Conditions for paying an interim dividend

After closing the accounts for the financial year and adopting the financial statements, the main decision-making body of a company can decide to pay a dividend and the amount of the dividend. The dividend decision can only be taken at that time, when the annual financial statements are adopted. If you want to distribute profits after the adoption of the annual financial statements, i.e. in the period between two sets of accounts, the company can assess and pay an interim dividend.

Based on the provisions of the Hungarian Civil Code (Act V of 2013), the decision on paying an interim dividend is taken by the single member or the members’ meeting in the case of a limited liability company, or by the founder or general meeting in the case of a joint stock company, or by the board of directors based on authorisation in the articles of association. If the company has a supervisory board too, its prior approval is also required for the decision on the interim dividend.

An interim dividend may be paid if

• the interim balance sheet shows that the company has the necessary funds to pay dividends;
• the payment does not exceed the amount of unrestricted retained earnings plus the after-tax profit or loss as shown in the interim balance sheet; and
• the company’s adjusted equity capital less the retained earnings and any positive valuation reserve does not fall below the amount of its registered capital as a result of the payment.

Interim dividends may only and exclusively be paid based on an interim balance sheet approved by the main decision-making body. This interim balance sheet must be prepared in accordance with the general rules of the Hungarian Accounting Act. If the company is subject to an audit, the interim balance sheet must be accompanied by an audit opinion.

As a general rule, any member/shareholder who was a member/shareholder of the company at the time decision to pay the interim dividend was made is entitled to receive the dividend. The members of the company may pay dividends/interim dividends at different rates if this is provided for in the articles of association.

Tax payment liability

If the company is owned by another company and the company pays dividends or interim dividends to that owning company, it is not liable to pay tax.

By contrast, if the owner is a private individual, the interim dividend is taxable. While dividends are subject to personal income tax and social contribution tax, an interim dividend is only subject to personal income tax. Social contribution tax is payable when the interim dividend becomes a dividend.

If, after payment of the interim dividend, it transpires from the annual financial statements that no dividend can be paid, or only a smaller dividend is approved – i.e. the interim dividend does not become a dividend, or only partly – then this amount is reclassified as a loan on which interest is payable. If the individual does not pay the interest, they will have earned income from interest relief under the Personal Income Tax Act. Any amount that does not become a dividend must be repaid by the members/shareholders at the request of the company.

In the case of a company liable to pay corporate tax, a paid interim dividend must be included in the information in the corporate tax return for the year – regardless of whether it was converted into a dividend or not.

The rules for paying and accounting for dividends should be regularly reviewed and scrutinised in each reporting period, and even separately in the case of an interim dividend payable during the year. The staff at WTS Klient Hungary’s accounting division with over 25 years of experience are ready to help clients with any questions they may have on this topic.

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What is a tangible asset?

Tangible assets are assets that are used directly or indirectly in the activity of the company and which remain in the ownership of the entity for more than one year. Unlike other purchases, they are not entered directly into the accounts as costs, but as capital expenditure. A special case of acquiring tangible assets is when the company uses an allocated development reserve to make the purchase; a previous article dealt with this in detail. The asset is capitalised when it is actually put into use, and the asset depreciation starts from that date, at which point the cost is entered in the books.

Asset depreciation

The Act on Accounting requires that the cost of a tangible asset less the residual value expected at the end of its useful life is allocated over the years the asset is expected to be used. The given asset is therefore entered into the books as a cost spread over these years. The exception to this rule are low-value tangible assets with an individual value of less than HUF 200,000. These can be accounted for as a lump sum when they are put to use. In addition, there may be cases where extraordinary depreciation needs to be recorded on an asset because its carrying amount is significantly higher on a prolonged basis than its market value, or because it becomes surplus, damaged or destroyed.

It is important to emphasise the distinction between depreciation under accounting law and depreciation under tax law. When calculating corporate tax in Hungary, the depreciation rates provided for in the relevant law must be applied to calculate the depreciation that can be used to reduce the tax base, but at the same time, the tax base is raised by the depreciation charged under the Act on Accounting. If the company has chosen to recognise deferred tax, the depreciation difference resulting from the difference between accounting and corporate tax law will also affect the amount of the deferred tax (see example 1 in our article on this topic).

