With centuries-old history in the common law systems, the trust structure in Hungary has been available since 2014 as an excellent solution for family wealth planning, generational changes, and generational asset transfer.
What are fiduciary trusts "bizalmi vagyonkezelés" exactly?
Under a trust agreement, the trustor (or several trustors together) transfers certain assets (e.g. shares, real estate, rights, claims) to the trustee free of charge, who manages the resulting independent pool of assets, the trust property, for the benefit of the beneficiary(ies) in the framework set by the trustor(s). Ownership of the transferred assets is transferred to the trustee, who exercises the taxpayer's rights and fulfills the obligations related to the trust property. In the Hungarian market, the most widespread model is where the trustor, a close relative or a company set up by them (ad hoc non-business trust) acts as the trustee, thus ensuring the influence of the original owners over the transferred assets.
Why is this trust arrangement useful?
The great advantage of the trust structure is that it can be used in an extremely flexible way: a well-drafted agreement offers a tailor-made solution for asset protection, estate planning, company structuring and complex matrimonial property law and inheritance issues, as well as the smooth transition from one generation to the next, while the development and operation of the structure also offer numerous tax advantages.
Fiduciary trusts: what happened in 2023?
Let us take a look back in order to understand the currently effective rules on property placement.
The tax-free property placement option has been abolished
As of 12 September 2023, one of the most significant tax advantages of trusts ceased to exist: the transfer of assets, which was originally exempt from tax and duty, became taxable if the transferred assets were valued on the market.
What does it mean? The trust agreement allows the trustor to determine the current market value of the assets to be transferred, the amount of which may, at the time of a subsequent distribution of the assets, be considered as capital and therefore as tax-free income for the beneficiaries. This was also true where the valued holding was sold within the trust and the consideration was paid to the beneficiaries. To give an example, if someone valued his HUF 3 million private limited company to HUF 1 billion under the trust arrangement and then sold it for that amount, he could save nearly HUF 150 million in personal income tax. Please note that if the sole purpose of setting up the structure was to obtain a tax advantage (especially if the trustor–trustee rights and the beneficiary system were not defined),the risk arises that this may qualify as an abuse of rights.
The amendment of September 2023 closed this tax loophole by classifying the placement of assets as a sale, while making the unrealised exchange rate difference and the increase of asset value achieved through the revaluation taxable.
The amendment was intended to discourage arrangements specifically designed to obtain a tax advantage. Not without reason, it should be added: in recent years, an increasing number of entities have set up trusts prior to a planned sale of a business in order to realise a potential tax advantage, thus somewhat overshadowing the original purpose of the legal instrument, which was to settle long-term issues of asset protection, inheritance, and property law.
Perhaps recognising that this radical tightening would make the slowly emerging trust market completely unviable and lead to the slow death of trusts introduced just over a decade ago, the autumn 2023 tax package is less stringent.
Trusts reloaded – present and future: criteria for tax exemption
Output taxation
Under the provisions in force from 30 December 2023, the placement of assets by way of revaluation will continue to be a taxable sale, but the actual tax liability will only arise if the unrealised increase in asset value (either the asset subject to the revaluation or the asset that replaces it) or part of it is disbursed by the trustee to the beneficiary within five years of the placement. To continue with the previous example, if the HUF 1 billion proceeds from the sale of the business remain part of the trust property for at least five years and are not distributed to the beneficiaries, the actual tax liability may only arise on the reinvestment return. In the case of asset distribution within five years, the asset value increase is taxable as dividends, but – unlike under the previous rules – the tax is payable by the beneficiary rather than the trustor (so-called output taxation). The detailed rules also impose an administrative obligation on the trustee: if the assets are valued at the time of the placement, the increase in asset value must be determined (with the data reporting obligation of the trustor) and kept for 5 years.
This change is a step in the right direction: it puts a stop to abusive practices and clarifies the legislator's expectations: assets in a trust must be held for at least five years in order to qualify for the tax exemption.
Until now, it has been unclear within what period – based on the principle of the proper exercise of rights – could the tax-free distribution of capital to beneficiaries be questioned, given the long-term nature of the structure (the Civil Code maximises the legal relationship in 50 years). It now seems that the five-year period for tax exemption could be a point of reference for all trusts.
It is important to note that the amendment did not affect the taxation of the trust income: there is no change in the fact that the income from the trust is taxed as dividends for the individual beneficiary and the income from the trust assets in a long-term investment account continues to be tax exempt at the level of both the assets and the individual beneficiary.
The tax changes described above also apply to the other instrument of family wealth planning: asset management foundations and placement to the ownership of private foundations.
Fiduciary trusts 2024
To summarise the above, with careful and thorough planning, trusts are still an option to consider in a favourable tax environment, offering asset protection, estate planning and solving succession issues at the same time.
What should existing trusts do?
For an existing trust, it should be considered whether additional assets are worth transferring by way of a supplementary placement, whether the trust agreement provides for the respective powers of the participants in sufficient detail, in particular in the event of the death of the trustor, and whether the related administrative tasks have been completed. In a few years' time, the need for more sophisticated detailed rules may arise, or even a change in the beneficiary system may be triggered by a subsequent change in family circumstances (e.g. marriage or divorce, birth of a new child). It is also worth consulting an expert if the company accountant is inexperienced in the complex accounting rules applicable to the trust or if further support is needed for business valuation. In preparation for the sale of business, it is advisable to consider whether intra-group structuring could facilitate the planned transaction also in case of companies placed in a trust (e.g. prior separation of business lines).
RSM’s Property and Family business line is a specialised team of legal, tax, financial and accounting professionals within the company. Our qualified and experienced professionals are ready to design and develop, or tailor in detail, the most appropriate wealth structure for you and your family. Our team can provide ongoing support in all areas of expertise from the design of the property management structure to its operation.
