Flexibility in managing Hungary’s minimum capital requirement

Writing in the British Chamber of Commerce’s spring newsletter, our Hungary tax and legal expert says involving your partners will help mitigate issues that arise in capital.

The new Civil Code (Act V of 2013) requires all limited liability companies to have a minimum registered capital of HUF 3,000,000. For companies founded with the previous minimum of HUF 500,000 applicable to the period from 1 September 2007 to 14 March 2014, the change implies an obligatory capital increase to the new minimum amount until 15 March 2016 at the latest.

The increase is likely to create challenges to both smaller entities because of shortage of funds and larger ones due to the administrative burden involved in executing corporate changes. However, it can be handled in several ways and provides companies with opportunities to review their capital structures, remedy negative equity positions or achieve thin capitalisation optimisation.

The capital increase can of course be managed by a simple cash payment. Thanks to the Act’s dispositive rules, capital payments can be made in several instalments with no prescribed deadline. Nevertheless, setting a payment deadline in the articles of association is encouraged. More importantly, a dividend allocation is not allowed when unpaid registered capital exists.

The Act also offers the option to make the increase through a contribution in-kind, either in the form of fixed assets - for which a value certification is needed, or made up of intercompany loans from the parent or other intragroup companies.

Multinational companies whose activity is financed by intragroup loans may find it financially efficient to convert part of these loans to equity. Keeping in mind the usual length of internal approvals for treasury transactions at such companies, this option could definitely be a more acceptable solution to meet the minimum requirements. Loans received from the parent company are always agreed and confirmed by both parties, and with this the founder’s receivable when contributed to a company that is, and is expected, to be a going concern for the foreseeable future, qualifies as a contributable asset from both legal and taxation perspectives.

Conversion still requires consideration especially in cases where the loan is not from the founder(s) but from other intragroup companies and where the loan’s currency is different from the bookkeeping currency.

In the first case, thought should be given to the route by which the loan can be allocated to the parent in order to make it suitable for contribution, or, where this is not possible, whether it makes sense to involve the owner of the loan receivable in the company structure. Difference in currencies can be resolved by a before capital-increase conversion of the loan to the bookkeeping currency, so the company can ensure that the capital increase can happen in the required currency and in the exact amount.

The number of possibilities for managing capital increase is broad, as is the number of potential issues that might arise. We highly recommend companies involve their accountants, lawyers and tax advisors in this process in order to reach an optimal result.

First published in the British Chamber of Commerce in Hungary’s spring tax and legal newsletter.

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