Substantiating tangible assets

The Act on Accounting states that an inventory has to be compiled and kept for the year-end accounting close, the preparation of the annual financial statements and to substantiate balance-sheet items. This inventory includes the assets, equity and liabilities of the company as of the reporting date, in terms of both quantity and value, item by item, in a verifiable manner. If the company keeps continuous records of its tangible assets, it must verify the accuracy of the data by taking an inventory and substantiate it with a stocktake at specified intervals, but at least every three years. If you do not keep quantitative records, you must do this as part of the year-end inventory.

Derecognition of tangible assets

Even if they have been fully depreciated and their value is zero, tangible assets do not disappear from company books in Hungary until they are derecognised. This may happen if the assets are not fit for their intended purpose, or are unusable, destroyed, missing, scrapped or sold. This must always be properly documented: in the case of scrapping for example, the scrapping report is such a document.

If an asset is sold, the difference between the proceeds from the sale and the carrying amount must be examined for accounting purposes. If the income exceeds the carrying amount, the difference between the income from the sale and the carrying amount is recorded as other income. Conversely, the difference is included under other expenses if the carrying amount is higher. In effect, this means the sale should be accounted for on a net basis.

Since tangible assets often support a company’s operations for many years, it is worth taking care from the very beginning to ensure they are treated correctly and recorded in the accounts. The staff at the accounting division of WTS Klient Hungary with over 25 years of experience are ready to help clients with any questions they may have on this topic.

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Previously we reported on the fact that the introduction of the global minimum tax triggered an amendment to the Act on Accounting, allowing the recognition of deferred tax in Hungarian financial statements. This can be done for the first time for the 2023 financial year.

For companies making use of this option, the profit after tax is calculated from the profit before tax, tax payable and the reporting-year change in the deferred tax difference. Accordingly, the balance sheet and income statement under the Act on Accounting have been amended as follows:

Recognition of deferred tax in reports published electronically

Companies can easily reflect these changes in their own financial statements and reports. But how is this handled by the Electronic Reporting Portal?

The information is now available on the Online Reporting and Form Completion System (OBR), which provides guidance on the above changes as well as practical information. Accordingly, you can select the reporting format with the new rows at point 17 of the Cover Page. So anyone who wants to publish a report that includes deferred tax can now do so. However, please note that in this case, due to changes in the balance sheet and income statement rows, the data for the previous year will not be included automatically, it must be filled in manually.

The situation is different for tax returns though.

Recognition of deferred tax in 2023 corporate tax returns

It is always important to stress that in Hungary, deferred tax can only be interpreted in relation to corporate tax, since only this tax has a carry-over effect through items reconciling the tax base.

Consequently, only with corporate tax returns (2329) may you run into problems with the recognition of deferred tax when completing annual tax returns. Form A-01 of the return contains the balance sheet data, which must be completed based on the financial statements. At the minute, form 2329 cannot yet fully handle the recognition of deferred tax in the balance sheet.

According to information obtained from the tax authority by telephone, if a company has a deferred tax liability it should be reported on form 2329-A-01, row 31, under Long-term liabilities.

However, in the case of a deferred tax asset, there is currently no appropriate row under Fixed assets, since only Intangible assets, Tangible assets and Investments can be classified here.

UPDATE! The above issue regarding the completion of the corporate tax return has been resolved. According to the written information from the tax authority, new lines have been added to the A-01 sheet of the 2329 return, where the balance sheet data must be shown:

2329-A-01, line 44: amount of deferred tax asset (under fixed assets)

2329-A-01, line 45: total amount of deferred tax liability (under long-term liabilities, deducted from the amount on line 31)

The above lines are now included in the updated ÁNYK form, so there is no obstacle to submit in the correctly completed corporate tax return by the deadline (31 May).

The accounting specialists and tax advisers at WTS Klient Hungary are in regular contact with the tax authority to seek answers to clients’ questions as soon as possible, and to draw the tax authority’s attention to any shortcomings with the system of tax returns or with publishing reports and financial statements. We believe it is important to share with our clients the latest accounting and tax law changes, professional knowledge, and practical advice on the problems they face. If you have any other questions about deferred tax, please contact us.

