Changes in the rules of duty on onerous transfer of property

1) General rate of the duty on onerous transfer of property: 4%

The general rate of the duty on onerous transfers of property has been reduced from 10% to 4% up to the limit of HUF 1 billion market value. Beyond this limit the rate of the duty is 2% but in any case not more than HUF 200 million for each property. This latter limitation will therefore only be applicable to properties having a market value of more than HUF 9 billion.

2) The rates of duties for onerous acquisition of residential property are 2% and 4 %

The rates of duties for onerous acquisition of residential properties have also declined significantly: Up to the limit of HUF 4 million market value a rate of 2 % continues to apply, while for the remaining part of the market value the duty is only 4% (instead of the previous 6%).

These favourable duty rates are applicable for acquisitions reported to the tax authority after 1 January 2010 ("reporting" means the submission of the relevant contract to the Land Registry for the purpose of registration). Important: The rate of the duty for gifts, inheritance are not changed, however it is worth noting that due to an earlier amendment of the Act on Duties, the acquisition of a property by inheritance up to the market value of HUF 20 million is exempted from the duty payment obligation for "close" heirs as listed in group 1 paragraph a) of article 12 of the Act on Duties.

3) Duty on acquisition of companies owning a real property

For real-estate developers one of the most important new provision is that duties will have to be paid also for the acquisition of real properties located in Hungary by the way of acquisition of shares of a company:

The acquisition of "property contributions" (i.e. shares, business quotas, co-operative shares, investor shares, transformed investor shares) shall fall under duty payment obligation, if the acquiring party, together with his/her close relatives, as well as with business associations held in majority by the acquiring party and affiliated enterprises of all of these (affiliated enterprise is defined by the Act LXXXI of 1996 on Corporate Tax and Dividend Tax) jointly or separately acquire a share of at least 75% in a company owning a real property in Hungary. The new provision affects share acquisitions of both private persons and business enterprises, with the exception of asset acquisitions via preferred interest swap (as determined in the Act on Corporate Tax and Dividend Tax). The basis of the duty has to be determined upon the market value of the real property/properties proportionally to the nominal value of the property contribution(s) acquired. The basis of the duty is that part of the market value of the real propertie(s) owned by the company, which is calculated by the ratio of the property contributions of the acquiring party to the nominal value of all property contributions existing within the company, all of this at the time of obtaining 75% (or higher) ownership ratio. It is important however that in course of the calculation of the basis of the duty the property contributions acquired more than five years ago or before 1 January 2010, or obtained as gift or by inheritance shall not be counted (this means that an acquisition shall only be subject to the duty payment obligation if the 75% threshold is reached without these exceptions). The ratio of the duty is the general ratio as described in clause 2) above.

If the 75% is reached by the acquiring party together with its affiliated enterprises (relatives, companies owned by majority, etc.), then each affiliated company or private person shall be obligated to pay duty separately for its own share within the company.

It is important that the occurrence of the condition establishing the duty-payment obligation (reaching 75%) shall be reported to the tax authority (APEH) by the party itself acquiring the property contribution. In case of involvement of affiliated companies the party, with whose acquisition the 75% is reached is designated to make the report, in which the details (name, tax ID number) of the affiliated persons or companies having property contribution in the company have to be included.

It is frequently asked how the share purchases concluded in 2009 shall be qualified (for shares within companies owning a real property of course), if the relevant agreements are only submitted/registered to/by the Court of Registration in the year of 2010, do such transactions fall within the scope of the new rules? The answer is most likely "no", as the registration by the Court of Registration has an "ex tunc" effect, i.e. it is retroactive to the date of the conclusion of the transaction. Nevertheless it is possible the tax authority would try to enforce a different interpretation of the new rules, which could be based on one of the effecting provisions of the amendment, namely upon the following provision: "the new rules shall be applicable for acquisitions and procedures reported for levying of duty or otherwise gotten to the attention of the tax authority following January 1st 2010".

4) Duty on properties acquired by transformation of companies

Property acquisitions via reorganization will generally become subject of the duty payment obligation, only property acquisitions by preferred transformation or preferred interest swap will remain exempt from the duty.

