During the last six years of economic growth, the number of insolvency proceedings in Hungary has reduced. As a result of the coronavirus epidemic, however, the positive trend is likely to reverse from the second half of 2020 and even more so from 2021.
Similarly, group restructurings are expected to more often lead to the voluntary dissolution of unnecessary companies. In parallel, in the area of M&A, the world has slowed down; many deals have been terminated or postponed as parties struggle with new risks for valuation, availability of financing, business uncertainty and remote due diligence work.
However, buyers with strong capital positions may still see increased potential and the number of international restructurings and transfers of businesses rise, representing a means of international reorganization for multinationals.
Difficult financial situations will, sooner or later, lead to the need for insolvency proceedings or a decision to eliminate less effective business activities and close unnecessary companies within the group. During a major crisis, what is believed to be a stable businesses can also be shaken; supply chains are interrupted, access to credit becomes difficult and more expensive, renewable credit lines run out and many otherwise viable businesses may find themselves insolvent.
One of the most important tasks for policy makers in such times is to increase the resilience of viable businesses and give them a chance through domestic insolvency proceedings to stay alive. This gives special importance to the implementation of the EU Directive on restructuring and insolvency, expected in July 2021. Insolvency law should have effective procedures for reorganization, also for the liquidation of non-viable companies. In addition to this, a less formalized, highly flexible restructuring framework is also essential for those enterprises which typically are outside the scope of formal insolvency proceedings.
Government measures such as the moratorium on loan repayments supporting liquidity can be a real help to businesses in difficulty. The cooperation of business parties in accepting payment delays and partial fulfilment is also important. However, it is certain that companies that were on the verge of insolvency even before the onset of the coronavirus had a negative impact on their operations will disappear from the economy.
However, all these processes require
caution from a tax perspective. Tax audits during liquidations and voluntary
disclosures play an important role in establishing the stability of the economy
as a whole. Exit taxation and transfer pricing measures are effective lines of defense
against aggressive profit shifting out of Hungary. Companies should also be
prepared for these mechanisms and increased tax authority attention.
In a post-pandemic word, a rush of previously terminated or postponed M&A deals is expected; due to the special circumstances, there are likely to be unrepeatable chances to acquire new markets, customers and valuable teams from competitors. This, combined with the generation change due in many businesses now will shake this segment. Such an environment raises unique considerations for parties contemplating an M&A transaction.
Special COVID considerations for M&A transactions consist, among other things, of understanding what steps a target has taken to mitigate against the adverse health effects of the coronavirus on its workforce and on employment-related diligence. Working from home can also have a material impact on employment-related taxes and withholdings, and raises potential tax exposure for conducting business in another jurisdiction. The review of amendments to material contracts and terms considering the pandemic might affect future enforcement, defenses against contract breaches, and the consequences of termination. The ability to fulfil contractual obligations and the performance potential of the other party should also be monitored closely as an area for further litigation.
LeitnerLeitner is one of the most influential tax consulting, accounting
and auditing companies in Central Europe, with tested cooperation all over the
World. As M&A is a key area of specialization for us, with the help of our
experts you can prepare the transition of your company or we can find a
sustainable financial solution for your situation.