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Choosing exchange rates 

If businesses have their assets and liabilities in a currency other than their bookkeeping currency, these must be translated into the currency of their choice at a fixed exchange rate, which then enables them to be recognised in the books. To this end they can choose the average of the buying and selling rates of a credit institution chosen by the company, or apply the official foreign exchange rate published by the National Bank of Hungary or the European Central Bank.

Eligible currencies 

When setting up a business in Hungary, it is easy to think automatically of the Hungarian forint to keep your books in and fulfil your reporting obligations. But it is worthwhile considering whether this really is the best option for your company. Of course, you can choose to use the Hungarian forint. However, if it is deemed a more optimal solution, there is nothing stopping you choosing the euro or US dollar. This can happen, for example, if the parent company’s accounts or most of the invoices received from partners are in a particular currency. In any case, selecting a currency requires careful consideration, as the next time it can be changed is for the third financial year following the decision, and the accounting policies and articles of association must be amended accordingly too. Although this change used to be only possible for the fifth financial year at the earliest, and has now been reduced to three years, it still means a lengthy period.

You can also decide to choose a different currency from the euro or the US dollar, but this is subject to conditions. This is possible if the currency of the company’s primary business environment is not one of the above-mentioned currencies, and more than 25% of its income, costs and expenses, financial assets and liabilities are denominated in that currency.

In terms of selecting a currency it is also important to note that, as of 2019, the Hungarian Act on Accounting requires that the currency used for reporting and accounting must be the same as the currency recorded in the articles of association. Among other things, this means that the registered capital cannot be recorded in a currency other than the currency you later want to keep your books in.

Importance of selecting a currency 

Essentially, choosing the right currency is not significant because of how you can review your accounting records, although this may be taken into account in the case of reporting in a different currency. What is much more important is the effect of realised and unrealised exchange rate differences arising from transactions in other currencies. The incessant and unpredictable movement of exchange rates constantly affects the results of a company. So if you know that the large and significant transactions of the company will mainly be in a particular currency, when selecting a currency you should aim to avoid any problems with this.

Let’s look at what this might mean in concrete terms:

In the case of accounting in Hungarian forints, income is booked based on the difference between the exchange rate when the invoice is recorded and the exchange rate when it is settled, which is included in the corporate tax base at the end of the year, thus increasing your tax liability. By contrast, in the case of euro accounting, no exchange rate difference had to be accounted for, so this has no impact on your result.

Of course, it is also possible for an exchange loss to arise upon settlement of the invoice, which reduces profit and hence the tax liability as an expense on financial transactions.

It is also worth noting the impact of the mandatory year-end revaluations, where all foreign currency items must be recorded in forints using the chosen exchange rate as of the reporting date of the financial year.

Our example shows how much of an impact gains from exchange rate differences can have on your company, as they can significantly increase your tax liability, but also, exchange differences can even turn your profit into a loss. This impact can be reduced by making the best choice for your company when selecting a currency.

Changing currency 

If there is a change in the company’s operations, or if it becomes clear in the meantime that the chosen currency is not the most optimal, it is possible to switch currency. We covered this in detail in an earlier publication.

Since selecting a currency and switching currencies are complex processes comprising accounting, tax, legal and IT challenges, it is advisable to do your research and ask for help as to what really is the best solution for your company. Do not hesitate to contact our financial and accounting advisers, they will be happy to help.

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What do we need Hungarian professionals for?

Today we see companies with foreign parent entities increasingly opting to have their bookkeeping handled abroad. In such cases, these companies use the services of Hungarian accounting firms and/or tax advisory firms to ensure the Hungarian financial statements from foreign general ledgers are also prepared without errors. In other words, based on the general ledger prepared in the integrated system, Hungarian experts help to compile financial statements that comply with Hungarian rules, and “translate” processes carried out abroad to ensure they comply with Hungarian legislation.

It is important to note that even in the case of bookkeeping abroad, i.e. when preparing Hungarian financial statements from foreign general ledgers, the company’s accounts can only be prepared by a chartered accountant registered in Hungary. If the company compiles annual financial statements under IFRS, these can also only be prepared by a chartered accountant registered in Hungary as an IFRS specialist.

