4.1. Tax consequences of company sales and acquisitions
At the time of company or quota sales, sellers have a tax liability (an obligation to pay income tax),let they be private individuals or companies. In connection with purchasing a company or quota, any duty payment obligations and potential subsequent uses of deferred losses must be examined.
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4.2. Taxation of Hungarian private individuals upon selling a company
In the event that a private individual sells a quota – as a general rule, that is, in case of a private individual who is a Hungarian taxable person or in case of a Hungarian share –, a quota in a limited liability company, a limited partnership, and a general partnership is deemed as a security in respect of the PIT Act.
Pursuant to Section 67 of the PIT Act, income from the transfer of securities – that is, the revenue from transfer as reduced by the value paid for acquiring such securities and by associated additional costs – is deemed as income from exchange rate gains and is subject to 15 percent personal income tax (PIT).
In addition to PIT, there is a 19.5 percent social contribution payment obligation as well, which – however – is maximized. The social contribution must be paid until the taxpayer has paid the tax ceiling in the current year (the twenty-four times amount of the minimum wage HUF 3,576,000),the social contribution tax on the income of the consolidated tax base and the income of separately taxed income (dividend, exchange gain, income withdrawn from the enterprise, etc.)
If the seller is a private individual who is a taxable person abroad, then applicable conventions are also required to be examined. The exchange rate gain from the alienation of securities is typically taxable in the state where the alienator is established.
In the event that a private individual transfers securities issued by a company established in a state with low tax rates, then the part of the revenue received for the alienation which exceeds the value appropriated for acquiring such securities shall be deemed as the private individual’s other income. After such other income, the PIT payable is 15 percent, and the social contribution payable is 19.5 percent. In the event that the provider of such income (the buyer) is a paying agent, then the paying agent shall be obligated to pay such social contribution. Otherwise, private individuals are required to pay 19.5 percent social contribution under the proviso that in such a case, 84 percent of the income determined is required to be taken into consideration.
4.3. Taxation of a Hungarian company as seller upon company sales
In the event that a Hungarian company sells its share in another company, then the difference between the value of the share derecognized (book value) and the counter value received as revenue shall be the corporate tax base. The standard corporate tax rate is 9 percent as from 2017.
If the share sold is deemed as a notified share under the Corporate Tax Act (meaning that the acquisition of the share in the degree as determined by the legal regulation currently effective at the time of acquisition has been reported to the tax authority),then the exchange rate gain realized by the sale will be exempted from corporate tax, in the form of an item to decrease the tax base. A further condition for this is that the taxpayer has registered such share among their assets on an on-going basis for at least a year before the sale. If there is a loss on the sale of a notified share, then it will increase the result before taxation, that is, the tax base.
If the sale is directed to a related undertaking and the purchase price is lower than the market price, then the pre-tax result is required to be increased by the amount of the difference, so a corporate tax payment liability is generated in this regard as well.
In the event that the seller is a foreign company (e.g. a company having a real property),the applicable conventions will need to be examined.
4.5. The tax implications of company sales are associated with the market price by the Corporate Tax Act
In regard to corporate tax, the market price is the arm’s length price which is or would be enforced by independent parties in their transactions by and between each other in comparable circumstances. The market price does not equal to the book value.
The Corporate Tax Act specified various methods to determine the market price:
a)Comparative price method, where the arm’s length price is the price applied by independent parties when selling a comparable asset or service at an economically comparable market.
b)Resale price method, where the arm’s length price is the price applied in the sale of an asset or service in an unchanged form to independent parties, as reduced by the costs of the reseller and by the usual profit.
c)Cost and income method, where the arm’s length price is required to be specified as the prime cost increased by the usual profit.
d)Net transaction profit method, which examines the net profit projected to the appropriate projection base (costs, turnover, assets) which is realized on the transaction by the taxpayer.
e)Profit share method, in the course of which the aggregate profit from the transaction is required to be distributed between related undertakings on an economically justifiable basis in a proportion as would be performed by independent parties in such transaction.
f)Another method, if the arm’s length price cannot be determined on the basis of paragraphs a-e.
The so-called fair value based valuation is classified among other methods; it is frequently used for company evaluation. If the parties to the transaction are related undertakings obligated to produce transfer price documentation (meaning that they are not small-sized enterprises at company group level and/or the transaction value exceeds HUF 50 million),then the arm’s length price (benchmark) analysis will form part of the transfer price documentation, where the applicability of the methods above is required to be examined in the serial order prescribed and reasons should be given why the selected method (e.g. the fair value method) is the most suitable one for specifying the market price.
4.6. Management of losses when acquiring a company
Following company acquisition, deferred losses are not allowed to be used automatically by law at the target company (before the transaction).
The deferred losses of the target company can only be offset against the profits for the current or the subsequent tax years
- if such company acquisition was performed within a company group, among related undertakings (the parties were related to each other in the course of the two tax years before obtaining majority control),or
- if the shares of the company or the company acquiring majority ownership are at least partly traded on the stock exchange or
- if the acquired company continues its activity at least in the two tax years following the acquisition of control and the nature of the activity does not differ substantially from the activity performed previously (not including the case of termination without legal succession) and the company realizes revenue, sales revenue from this activity in both tax years.
Here the general requirement also applies according to which the amount of loss generated in the tax year can be recognized by the taxpayer in the course of the next five tax years, in a breakdown as decided by the taxpayer, under the proviso that in the cases above the company acquired may only use its deferred loss in the proportion legally prescribed. In a particular tax year, the deferred loss of earlier years may only be accounted for up to 50% of the tax base calculated without a loss. The five-year time limit for using the loss was introduced in 2015. Before that, by 31 December 2014, the losses of earlier years were allowed to be used without any time restrictions. The modification is related to a transitional provision, according to which deferred losses generated before 2015 may be enforced in the tax year including 31 December 2025, at the latest.