In case of gifts the acquisition of movable properties by business enterprises via free asset-transfer as regulated by Act C of 2000 on Accounting becomes exempted from duty, furthermore the acquisition of claims by free transfer between business enterprises (including waive of claims and assumption of debts), as well as the claims waived due to reasons of equity shall become exempted from duties.

5) No duties for "sale and lease back" leasing of real properties

Due to the economic crisis, the acquisition of real properties by "sale and lease back" leasing will be exempted from duty payment obligation for a transitional period, i.e. if reported to the tax authority between 9 July 2009 and 31 December 2010.

6) Changes of the rules of the "2%" reduced duty

From 1 January 2010 the availability of the reduced duty of 2% for real estate marketing activity will not be conditioned on the main activity as registered in the company register or the entrepreneur's license, but on one of the followings:

("The reduced duty shall be available if the party acquiring...")
a) is such entrepreneur pursing sale of ownership of real estate (hereinafter: marketing of real estate), whose net sales revenue in the previous tax year came from such activity in at least 50%, or
b) is such entrepreneur pursuing financial leasing, whose net sales revenue in the previous tax year came from financial leasing activity in at least 50%.

So to decide whether one is eligible for the reduced duty, the sales revenue of the previous year has to be examined, however if the report of the acquisition to the tax authorities takes place before the first day of the sixth month of the given tax year, the acquiring party has only to declare that its net sales revenue will come from the activities required by the above provisions, in the proportion as required. If this undertaking is not fulfilled the acquiring party can voluntarily report this to the tax authority until the 15th day of the sixth month of the given tax year, in which case only 50% of the difference shall be paid as sanction to the tax authority (the difference means the difference between the amount of the standard and the reduced duty). If the required conditions are not met in due time and that is discovered by the tax authority, then the same sanctions apply as previously: the acquiring party has to pay the double amount of the difference of the duties. The text of the new regulation is not clear on whether the voluntary report of the non-fulfilment of the required conditions shall also mean that the acquiring party becomes automatically relieved from its obligation to re-sell the real estate. The reason for the introduction of this provision was most probably that the amount of net sales revenue is usually not known before 1 June. These regulations apply accordingly to newly founded companies and newly registered entrepreneurs. The fulfilment of the undertakings regarding net sales figures does not have to be reported by the acquiring parties, this is supervised by the tax authority independently.

Other important elements of the 2% rule are basically unchanged, the 2 years period starts with the notification of the purchase to the tax authority (practically the submission of the contractual documents to the land registry for the purpose of registration) and the purchased real estate has to be sold or given into financial leasing resulting transfer of ownership at the end of the lease term until the expiry of the 2 years period. However it can be useful to go over the most recent changes of the Act on Duties regarding the 2% reduced duty:

- The acquiring party is not obliged anymore to report the sale at the end of the 2 years period, this is to be checked by the tax authority "ex officio". (the absence of reports caused a lot of problems in the past!).
- Declarations about the application of such reduced duty can be submitted until the resolution of the tax authority on the levying of the duty becomes final and enforceable (this a substantially longer period than before, giving more possibilities to the acquiring party).
- If legal succession occurs on the side of the acquiring party during the 2 years period, the successor obtaining the ownership of the real property will only be relieved from the obligation to pay the double of the difference between the duty paid by the legal predecessor and the generally payable duty, if the successor sells the real property or gives it into financial leasing resulting transfer of ownership and the end of the lease term until the expiry of the 2 years period.
- The 2 years period is counted from the time of report of the transaction for levying of duty, which practically means the submission to the Land Registry (irrespectively to whether the first submission only asks for e.g. registration of sale with title retention). This can cause problems as the 2 years period can expire while the acquiring party would still not be the owner of the real property (so further sales may also not be possible).
- The re-sale during the 2 years period has to be verified by at least a registered side-note on the ownership deed of the real property, which will have to result actual transfer of ownership (fact of sale with title retention is not sufficient!), with the exception of financial leasing, where a side-note regarding the fact of sale with title retention is sufficient.

