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11.1. Direct and Indirect Tax Consequences of Re-Organizations

Hungary has implemented all the EU laws regarding the reorganization of businesses. Broadly speaking all transformations and reorganizations can be carried out in a tax neutral manner.

All basic transformations can be executed under Hungarian corporate law, including merger of two or more companies; de-merger into two or more companies either by the termination of the legal predecessor or by keeping the predecessor as surviving entity.

Cross-border transformations may also be carried out, provided that the companies are established within the territory of the European Union.

Generally, an entire transformation takes at least 4-6 months provided that all the necessary supporting documents are available. Transformations may be secured by binding tax rulings.

The assets and liabilities transferred in a merger or demerger may be revalued to fair market value. Tax losses incurred in prior years may also be carried over subject to specific conditions (see Sec. 7.1. for further details).

Tax Considerations

Transformations may result in taxable accounting gain both at the level of the transforming entity(s) and at the level of the shareholder(s). However, transformations may be carried out tax neutrally, provided they qualify as a preferential transformation under the EU Merger Directive

Pursuant to the CIT Act, which implemented the Merger Directive, the following transformations qualify as a preferential transformation:

  • The shareholder(s) of the predecessor company are granted newly issued shares in the successor company and a cash payment not exceeding 10% of the nominal value of such shares;
  • A single-member company merges into its sole shareholder; and
  • The merger is based on real business reason(s), which, if challenged by the tax authority, has to be proven by the parties.