Tax expert: Hungarian SMEs need funds big time

The ‘surviving’ SMEs are now seeking new funds in order to improve their effectiveness and competitiveness. Bálint Szűcs, attorney-at-law, tax expert and partner of RSM DTM, talks about the situation and prospects of small- and medium-sized businesses in Hungary.

BBJ: Are company setup procedures regulated in an effective manner in Hungary in your view?
Szűcs: Generally it can be concluded that company setup and alteration procedures are regulated in a simple and effective manner. A simplified company setup process can be used for quick setup needs, which is practically administered within a day by the court of registration, but even general company establishment procedures are implemented within 15 working days. All company procedures are dealt with in an electronic manner, so the documentation as well as the resolutions of the court of registration are sent in electronically signed documents, which makes the administration quite simple. 

Are there any restrictions for company setup for individuals who were involved in bankruptcy before?
There are relevant rules to protect and to sanction those situations directly where the central budget was damaged. Pursuant to the so-called tax registration procedure introduced in 2012, new companies connected through their majority shareholder or executive officer to an insolvent or bankrupted company having or having left significant unpaid tax obligations cannot receive a tax number and therefore cannot be established.

However, there is no such restriction if a bankrupted company has or leaves unpaid dues towards creditors other than the state. Accordingly, the tax registration procedure is a kind of positive discrimination of the state as creditor, but, from the other side, the debts left towards other creditors do not result in the same negative effect for prospective company owners and managers.

There are certainly anti-avoidance rules in place for shareholders misusing the limited liability of their companies or managers withdrawing funds serving as a basis for creditors’ claims, but the proving and enforcement of such regulations are burdensome and do not have such direct effect as the above mentioned tax registration rules.

What was the effect of the crisis on the number of companies going into bankruptcy and liquidation?
This is a complex question, as it is driven not by one factor only. For example, the whitening of employment relationships may also play a role in the number of liquidated companies. It can be assessed generally that the number of companies going into liquidation was highest in 2010 and the number has been decreasing since then. On the other hand the number of voluntary liquidations and bankruptcy proceedings is increasing and as a result of this the total number of terminated business shows an increasing trend. The construction industry has been clearly affected by bankruptcy in a deeper manner than other sectors.

Is this because ‘chain debts’ affected this sector much more than others?
Chain debts are still a very current problem. There have been significant steps by the government to cure this issue, such as the recent introduction of minimum hourly rates in the construction industry, using an independent organ for the certification of performance and monitoring of disproportionately low prices in public procurement procedures. These are new instruments aiming at the right direction, but their effect cannot be measured yet.

How can the situation of small- and medium-size enterprises in Hungary be described?
Small businesses form the spine of business enterprises in Hungary, but in the past 20 years there has been a fundamental change in the structure of these companies. In the 1990s, small enterprises were found in large numbers due to high unemployment and therefore a lot of companies were established by so-called ‘forced entrepreneurs’. There has been a trend for eliminating these companies and the workforce returning back to normal employment. The portion of micro enterprises, namely businesses with less than 10 employees, is still more than 90%, so SMEs – although they have a significant role in the economy – still have a lot room to improve.

Another interesting issue is that most of the businesses are set up and working in central Hungary, mainly in the Budapest region. Subsidies are available with more beneficial conditions for underdeveloped regions, but statistics show that the chances for long-term survival of a business are greater in the central region of Hungary.

What kinds of funds are available for SMEs?
The range of possible funding measures is wide from credits through subsidies and private equity to venture capital. The most recent interesting initiative was the favorable SME growth credit program introduced by the National Bank of Hungary (MNB). The scheme, which was available for SMEs for investments, financing of their own share of subsidies and refinancing of foreign currency credits, drew significant attention. As a result, a similar funding scheme was announced by the national bank as of October 1, considering the experiences of the first round and focusing more on financing of new investments. The intensive awareness of these credit programs shows that SMEs have significant need for funds and also that a beneficial credit facility may serve their purposes well, sometimes even better than a subsidy.