7) Special prolongation for the deadlines for re-selling of real properties obtained with the 2% reduced duty

Due to the economical crisis, a special provision of the law provides for an exceptional deferment for those who are or expect to be in delay with their obligation to re-sell their real properties under the 2% rule within the 2 year period. If the property acquisition was reported to the tax authority between 1 October 2006 and 31 May 2009 and the 2% reduced duty was applied, the deadline can be extended upon request to 4 years. The request can also be submitted until 31 January 2010 if the 2 years deadline has already passed and the differences already paid shall be returned. It is crucial that this deferment can only be granted upon requests submitted within this deadline.

8) Temporary prolongation of the deadline of the "4 years rule":

The 4 years deadline for the construction of residential property, which is required to be exempted from duty payment obligation in course of acquiring vacant plots suitable to construct residential building by onerous transfer, inheritance or as gift, has been prolonged to 6 years for transactions reported between 1 October 2004 and 30 September 2012 upon the request of the acquiring party. The request may also be submitted until 31 January 2010 if the 4 years deadline has already passed and the differences already paid shall be returned.

It is very important that this temporary prolongation is not general, it has to be requested individually from the tax authority by the acquiring party. The request shall be submitted until 31 January 2010 in case of deadlines expiring between 1 October 2008 and 15 January 2010. After this date, the deadline for the submission of the request is the last day of the period, during which the residential building should have been constructed.

I. Changes of the Act on Companies

Registration of the quota pledge into the court of registry

Regarding the limited liability companies (Kft.) the company registry will contain whether the quota of the business association is encumbered by pledge. The registration may be initiated by both the pledgee and the pedgor. For the registration of the quota pledge the original copy of the pledge agreement or the extraction thereof and - if the registration is initiated by the pledgee - also the approval of the pledgor shall be attached. Upon the deletion of the pledge the pledgee's approval to the deletion of the pledge shall be enclosed. Provision of the Civil Code applicable to the establishment of pledge (section (1) of paragraph 268) has been amended so that if the right and obligation is certified by public registry then the pledge shall come into existence upon the registration thereof. Consequently the quota pledge shall come into existence upon its registration into the company registry.

We would like to suggest for our Clients, for benefit of whom a quota pledge has been established as collateral in the past, to apply for the registration of the quota pledge before the court of registry in order to increase their legal certainty and security. Of course we are happy to assist you in the performance of the related legal tasks.

Name and seat of the company

The requirement providing that the company name shall reflect the character of the company's activity has been deleted. Accordingly any word or phrase can be indicated as company name with the restriction that beyond the head word the company name shall be in conformity with the rules of the Hungarian spelling.

The new rules of law provides expressly that the seat shall be deemed to be the postal address of the company and the take over, receipt, registration and keeping place of documents shall be exercised under that address. It is possible to designate the place of seat and the place of central management (decision-making) under different address in the articles of association of the company and accordingly the place of seat and the place of central management will be registered under different addresses.

The regulation providing that the company shall prove the right of use of the real property serving as the seat or site of the company - which proved to be very problematic in practice - has been deleted.

The newly introduced modification of the Act expressly provides that the business association registered in Hungary is entitled to provide its primary business activity in any other member state of the European Union.

Other provisions related to the court registration procedure

In the future the submission of the signature specimen of the company's representative is not obligatory any more. The signature specimen may be prepared by lawyers as well but only for the purpose of the court registration procedure and only if the company's articles of association or the amendment thereof is prepared and countersigned by the lawyer. Nevertheless we would like to emphasize that the signature specimen prepared by the lawyer may be used exclusively for the purpose of the court registration procedure therefore in every other case (e.g. certifying the signature before banks or other institutions) the electronic signature specimen or the signature specimen signed before the public notary shall be used.

The designation of delivery agent for the companies having seat in abroad or for natural persons not having a Hungarian address is not obligatory in the future. If no delivery agent has been designated then the documents shall be deemed to be delivered 5 days after the publication of the document in the official company gazette.

The company registry will be available in English, German, French and Russian as well. The company may apply that its data will be registered in one of the official language of the European Union. For that the company shall submit the official translation of the company documents to the court of registry in the respective language.