If the Hungarian company is subject to an audit, then the audit of the Hungarian entity can only be performed by an audit firm or auditor registered in Hungary.

Tax returns, annual financial statements and all other reports have to be prepared and submitted to the various Hungarian authorities in Hungarian, so these tasks are often performed by the engaged Hungarian accountant or tax advisory firm based on the information provided to them from the integrated system abroad.

What to look out for before preparing Hungarian financial statements from foreign ledgers?

In the six points below we have summarised what should be checked in general ledgers received from accountants abroad before preparing Hungarian financial statements from foreign general ledgers.

1. The integrated systems of foreign companies mostly follow the accounting policies of the parent entity, and are accounted for according to IFRS or US GAAP rules. It is essential to clarify at the outset what approach was used to prepare the ledger.

2. Some integrated systems (e.g. SAP) are able to manage several general ledgers at the same time, thus it is possible to take Hungarian accounting and taxation rules into account alongside IFRS or US GAAP rules.

3. The content of the received general ledger should be clarified and interpreted row by row so it can be treated properly according to Hungarian rules and the content classified in the appropriate rows of the accounts.

4. Items that are permitted under IFRS or US GAAP, but not according to Hungarian accounting standards, should be eliminated.

5. The accounting of depreciation and the capitalisation of tangible assets are both key issues from both an accounting and taxation point of view, so it is worth asking for and learning about the accounting policies applied before preparing the financial statements.

6. Reconciling the tax account with the received general ledger is also an essential task, as we often encounter situations where – for example – the payment of tax advances or the accounting of taxes are not found in the right place in the foreign general ledger.

Our article highlights just a few points that definitely should be taken into account before preparing Hungarian financial statements from foreign general ledgers.  There are of course a number of other factors to consider to ensure that tax returns and financial statements comply with relevant Hungarian provisions. If you need an expert in this field, our accountants experienced in preparing Hungarian financial statements from foreign general ledgers will be happy to help.

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In this article we look at the current taxation and accounting rules for allocating and using a development reserve.

Allocating a development reserve

When determining the corporate tax base for businesses in Hungary, taxpayers may choose to set aside a reserve and account for the amount as a deductible in the fiscal year. The reserve may not exceed the amount of the pre-tax profit, and may only be used for investments.

How and under what conditions can the development reserve be used?

The planned investments must be carried out over the next four fiscal years and the previously established development reserve must be fully released by the end of the fourth year. These investments may also relate to the acquisition of new and second-hand tangible assets, for which there is no restriction in the Hungarian legislation.

Depreciation on the assets may no longer be deducted for corporate tax purposes, as this has essentially been done already by allocating the development reserve, so in practice this is an early depreciation charge.

The development reserve cannot be used for the following assets:

• non-cash contributions,
• assets received free of charge, and
• investments accounted for in relation to tangible assets on which ordinary depreciation can or must not be recorded, except for historic listed monuments, or buildings and structures placed under local protection.

What does all this mean from an accounting point of view?

Of course, Hungarian accounting rules allow companies to recognise depreciation on the assets during their useful life. What we must not forget, however, is that allocating a development reserve will also impact on the financial statements – in addition to the corporate tax calculation – since the composition of equity will change in the balance sheet. This is because the amount recognised in tax must be transferred from retained earnings to the allocated reserve in the year of allocation, and this constitutes a dividend payment limitation for companies.

In the years following the allocation, after the acquisition of the assets the allocated reserve may be reversed into retained earnings, but this is not compulsory, since pursuant to the Hungarian Act on Accounting a company can recognise an allocated reserve at its own discretion. Businesses are therefore free to decide when and how to carry out the reversal.

What to do with unused reserves?

According to the provisions of the Hungarian Corporate Tax Act, development reserves created in 2021 must be fully released over the next four fiscal years but no later than by 31 December 2025, in accordance with the cost of the realised investment.

If this is not done, or only done partially, taxpayers will not need to submit a self-revision for their 2021 corporate tax return, nor will they need to prepare three-column financial statements at the close of the next financial year, as this will not be considered a significant error.

