13 September 2019
As of the end of March 2019, it is possible to establish special asset management foundations as private foundations. In our previous article, we have summarized the legal background of such asset management foundations, while our current post describes the preferential taxation rules in connection with these foundations.
The detailed rules on the taxation of these asset management foundations were introduced by the mid-summer 2019 tax law amendments. As described in our previous article, this new instrument shows similarities to fiduciary asset management trusts, therefore – as expected – similar tax consequences were attached to the asset management foundations.
In theory, setting up the foundation and transferring the assets by the settlor to the asset management foundation may be done in a tax neutral way, since the Hungarian Duties Act provided full personal duty exemption for foundations (including gift tax). However, we would like to note that no special new rules were implemented into the Duties Act as a result of the recent tax law changes and based on the prevailing rules only public benefit foundations are subject to that duty/gift tax exemption. Although, it is the intention of the regulator to provide the same exemption as in case of trusts, so the transfer of assets could be done in a tax-exempt way, the prevailing legislation is not entirely clear on this matter.
The asset management foundation itself – similarly to the trust – is subject to Hungarian corporate income tax (thus taxed like a simple holding company), however it shall not pay any tax provided that it was established by a private individual in order to transfer assets solely to private individuals as beneficiaries and in the given tax year it only realized revenue from financial investments, receivables, securities or holding cash.
We would like to note that the trust is also subject to local business tax, but the Hungarian Local Tax Act does not list the foundations as subject to this kind of tax.
In case the beneficiaries receive payments from the initial capital of the asset management foundation, such payment is tax exempt at their level, while the payments made from the yield (proceeds or profits) of the foundation are taxed as dividends. If the initial capital and yield value could not be properly separated from each other, it should be assumed that all payments are classified as dividend.
In addition, with respect to the tax-exempt part of the payment from the asset management foundation, gift tax (duty) considerations might arise. However, the Duties Act does not include similar special rules like in case of trusts that determines the gift tax liabilities (or exemption) based on the relationship status of the settlor and the beneficiary. As result, the current prevailing legislation is not entirely clear with respect to the gift tax liabilities of the beneficiaries.
As it can be seen from the above, the taxation of the asset management foundations shows similarities to the taxation of the trusts, but some questions have not yet been fully clarified. It is clear however, that a new and very beneficial instrument has been introduced that widens the possible wealth planning opportunities. Our office is happy to provide further information and details on best possible alternative for your case.
In case of question please contact:
Dr. Gergely Bogdán