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Foundation trusts set for introduction - Kinstellar

Hungaryʼs Parliament passed the Act on Foundation Trusts on March 5, with the main purpose of introducing the concept, to provide a legal framework in addition to already operating trusts, and to manage, preserve and enlarge private equity owned by families for future generations, says a press release from law firm Kinstellar.

The act enters into force on March 29, notes Kinstellar. The law firm adds that the introduction in Hungary of this new model is justified as the Civil Code strictly restricts the economic activities of foundations to the point where they can only carry out activities that are directly related to the achievement of the foundation’s objectives.

Contrastingly, a foundation trust could, as its principal activity, manage assets regarding its own portfolio, notes the press release. The Civil Code foundation rules apply to foundation trusts unless there is a different rule regarding the matter.

A foundation trustʼs minimum registered capital requirement is HUF 600 million. The founder can fulfill this contribution either in cash or in a consideration other than cash, particularly as a contribution of real estate, movable property or share capital. At least five natural persons are required to serve on the board of trustees of a foundation trust. In addition, a supervisory board must also be set up, and a permanent auditor needs to be appointed.

The founder can transfer the founder’s rights to the foundation trust or to the board of trustees, Kinstellar explains. In the latter case, it is necessary to appoint an independent treasurer monitoring the activities of the board of trustees. Only auditors, attorneys or other trained professionals without a criminal record can fill the position.

Investment guideline

In addition to the deed of foundation defining the purpose of the trust, Kinstellar notes that an investment guideline must also be created, serving as the basis for managing the trust’s assets. The guideline defines the investment portfolio, as well as its risk management mechanism, and sets out the decision-making methods regarding investments, which are binding on the board of trustees.

The founder can set in the deed of foundation a minimum threshold on the trust’s assets, as long as the limitation is not lower than the registered capital of HUF 600 mln. If assets drop below the prescribed minimum, payments to beneficiaries must be proportionately decreased until the assets climb back to the minimum level of registered capital.

The founder does not set up an independent legal entity, but appoints a trustee managing the assets in accordance with a pre-established mandate that is set out in a contract, notes Kinstellar. In contrast, the foundation trust is registered as a legal entity by the court, it adds.

A foundation trust is suitable for the management of private assets even through generations, according to the law firm. This is supported by the fact that a trust management contract can be concluded for up to 50 years. Still, there is no time limit set on the existence of a foundation trust, and the legal entity only ceases to exist if its assets dip below the registered capital minimum for a period of three years.

One exception to this, notes Kinstellar, is the extraordinary situation pertaining to a non-public trust, when the founder petitions the court to liquidate the foundation trust. The decision does not affect payments which were already established and due to beneficiaries as the legal entity may only be deleted from the registry after the fulfillment of such payments.

Despite the law’s adoption, lawmakers have not yet created specific tax rules for foundation trusts. Kinstellar notes that it is currently not possible to determine how foundation trusts and their payments will be taxed. One of the most important issues regarding this new legal concept is whether legislators will give foundation trusts a tax-exempt status or, as in the case of trusts, ensure that foundation trusts are able to operate in a tax-neutral state.