The twilight of property holding companies
 

As from 1st January 2010, in addition to several other new legal provisions, changes will take effect regarding the taxation of property holding companies. Behind the amendment of the law is the explicit intention of the legislator to eliminate the loopholes that have so far allowed the avoidance of Hungarian stamp duty and income tax liabilities on the sale of property in Hungary by using special purpose vehicles ("property holding companies"). Unfortunately, the amendment of the relevant legal provisions does not only affect these special purpose vehicles but also all companies that either directly or indirectly hold property in Hungary.

Changes concerning the stamp duty liability

As from 1st January 2010 stamp duty will be payable on the onerous transfer of property on the acquisition of a capital contribution (i.e. share, quota, cooperative share, investor share, converted investor share) in a company that holds property in the territory of the Republic of Hungary, if through such acquisition the ratio of capital contributions owned by

· the acquirer or the close relatives of a private individual acquirer,
· an entity whose majority owner(s) - either independently or jointly - is the acquirer or are the close relatives of a private individual acquirer, and
· an entity that is in an associated company relationship with the aforementioned persons and entities

reaches or exceeds 75% of the total capital contribution, either independently or jointly.

Where capital contribution is acquired in the above manner, the base of the stamp duty shall be calculated as follows:

· first the part of the market value of the Hungarian properties held by the company that belongs to the person liable to pay stamp duty shall be calculated by prorating to the capital contribution owned by such person,
· second, this amount shall be reduced by that part of the market value of the Hungarian properties held by the company that corresponds to the capital contribution acquired by the person liable to pay stamp duty
· more than five years earlier or prior to 1st January 2010,
· no more than five years before the date when the stamp duty liability is incurred but after 1st January 2010 in a manner subject to a stamp duty liability on the onerous transfer of property, or free of stamp duty, and
· by way of inheritance or voluntary conveyance.

The rate of stamp duty on the onerous acquisition of property will be 4% up to HUF 1 billion per property and 2% on the part of the market value of the property exceeding HUF 1 billion, but no more than HUF 200 million per property.

Changes concerning the tax liabilities on capital gains

As from 1st January 2010 the notion of property holding company will be introduced both in corporate and in personal income taxation as a result of which foreign investors will be liable to pay tax in Hungary in relation to their holdings in such companies in many instances.

According to the new legal provisions, by 31st July of the year following the calendar year all taxpayers will be liable to inform their associated enterprises that qualify as resident taxpayers or as non-resident entities (hereinafter collectively referred to as "Group")

· about the market value of the assets shown in their financial statements as of the balance sheet date, and
· the market value of properties located in the territory of the Republic of Hungary within the assets shown in their financial statements as of the balance sheet date,
· the tax residence of their shareholders in the calendar year,
· whether any of their non-resident shareholders alienated or withdrew their business share in the taxpayer during the calendar year, and also
· whether their shares are listed on the stock exchange.

This is necessary because the Group is required to determine whether its shareholders qualify as property holding companies under Hungarian law, i.e. whether Hungarian properties represent more than 75% of the total market value of the Group's assets, and whether the shareholder of any group member was a tax resident - for at least one day of the tax year - of a country that has not concluded a treaty with the Republic of Hungary for the avoidance of double taxation or has concluded such a treaty that allows the taxation of capital gains in Hungary. For the purpose of determining their tax liability, the members of the group shall determine the tax residence of their shareholders on the basis of the shareholders' statements and if such statement is not available from a shareholder by 31st July of the year following the calendar year, they will be required to act as if the shareholder is a tax resident of a country that has not concluded a treaty with the Republic of Hungary for the avoidance of double taxation.

It is an important provision that taxpayers listed on a recognised stock exchange are not regarded as property holding companies, similarly to members of a group none of whose non-resident shareholders alienated or withdrew their business shares during the calendar year.

As from 1st January 2010, in the event that a non-resident entity sells, contributes or transfers without consideration its business share in a property holding company, or if the registered capital of the property holding company is decreased by means of divestment, then the entity will incur a tax liability in Hungary on the positive amount of the consideration received by the former owner less the acquisition value of the business share or the justified costs of acquiring or holding such business share. The due date of paying and declaring the 19 per cent corporate income tax liability will be 20 November of the year following the tax year.

In the event that after 1st January 2010 a non-resident private individual transfers its business share in a property holding company for a consideration, lends it or earns income as a result of the decrease of the registered capital of the property holding company by means of divestment, then the private individual will incur a personal income tax liability in Hungary. Depending on the method of realising the income, the non-resident private individual will be required to determine the 25% personal income tax liability pursuant to the rules applicable to income derived from capital gains, income derived from the lending of securities or income withdrew from the entity. The due date of paying and declaring the tax liability will be 20th November of the year following the tax year also for the aforementioned private individuals.

Companies should take the aforementioned data supply and reporting obligation very seriously because in the event that the tax authority concludes in a subsequent tax audit that one of the shareholders of the group has failed to declare and pay its tax liability to the state tax authority because the company has not reported that it qualifies as a property holding company, then the company will have unlimited, joint and several liability for paying the shareholder's tax liability.

The effect of the changes on long-standing taxation structures

The new tax rules entering into force on 1st January 2010 may necessitate the revision of taxation structures based on special purpose vehicles that have been successfully used by Hungarian and foreign persons in relation to their property investments in recent years.

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