Under the economy protection action plan, the Hungarian government introduced a number of tax relief measures to alleviate the economic impact of the coronavirus pandemic. Under Government Decree 140/2020 (IV.21) and Act LVIII. of 2020 about transitional rules in connection with the pandemic businesses were allowed to defer the fulfilment of their obligations with regard to taxes and reporting.
Postponement of deadline for 2019 financial statements due to coronavirus pandemic
This year, business entities (excluding public-interest entities) received an extension until 30 September 2020 for the preparation, disclosure, filing and publishing of 2019 financial statements compiled in accordance with the Act on Accounting.
Taxpayers whose tax obligations (corporate tax, small business tax, income tax on energy providers, local business tax and innovation contribution) were due by 31 May 2020 may decide, as an exception, to meet these obligations for this year by 30 September 2020. If you miss the new deadline, however, you can count on receiving penalties.
The coronavirus pandemic impacted on a number of Hungarian businesses unfavourably. These impacts must already be presented in the 2019 financial statements. For companies where the 2019 financial statements have not yet been published, this must be considered when closing the year. Based on the experiences gained in previous months, Hungarian companies may already be able to quantify these impacts, possibly recording accruals/deferrals, provisions or impairment too.
Changes to development reserves and equity
Changes to the development reserve may already have an effect on the content of the 2019 financial statements and the corporate tax return. This is because a new bill allowing Hungarian businesses to use up to 100% of their pre-tax profit to allocate a development reserve was recently approved. This choice can already be applied to fiscal years beginning in 2019 with a self-revision of corporate tax returns already filed, or with an accounting revision of prepared 2019 financial statements. The ceiling for the development reserve (HUF 10 billion – roughly EUR 29 million) and the rules for using it remain unchanged. If such a reserve is recorded then an allocated reserve must be accounted for by way of a transfer from retained earnings, which then creates a dividend payment limit for the company.
If a company is running a loss it is worth keeping an eye on the equity throughout the year too. Owners are often only notified of an equity loss when approving the financial statements. However, complying with the provisions on equity is not only necessary from a legal point of view. Capital adequacy provides important information for business partners and creditors too. Note that the amount of critical equity is different for each type of company, such as for a Kft. (limited liability company) or for an Rt. (company limited by shares).
Changes to additional capital contribution
Additional payments received to cover losses must be shown under the allocated reserve at the company. It is recommended to draw owners’ attention to the fact that under the provisions of the new Hungarian Civil Code, additional contributions – if permitted by the articles of association of the given company – may be made not only as cash contributions but also from a member’s loan as well. This is because a receivable can be provided as a non-cash contribution too, provided the debtor acknowledges it or it is based on a final court resolution. Additional contributions can therefore be made through a non-cash service compliant with the requirements of non-cash contributions.
In the case above, the asset transferred as contribution must be recorded at the owner (member) of the company pursuant to the rules on sales, parallel to the movement of the asset, with the proviso that the receivable thus created shall reduce retained earnings by the same amount.
The owner (member) of the company may decide to waive the receivable derived from the additional contribution. An amendment to the Hungarian Act on Accounting which took effect on 1 January 2020 settles the accounting thereof, declaring that in such a case the amount of the additional contribution must be recorded as an addition to retained earnings against the allocated reserve at the company. This change must first be applied in the financial statements of the 2020 financial year, but it can already be applied for the 2019 financial statements too. Naturally, if the owners would like to use this option, they first need to review the transfer from a tax perspective as well.
Change to other method of settling equity
The new rule amending the registration of capital increases was announced at the end of 2019 and it took effect the next day. Previously, capital increases had to be recorded in the accounting records on the same day they were registered at the court of registration. Now, however, businesses may choose the date of the change. Under the Hungarian Act on Accounting, in their accounting records companies can record any changes in registered capital derived from increasing the capital, share capital, founders’ assets or other shares as of the date of the change, if the change date differs from the registration date.
These changes benefit Hungarian businesses because they provide the owners with greater scope to treat issues arising from equity. What remains unchanged, though, is that both additional contributions and capital increases are subject to a resolution passed by the owners (members), while registration at the court of registration is mandatory for capital increases too. If the articles of association do not enable additional contributions to be made, the articles can be modified, which is also subject to registration at the court of registration.
Before an owner decision is made it is always worth consulting a lawyer, tax consultant and accountant to ensure all transactions are compliant with the rules and are carried out in the company’s best interest. The professionals at WTS Klient Hungary are here to help.