Businesses will have to declare the unused portion in their 2025 corporate tax return at the latest, and the resulting tax (at the rate prescribed by the provisions in force in Hungary in the fiscal year of the allocation) and late payment interest will be charged to the 2025 profit or loss.

The tax will be accounted for in a similar way to the 2025 corporate tax. The late payment interest for the 2021 allocations is calculated from 1 June 2022 (the day after the deadline for filing the tax return claiming the benefit) until 31 December 2025 (the end date of the period for use). The tax and the interest must be assessed and paid by 31 January 2026 (last day of the first month of the fiscal year following the fourth fiscal year). As the interest will not be due until 2026, but in fact relates to the period before the reporting date, and its rate will be known at the balance sheet preparation date, it should be recognised under other expenses for 2025 against accrued expenses and deferred income.

A taxpayer who is a group taxpayer for corporate tax purposes pays the tax assessed and the related late payment interest as a group member, through the group representative, during the period of group membership.

Please do not hesitate to contact the professionals at WTS Klient Hungary should you have any questions regarding the taxation or accounting aspects of a development reserve.

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How long can a voluntary liquidation last, and when can it be completed? 

Voluntary liquidations must be completed by the liquidator within three years of the start date.

Completing a voluntary liquidation procedure can happen if the liquidator has finished its duties and no legal proceedings or administrative investigations are pending. In addition to these conditions, completing a voluntary liquidation procedure is possible in Hungary when:

• the company has terminated its activities,
• lender demands have been settled,
• collectible receivables have been recovered,
• employment contracts have been terminated,
• contracts with customers and suppliers have been terminated,
• assets intended for sale have been sold.

Once these have been done, and the relevant authorities have been notified of the voluntary liquidation, the liquidator’s only task is to prepare the financial statements closing the voluntary liquidation procedure and to divide the remaining assets among the owners.

How to start completing a voluntary liquidation procedure in Hungary? 

The owners make the decision on the date for completing a voluntary liquidation procedure. The liquidator prepares the financial statements closing the voluntary liquidation procedure for the last financial year of the voluntary liquidation, as well as the proposal for the distribution of assets, as of this date (reporting date). In Hungary, the closing tax returns must be submitted together with the financial statements closing the voluntary liquidation. The financial statements must be prepared, filed and published and the closing tax returns must be submitted within 60 days. 

Features of financial statements for last period of voluntary liquidation 

In the financial statements prepared for the last period of the voluntary liquidation, all assets and liabilities other than liquid assets must be recognised at market value. The impact on profit/loss of differences accounted for due to valuation at market value must be recognised in the income statement. If the company’s assets include ones subject to value-added tax upon the distribution of assets, pursuant to the Hungarian VAT Act, then the amount of value added tax payable must be recognised as a liability against other expenses. 

Final report, proposal for distribution of assets, and deregistration request 

Having prepared the financial statements for the last period of the voluntary liquidation, the liquidator has to summarise the significant economic events that took place during the period of the voluntary liquidation in a final report. Additionally, he/she has to prepare a proposal for the distribution of the remaining assets. If the owners have accepted the financial statements closing the voluntary liquidation along with the proposal for the distribution of assets, the liquidator’s final report and the closing tax returns, a request has to be submitted to the Court of Registration to deregister the company at the same time as filing and publishing the financial statements closing the voluntary liquidation and submitting the closing tax return.

Based on the above it is obvious that there are tasks when completing a voluntary liquidation procedure that may require the involvement of experienced professionals. Feel free to contact the professionals at the financial & accounting advisory division of WTS Klient Hungary, who, as consultants, will be happy to support you with the special taxation and accounting issues that may arise during a voluntary liquidation.

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Tax also has to be paid when submitting an extension request

The special tax relief implemented in the third wave of the coronavirus will affect the deadline for certain tax returns and annual reports at companies which, through no fault of their own, cannot comply with their obligations by the original deadline, i.e. 31 May, due to the pandemic.

Companies and organisations missing the deadline of 31 May can only be exempt from the default penalty if they submit their extension requests containing pandemic-related reasons to the National Tax and Customs Administration by 30 June. The extension request can exempt you in Hungary from the legal consequences for failing to submit four types of tax return and financial statements as well as to prepare transfer price documentation on time.

