Timing is everything – in generation change too

Making plans belongs to mankind. We prepare shopping lists, holidays, meetings, budgets. Even it seems that we like things being organized, there are areas where planning might be already in mind; however, taking the decisive steps are awaiting.

The generation who established their business in the years of the political changes in Hungary at the beginning of the ‘90es is to step back slowly. Some of them might already have plans about what to do with the companies they lead, but this issue requires utmost care due to not only economical but family considerations as well. Even if the plans for resignation are more or less decided, it is not easy to really make the step back and giving up the daily business based on rather personal than business reasons. We often face with the conflict of family and business interests combined with the fear of the founders about the future operation. But if these decisions are not made in time, the heirs can end up in a situation that they have to run the business although they never intended. However, with a timely planning it can be ensured that the resignation of the founders is done in a smooth way according to their intention ensuring the stability, unity and continuity of the business, avoiding family conflicts and the dismembering of the company.

Though regarding corporate inheritance, there are no general approaches and best practices as family relations have a key role, the Hungarian legislation tries to catch up with these topics and it provides beneficial solutions that can be alternatives worth considering based on foreign experiences and practices. In addition to the already known and applied preferential rules connected to business transformations, some new instruments have been introduced in Hungary recently.

The fiduciary management and the trusts in the form of foundations are relatively new instruments in Hungary. The aim of these is to ensure the unity of the business on a way that the assets subject to these management forms acquire an economically independent form and designated persons may only acquire the profit based on the general operation of the company. Establishing a fiduciary management and a foundation might be done on a tax exempt way. By this the legal and economical ownership are divided and the assets – practically the companies – start their independent operation. The asset management forms become independent taxpayers subject to corporate income tax and other obligations under the general rules. Profit distribution to the designated persons – according to the establishing documents usually laid down by the founder to resign – is subject to dividend taxation on the level of the individuals. Nevertheless, when the capital (here shares in the company) is distributed if it happens at some point, it can be treated as tax neutral again under specific conditions. This may happen when the preconditions laid down already at the establishment are fulfilled or the whole construction is ceased. By this the handover of the assets may be postponed and linked to specific conditions to be fulfilled with the connected tax optimization.

Naturally – as always when dealing with taxation – the detailed provisions must be examined precisely in order to ensure the connected tax benefits already at the establishment and later distribution.

Even practical experiences are weak in this regard, we do believe that - similar to International examples - the Hungarian the legislation also slowly moves to a way that provides chances for a good (tax) planning opportunity. A good and timely planning may provide the chance to enjoy the time after resignation in a well-deserved calm environment.

LeitnerLeitner is one of the most influential tax consulting, accounting and auditing companies in Central Europe, with tested cooperation all over the World. Family business is a key area for us and we provide taylormade services for family owned enterprises. Here the combination of the tax experience and the consideration of family governance merge into advantageous solutions. Ask for our offer: budapest.office@leitnerleitner.com!