The business associations may fulfill their duty of disclosure via publishing the information on their own website instead of the official company gazette. The company may do so if it operates its website constantly and it has submitted the address of the website to the company registry. Thereby the different company transformation processes can be exercised faster but at the same time higher attention towards the business partners is also suggested.

Court registration procedure

After 1st July 2008 all the company documents and applications shall be submitted to the court of registry in electronic form and they will be kept registered in electronic form as well.

II. changes of the Act on Business Associations

General provisions applicable to every company

The executive officers may render their tasks within employment relationship again.

The members shall be entitled to bring their decisions - including the acceptance of the annual report prescribed by the accountancy act - in written form without holding a meeting.

The new deadline for harmonizing the articles of association with the new company act is 1st July 2008 instead of 1st September 2007.

Limited liability company (Kft.)

The minimum equity capital necessary for the establishment of a limited liability company has been reduced to 500.000,- HUF from 3.000.000,- HUF. In case of a sole member company the deed of foundation may provide so that the founder shall pay only 100.000,- HUF cash contribution to the company. However the rule that the remaining amount shall be paid within 1 year of the registration of the company has remained unchanged.

Except where the equity capital is reduced - if the company provides payment to the member on the basis of its membership in the company from the company's capital, the managing director shall issue a written declaration towards the members' meeting that the payment does not endanger the solvency of the company and the interest of the creditors. The declaration of the managing director shall be submitted to the court of registry within 30 days. The above described obligation results increased liability of the managing directors because if he/she omitted to make such a declaration or made an untrue declaration, the managing director shall be liable for such damages in conformity with the general rules applicable to the liability for damages.

Company limited by shares

Private companies limited by shares can be established with a minimum equity capital of 5.000.000,- HUF, however the minimum equity capital necessary for the establishment of a public company limited by shares will remain 20 million HUF.

In case of a sole member company limited by shares only the contribution in kind shall be paid to company in 100% upon the establishment of the company. Consequently the member shall pay only 25% of the contribution in cash as it is provided by the general rules of law.

III. Civil Code

In conformity with the new regulations applicable to the construction contracts the contractor shall be entitled to a mortgage up to the amount of the contractor's fee on the real property owned by the principal and on which the works shall be implemented. This is an obligatory rule so any alteration from that shall be null and void. The mortgage shall come into existence by its registration to the land registry upon the initiation of the registration by the contractor and subject to the fact of the conclusion of the construction agreement. If the principal fully paid the contractor's fee the contractor shall give its approval to the deletion of the mortgage. If the real property is owned by an entity in which the principal has a control interest or if the owner of real property has a control interest in the principal or where the owner and principal are controlled by the same entity the real property shall be deemed to be owned by the principal so the mortgage shall encumber that real property as well.

The above regulation indicates several problems in the practice and leaves a lot of questions open in connection with the registration of this statutory mortgage into the land registry.

IV. Bankruptcy law act

Bankruptcy procedure

The new regulations provide that during the bankruptcy procedure the debtor may request a moratorium of 60 to 120 days from the creditor.

Liquidation procedure

The new regulations provide that during the bankruptcy procedure the debtor may request a moratorium of 60 to 120 days from the creditor.

The regulations applicable to the determination of insolvency have been changed in conformity with the followings: If the debt has not been reimbursed within 15 days calculated from the expiry of the payment deadline and the debtor is entitled to raise an objection against the debt only till the receipt of the written notice of the creditor. If the debtor does not object the debt before the written notice of the creditor the debt shall be deemed to be undisputed in respect of the liquidation procedure.

The court shall also determine the insolvency of the debtor if the debtor or the receiver declares in the application for the liquidation of the company that the company is insolvent and it was not able to reimburse its debt within the payment deadline or it is expectable that it will not be able to reimburse them.

Except of a narrow exception the negative discrimination of the debtor's members has been deleted regarding the announced claims, therefore the claims of the member against the company shall be registered in accordance with the general rules as well.

We would like to lay emphasis on the fact that the above summary is only for information purposes, and it does not introduce all of the modifications of the new rules compared to the previous regulations.

Should you have any question or comment concerning the above, please do not hesitate to contact us.