFRS) adoption
Companies defined in Section 4 of Decision no. 1606/2002/EC (mainly companies listed on the stock exchange) have to prepare their consolidated annual reports according to IFRS. However, non-listed subsidiaries of EU-listed entities are exempt from the preparation of IFRS consolidated financial statements.
In Hungary, IFRS was adopted in a multi-stage procedure. From 1 January 2017, the transition to stand-alone IFRS reports are obligatory for credit institutions, financial enterprises, and listed companies. From 1 January 2018, the adoption of IFRS is also mandatory for cooperative credit institutions and other credit institutions taking part in the integration of cooperative credit institutions and smaller credit institutions. The companies applying IFRS for stand-alone purposes will have to base their tax liability calculations (e.g. CIT, LBT, and energy suppliers’ income tax) on IFRS as well. Companies that prepare IFRS reports at the head office level and/or companies that are subject to mandatory audit in Hungary are also able to opt to use stand-alone IFRS books in Hungary.
Foreign Account Tax Compliance Act (FATCA) agreement with the United States (US)
Hungary and the United States signed an intergovernmental agreement (IGA) on 4 February 2014 in order to implement the US FATCA. The Hungarian IGA is based on the ‘Model 1 A’ Agreement, which means a reciprocal information exchange between the Hungarian tax authority and the US Internal Revenue Service (IRS). As part of the negotiations regarding the IGA, Hungary can include further entities and accounts into Annex II of the Agreement with exempted or deemed-compliant status compared to the originally issued Model Agreement. Changes to the local legislation for FATCA and IGA purposes have successfully been adopted by the Hungarian Parliament.
The first information exchange between the Hungarian tax authority and the US IRS was in September 2015. Reporting Hungarian financial institutions have to file their report by 30 June each year.
Common Reporting Standard (CRS) agreement within the OECD
The CRS, developed in response to the G20 request and approved by the OECD Council on 15 July 2014, calls on jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.
The first information exchange between the Hungarian tax authority and the other participating jurisdictions took place in September 2017. Reporting Hungarian financial institutions have to file their report by 30 June each year.
On 23 July 2019, the provisions of the legislative proposal implementing the Council Directive 2018/822 of 25 May 2018 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (the so-called 'DAC6') has been enacted into the Hungarian legislation. In brief, the DAC6 requires service providers or, alternatively, taxpayers to report on cross-border arrangements that meet either of the hallmarks set out by the Directive. Pure domestic transactions, however, are not in the scope of the DAC6 rules.
The relevant rules are in force from 1 July 2020; however, cross-border arrangements where the first step was executed between 25 June 2018 and 1 July 2020 must be reported too until 28 February 2021. With respect to reportable arrangements, the implementation of which have been commenced in the period from 1 July 2020 up to 31 December 2020, the information should be disclosed by 31 January 2021.
For this reason, previous cross-border arrangements/cross-border transactions are recommended to be reviewed from a DAC6 reporting point of view.
The new legislation transposes into Hungarian law the amendment of Directive 2011/16/EU on the reporting obligations of digital platforms (DAC7 Directive). The DAC7 data reporting imposes data reporting obligations on companies operating digital platforms, covering the 'active sellers' and their so-called 'relevant activities'. The activities covered by the data reporting are real estate rental, personal services, the supply of goods, and the hiring of means of transport. The law entered into force from 1 January 2023. The data reporting period is one calendar year, and the first DAC7 reporting must be made to the tax authority by 31 January 2024.
Under a Hungarian trust contract, the settlor entrusts the trustee to manage (in its own name but for the benefit for the beneficiary) the assets, rights, and receivables (trust asset) transformed thereto by the settlor. A trust contract cannot have a term longer than 50 years.
The trustee can be either a natural person or a legal entity, and its private fortune is handled separately from the trust asset/fortune. The trustee is liable for the tax administration (tax number, tax returns, etc.) and the bookkeeping of the trust. The Hungarian National Bank keeps an authentic registry of the Hungarian trustees.
The trust asset is subject to Hungarian CIT and LBT and is considered to be tax resident under domestic law (thus, may have access to treaty benefits). If some conditions are fulfilled (i.e. the settlors and beneficiaries are private individuals) and the passive income test is fulfilled, then the trust may opt for a CIT exempt status.
The Hungarian trust is a good business opportunity for companies since it may be inserted into a structure tax neutrally.