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Timing is Everything, in Generation Change Too

Making plans is a human trait. We prepare shopping lists, holidays, meetings, budgets.  While it may seem like we prefer the important events of our lives to be planned out ahead, there are areas we tend to neglect. Surprisingly, retirement is one of these.

dr. Gellért Menczel-Kiss, Manager, LeitnerLeitner

The generation who established their business in the years of the political changes in Hungary at the beginning of the 1990s is slowly stepping back. Some might already have plans about what to do with the companies they lead, but this issue requires utmost care not just for economic reasons, but because of family considerations as well.

Even if the plans to retire are more or less decided, it is not easy to really take that final step back and give up the daily work, if only for personal rather than business reasons. We are often faced with the conflict of family and business interests combined, with the fears the founders have about future operations.

But if these decisions are not made in time, the heirs could end up in a situation that they have to run the business, whether that was what they intended or not. However, with a timely planning it can be ensured that the retirement of the founders is done in a smooth way, according to their intentions, ensuring the stability, unity and continuity of the business, avoiding family conflicts and the dismembering of the company.

Although in corporate inheritance there are no general approaches and best practices, as family relations have a key role, Hungarian legislation tries to keep up with these topics and it provides beneficial solutions that can be alternatives worth considering, based on foreign experiences and practices. Some new instruments have been introduced in Hungary recently.

Fiduciary management and trusts in the form of foundations are relatively new instruments in Hungary. The aim of these is to ensure the unity of the business in a way that the assets subject to these management forms acquire an economically independent form and designated persons may only acquire their 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 speaking the companies) start 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 retiring founder – is subject to dividend taxation on the level of the individuals.

Nevertheless, if the capital (here shares in the company) is distributed at some point, it can be treated as tax neutral again under specific conditions. This may happen when the preconditions laid down at the establishment are fulfilled or the whole construction is ceased. Thus, 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 at establishment and at later distribution.

Even if practical experiences are weak in this regard, we do believe that, similarly to international examples, the Hungarian legislation slowly moves in a direction that provides chances for a good tax planning opportunity. Timely planning may provide the chance to enjoy the time after retirement 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 tailor-made services for family owned enterprises. Here the combination of tax experience and the consideration of family governance merge into advantageous solutions.