What are trusts?

A trust contract means a settlor, i.e. the owner of the assets, transfers to the trustee assets, rights and claims that the trustee then holds in his own name, but on behalf of the beneficiary (usually the settlor and his family). Although the legal structure is slightly different, private foundations achieve their purpose through similar partial independence of the assets they hold from the founder.

From a tax perspective, trusts and private foundations are relatively popular investment structures because they allow for the integration of certain assets into tax- and duty-free frameworks during the settlement.

Current rules of trusts 

Under the present system, there are basically two types of asset settlement structure with regard to valuing the assets involved:

• transfer of the assets concerned at their acquisition value, or
• settlement of assets at market value (upwards revaluation).

Why does it matter what value is placed on each asset when creating the trust or private foundation?

From a tax point of view, the crucial difference occurs when the trustee or private foundation sells the given asset (e.g. a share in a limited liability company) and distributes the proceeds of the sale to the beneficiary (disposition of assets). For example, if a share in a limited liability company that is given to a trust or a private foundation during the settlement for HUF 10 million is then sold for HUF 150 million, the tax liability of a private beneficiary is based on the difference between the two amounts, i.e. HUF 140 million. However, if the settlement for the share in the limited liability company is based on its market value at the time, for example HUF 100 million, the tax liability for the HUF 150 million proceeds from the sold share in the limited liability company is only calculated on the difference of HUF 50 million.

Under the current provisions of the Act on Personal Income Tax, an individual who transfers assets to a trust or private foundation is not liable to pay tax on the transfer of the assets either at acquisition value or in the case of a settlement revalued to market value.  

What is changing?

The example above clearly shows that among trust structures, the upwards revaluation option can generate significantly higher after-tax income than if the assets concerned were transferred at their acquisition value. This is precisely where the legislator intervenes with an amendment to the law, by removing the possibility of tax-free upwards revaluation. The new legislation does not amend the rules on the tax liability arising when disposing of assets, but imposes a special tax liability when creating the structure, for the asset settlement (i.e. when the settlor, the founder in the case of a private foundation or any joining private individual places their assets in trust or transfers them to the private foundation).

If there is any upwards revaluation on the transfer of an asset (i.e. the accounting value of the asset exceeds its historical acquisition cost), this generates taxable income for the settlor or founder. If there is no upwards revaluation at the time of the transfer, there is of course no taxable income at the time either.

Other amendments

Furthermore, based on the amendments to the bill that have been proposed in the meantime, a further change will introduce the obligation to report the value of the asset settlement to the NAV, while a three-year tax deferral option has also been added to the regulation. The tax package was adopted by the Hungarian Parliament on 4 July, the amendments related to trusts and private foundations will enter into force on the 60^th  day after the promulgation.

Although the amendments will undoubtedly remove a major tax benefit of trusts and private foundations, there are still a number of tax advantages associated with settling assets without upwards revaluations that may make it worthwhile choosing these forms of long-term wealth planning.

If you need an expert on trusts or other tax planning tools and tax optimisation solutions, our tax advisers will happily advise you. Feel free to contact us.

A Trusts: narrowing options for optimising tax bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

New rule on income garnishment among provisions of tax enforcement law

The law introduces a new information obligation for the employer, according to which employers are obliged to inform both the tax authority and the employee of the employee’s income that can be garnished every month, along with any changes and other circumstances, within 15 days.

The collateral swap

The law introduces a new, customer-friendly option, which means assets seized by the tax authority can be released from enforcement proceedings. This opportunity applies if the debtor offers another asset as collateral, whose market value reaches or exceeds the value of the movable to be swapped, and if recovery of the debt is still ensured after the release. Additionally, the application has to be submitted by the debtor prior to the setting of the auction date at the latest.

Suspension of enforcement proceedings

The tax enforcement law provides new rules for cases when enforcement proceedings can be suspended. In line with the former rules, proceedings will still be suspended in future if deferred payments or payment in instalments are approved. However, the rules have been tightened for debtors in that only an application for payment relief submitted within 8 days of the due date of the debt will suspend the enforcement.

Options to appoint a trustee

The tax enforcement law regulates the cases when a trustee can be appointed. This is necessary when debtors have assets that can be seized, but their whereabouts are unknown, they live abroad, or have resided abroad for a long time, and they have no representatives. In such cases, the assets can be seized and sold after the appointment of the trustee.

Changes regarding challenges of enforcement

The law contains several new features in respect of challenging enforcement: firstly, it increases the scope of cases when applications containing an enforcement challenge can be rejected, and now includes enforcement challenges that do not contain any reason for annulling or changing the measure. Secondly, as opposed to the current 8-day deadline, the proposal allows for a much longer period, i.e. 15 days, for the submission of enforcement challenges. Additionally, the law revises the rules on the postponing effect of enforcement challenges. An enforcement challenge does not suspend further enforcement actions, except for challenges submitted for the first time after the setting of the auction date to dispute the lawfulness of setting such date; this helps to avoid time-wasting and the submission of challenges related to false grievances.

Other changes

The tax enforcement law did not change the fact that enforcement proceedings can be freely launched without notifying the debtor in any way. One change, however, is that in the case of a debt of HUF 10,000 (approx. EUR 32) or less a payment reminder is sent out, and the tax authority will at most only implement an enforcement-related internal transfer to recover the debt.

According to the reasoning in the tax enforcement law, one of the main new concepts is that movables can be physically taken from the debtor right after they are seized, in order to prevent any sale from being undermined or prevented.

In addition to the stricter rules there are some positive changes for debtors in relation to the seizing of properties. In the case of a residential property used directly as the residence of a natural person or private entrepreneur (debtor) and their close relatives living with them, such property cannot be seized if the amount of debt does not exceed HUF 500,000 (approx. EUR 1,600), even if the value of the residential property is proportional to the extent of the debt.

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