Parallel to submitting the extension request, it is important that the missed tax returns must also be submitted and the corporate tax as well as the small business tax, the innovation contribution and the income tax on energy providers must be paid simultaneously, or any payment difficulties must be reported.

Circumstances to be considered

Submitting an extension request does not necessarily mean it will also be accepted, but the National Tax and Customs Administration has promised to assess these requests quickly and fairly, qualifying reasons derived from the coronavirus pandemic as particularly justifiable circumstances. It is worth knowing that since members’ meetings or general meetings can even be convened online in an emergency, without personal attendance, not holding them does not necessarily represent a circumstance that can be taken into consideration.

The relief does not apply to public-interest entities such as listed companies, banks, insurance companies and investment firms.

WTS Klient Hungary is continually trying to keep its clients updated regarding the economic measures taken due to the coronavirus pandemic. If you have any questions on how these measures will impact your business, feel free to contact us.

A Deadline for certain tax returns and annual reports can be postponed by submitting an extension request bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Tax returns, tax payments, tax advance payments

The decree takes effect on the day after it is promulgated, i.e. on 22 April 2020. So taxpayers have until 30 September 2020 to assess, declare and pay the annual and unscheduled amounts of

• corporate tax,
• small business tax,
• energy supplier income tax,
• local business tax
• and innovation contribution

as well as to assess and declare any corporate tax advances, which will be due in the period between the decree taking effect and 30 September.

Taxpayers may request the reduction of tax and contribution advances before they become due if, according to their calculations, the taxes and contributions for 2020 will not reach the amount of the tax and contribution advances.

Reporting obligation

If they fall within the period between the decree taking effect and 30 September 2020, the deadlines for financial statement preparation, publication, filing and disclosure as well as their submission are postponed until 30 September 2020, and any due dates for further accounting obligations based on these financial statements shall be calculated from this date (this does not apply for public-interest entities).

Payment relief 

Besides the allowances outlined in the Act on Rules of Taxation, the Hungarian tax authority allows taxpayers to defer payment of taxes of no more than HUF 5 million (roughly EUR 14,000) on one occasion for a maximum of 6 months, without any surcharge, or to pay the tax in no more than 12 monthly instalments, without any surcharge, based on a duty-free request submitted by the taxpayer by no later than the 30^th day after the end of the state of emergency, provided that the taxpayer verifies and presumes upon submitting the request that the payment difficulty arose as a result of the state of emergency. The administration deadline for such requests is 15 days.

One important new rule is that if an entity submits a request (exempt from duties too) by the 30^th day after the end of the state of emergency, the tax authority may reduce the taxpayer’s debt once, by no more than 20% but by an amount not exceeding HUF 5 million (roughly EUR 14,000), if paying the tax debt would make it impossible to continue the business activity of the taxpayer for reasons attributable to the state of emergency. A tax reduction may be requested for one tax type only.

Social contribution tax

From 1 July 2020 the social contribution tax rate will be 15.5% of the tax base. 

Further tax relief measures

• The amount payable to employees on their Széchenyi Rest Cards as a fringe benefit is raised to HUF 800,000 (roughly EUR 2,230) (annual allowance) for employers not qualifying as budgetary institutions and such benefits are exempt from social contribution tax (exemption shall be applied from the decree taking effect until 30 June 2020).

• Tourism tax does not have to be paid for guest nights from the 5^th day after the promulgation until 31 December 2020, and businesses obliged to collect the tax do not have to collect or pay the tax, but they have to declare uncollected amounts to the tax authority. Assessed tax does not have to be declared if it amounts to 0.

• No reliable taxpayer ratings shall be downgraded based on ratings carried out during or after the state of emergency with reference to a tax difference determined for the taxpayer as a result of violating a tax payment obligation due in the course of the state of emergency or within 30 days of it ending.

• EKAER: During the state of emergency and until the 30^th day after it ends, taxpayers are exempt from providing risk collateral, and the Hungarian Tax and Customs Administration shall arrange for the repayment to taxpayers of any risk collateral paid into separate escrow accounts before the decree took effect, and for the sending of its approval to the relevant financial institution as is required to cancel any guarantee. Authorisation for exemption from submitting route data shall remain valid throughout the state of emergency, and conditions shall not be checked during this time.

