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Taxation of Cross-Border Mergers and Acquisitions

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Taxation of Cross-Border Mergers and Acquisitions Taxation of cross-border mergers and acquisitions Hungary kpmg.com/tax KPMG International © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Hungary Introduction — The profit realized during the sale or in-kind contribution of the so-called ‘reported intangible assets’ (if entitled This overview of the Hungarian regime for mergers to royalty income) is exempt from corporate income tax and acquisitions (M&A) and related tax issues only under certain circumstances. Certain profit from non- discusses statutory frameworks for acquisitions in reported intangible assets may also become tax-exempt. Hungary. It does not consider any specific contractual — The general rate of value added tax (VAT) was increased to arrangements that may affect such transactions. 27 percent, as of 1 January 2012. The primary legislation governing the form and — The concept of real estate investment trusts (REIT) was introduced to the Hungarian legislation, as of 27 July 2011. regulation of companies is ACT V of 2013 on the Civil Code (the Civil Code), effective since 15 March — Withholding tax (WHT) on interest, royalties and certain 2014. As a result of the accession of Hungary to the service fees was abolished as of 1 January 2011. European Union (EU) on 1 May 2004, new forms — As of 1 January 2013, the transfer of a business unit of business associations have been integrated into may be out of scope of VAT if the acquirer meets certain the Hungarian company law legislation, such as conditions prescribed in the Act on VAT. the European economic interest grouping and the Asset purchase or share purchase societas Europaea (SE). An acquisition in Hungary usually takes the form of a Recent developments purchase of shares of a company, as opposed to its business and assets, because capital gains on the sale of In the past few years, the Hungarian parliament approved shares may be exempt from taxation, while the purchase several tax law changes that might have implications for M&A of assets might be subject to VAT. The advantages and transactions in Hungary. The key tax law changes are as follows: disadvantages of asset and share purchases are compared — As of 1 July 2010, the statutory corporate income tax rate later in the report. in Hungary is 10 percent a tax base of up to 500 million Purchase of assets Hungarian forints (HUF) and 19 percent above this threshold. According to Hungarian legislation, a gain from the sale — As of 1 January 2012, the provisions on carry forward of assets is taxable for the company that sells those losses have changed significantly. According to the new assets. The gain becomes part of the general tax base rules, tax losses may only be utilized for up to 50 percent and is subject to corporate income tax at the normal rates of the tax base (calculated without the utilization of the of 10 percent on a tax base of up to HUF500 million and carry forward losses), and further restrictions may apply 19 percent above this threshold). on changes in ownership structure and/or transformations Generally, the sale of assets is also subject to the standard (mergers, demergers). As of 1 January 2015, the rules on VAT rate, which is currently 27 percent. tax loss carry forward became even stricter, with a general 5-year time limitation introduced for tax losses arising in In addition, transfers of immovable property, vehicles 2015 or later. Tax losses generated before the end of 2014 and rights related to them are subject to transfer tax. may be utilized by the end of 2025. Further restrictions The transfer tax base is the market value of the assets may apply on the amount of tax loss carry forward in transferred. The standard rate of the tax is 4 percent the event of a change in ownership structure and/or for real estate up to HUF1 billion and 2 percent on the transformation (merger, demerger). See this report’s excess amount. The amount of the tax cannot exceed information on purchase of shares for details. HUF200 million per plot number. — The rule on thin capitalization is extended to cover interest- Thus, the transfer of the real estate and any other asset free related-party liabilities — however, it is possible to mentioned earlier may trigger a transfer tax liability payable reduce the amount of liabilities with the daily average by the purchaser. amount of financial receivables (as of 1 January 2012). Taxation of cross-border mergers and acquisitions | 1 © 2016 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Hungary Purchase price Tax attributes The transfer pricing rules have to be applied in the case of According to the Hungarian legislation, any gain from the a sale of assets between related parties. In Hungary, the sale of assets is taxable for the company that sells them. The transfer pricing rules broadly comply with the Organisation gain is part of the general tax base and subject to 10 percent for Economic Co-operation and Development (OECD) transfer corporate income tax up to HUF500 million and 19 percent pricing guidelines. The transfer pricing rules allow the tax above this threshold. The transfer pricing rules have to be authorities to adjust taxable profits where transactions applied in the case of a sale of assets between related parties. between related parties are not at arm’s length prices. Value added tax Goodwill In general, the sale of assets is subject to the standard VAT Under changes to the Hungarian Accounting Law announced rate, currently 27 percent. As of 1 January 2013, the transfer in 2016, goodwill and badwill can only arise in standalone of a business unit may be out of scope of VAT if all of the financial statements if the acquisition is realized through following conditions are met: item-by-item recording of assets and liabilities (i.e. asset deal). — The acquirer acquired the business line with the aim of Goodwill and badwill cannot arise where the entity obtains further operation. qualified majority influence through the acquisition of interest in another company. In line with this, the consideration — The acquirer is a Hungarian tax-resident entity (or (purchase price) paid on a purchase of interest is considered becomes Hungarian tax-resident as a result of the in-kind as the book value of the participation. contribution). Under a transitional rule, the book value of goodwill or badwill — The acquirer undertakes an obligation to assume the that cannot be presented separately based on these new rights and obligations prescribed under the Act on VAT rules an amendment should be made to the 2016 opening in connection with the assets acquired (with certain balance of the related participation. However, the goodwill or exceptions) at the time of acquisition (e.g. monitoring badwill should remain in the books where: period regarding properties). — the value of the badwill exceeds the 2016 opening balance — The acquirer does not have any legal status that would of the related participation, and violate the above obligation (e.g. VAT-exempt activity). — the relating participation can no longer be found in the books. — The activity within the frame of the business line is limited to supply of goods and services giving rise to deduct the VAT. As of 1 January 2016, goodwill is depreciated over 5 to 10 years for accounting purposes if its useful lifetime cannot — Where the acquired assets include real estate property, if be estimated. A 10 percent tax depreciation also may be the seller opted for a VAT-able sale of real estate or the sale of claimed for corporate income tax purposes, if a declaration real estate is otherwise VAT-able (e.g. new real estate), the is made in the respective tax return that the circumstances purchaser is obliged to opt for VAT-able sale of real estate. of both presenting and cancelling the goodwill in the books If these conditions are not met, the transfer of a business unit was in line with its intended purpose (i.e. not abusive). (The would be regarded as a single service provision based on the previous regime did not allow the ordinary depreciation of current approach of the Ministry for National Economy and the goodwill for accounting purposes, however, an extraordinary Tax Authority. Thus, the whole purchase price of the business depreciation might have been accounted for on goodwill unit would be subject to VAT at a rate of 27 percent. (e.g. if the book value permanently and significantly exceeded the market value), which qualified as tax-deductible for Transfer taxes corporate income tax purposes.) If the assets to be sold include real property, as noted For goodwill or badwill that may remain in the books despite earlier, the buyer is liable to pay real estate transfer tax. As of the 2016 changes, the taxpayer may choose between of 1 January 2010, the standard real estate transfer tax rate applying the new rules or continue with the rules that were in is 4 percent up to a value of HUF1 billion and 2 percent of force at the time the goodwill was recorded in the books. the excess value of the real estate. The maximum amount of the tax is capped at HUF200 million. No real estate transfer Depreciation duty liability arises if the transfer is a result of a preferential The purchase price of the assets may be depreciated for transformation or preferential exchange of shares as tax purposes.
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