• During the state of emergency, any employee on unpaid leave as a result of the state of emergency is entitled to healthcare services. In such cases the employer shall assess, declare and pay the health service contribution (HUF 7,710 – roughly EUR 21.5 per month) for the employee (at the employer’s request, the employer may be granted permission to pay such health service contribution until the 60^th day after the end of the state of emergency).

• The KIVA rate will be reduced by one percentage point, to 11%, from 2021.

WTS Klient Hungary is doing everything it can to provide up-to-date information on the further details of the economy protection action plan launched as a result of the state of emergency, and to help its clients in these tough times too. If you have any questions on how the new measures will impact on your business, and what opportunities the current regulation brings with regard to tax payments for instance, feel free to contact us.

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What are the conditions of a repurchase?

Own shares and own partnership shares are the company’s own equity investments repurchased (acquired) by the company itself.

The decision on the repurchase is always made by the supreme body, and is recorded in a members’ resolution in the case of limited liability companies. For companies limited by shares, the general meeting authorises the Board of Directors to acquire the own shares, but in exceptional cases – in the case of a transformation for example – prior authorisation may be disregarded.

In return for consideration, own shares and partnership shares may only be acquired if the conditions for payment of dividends are fulfilled at the company. Another condition for limited liability companies is that own shares and partnership shares may only be acquired from available assets in excess of the share capital, and that members must have paid their entire capital contribution. The regulation is similar in the case of companies limited by shares as well, as it is prohibited to acquire shares or partnership shares if the total nominal value/issue price has not yet been paid by the owners. The consideration for the own shares can be paid from the assets payable as a dividend.

Another important rule is in Hungary that membership rights related to the repurchased partnership shares may not be exercised, and the repurchased own shares do not provide shareholder rights, so when calculating the voting ratios, the relevant voting rights are deducted. Their share of the dividend must be distributed among the eligible members/shareholders.

Funds for repurchase, maximum repurchase

The funds for repurchasing own shares or partnership shares must be provided from the profit after tax and the disposable retained earnings recognised in the balance sheet or the interim balance sheet of the last financial year closed with financial statements, in a manner that ensures the equity reduced by the allocated reserve, the positive valuation reserve, and the repurchase value of the own shares does not fall below the amount of the registered capital. The data of the financial statements may be taken into account within six months of the reporting date.

The Civil Code in Hungary also stipulates a maximum limit for repurchasing own shares or partnership shares: For limited liability companies the capital contributions underlying the repurchased partnership shares may not exceed 50% of the share capital, while for companies limited by shares, repurchasing own shares or partnership shares is only possible up to 25% of the share capital.

Presentation in the financial statements

After the repurchase, an allocated reserve must be created from the retained earnings for the amount of the repurchase, which also sets the dividend payment limit. The repurchased own shares and partnership shares are recognised under securities in current assets in the balance sheet. The data related to their acquisition (reason for acquisition, number, nominal value, ratio to registered capital, amount of consideration paid) must be disclosed separately in the supplementary notes of the company.

Other rules in Hungary on repurchasing own shares or partnership shares

Own shares may not be acquired during a company establishment or an increase in capital, and when reducing capital, own shares must be withdrawn first. Neither single-person companies nor single-person companies limited by shares may acquire own partnership shares.

If a company limited by shares acted unlawfully during the repurchase process, it must withdraw the shares by reducing the share capital within one year of the acquisition. The company must sell the repurchased own partnership shares, give them to members free of charge or withdraw them within one year, and thereafter the allocated reserve can be reversed.

In the case of a sale, a gain between the selling price and the carrying value is recognised under other income from financial transactions, while any loss is recognised under other expenses on financial transactions.

In the case of a withdrawal, the registered capital  is reduced with an amount equivalent to the nominal value, while retained earnings are increased or decreased with the difference between the nominal value and the (carried) repurchase value, as applicable.

It follows that companies need to consider a number of things when repurchasing own shares or partnership shares. It is best to consult with an accountant and a lawyer before making the decision, to ensure everything is implemented in accordance with the rules. Feel free to contact us, the accounting advisers of WTS Klient Hungary will be happy to help.

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