With the effect of 1st January, 2010 the Hungarian legislation has adopted amendments to the Act XCIII of 1990 on Duties. The latest amendments intend to eliminate the loopholes of the provisions concerning the new land transfer tax payable upon the sale of the real estate-companies.
The original provisions (Act LXXVII of 2009) prescribe that a purchase of a company that owns directly a real estate in Hungary (“share deal”) is subject to the same land transfer tax as a regular asset deal (the general rate is 4%, and, over 1 Billion asset value, 2%). According to the initial version of the new regulation the share acquisition of the affiliated companies in the company that owns directly a real estate in Hungary shall be accumulated. A duty obligation is arisen in case the acquirer’s accumulated shareholding is increased on at least 75 % in the company that owns directly a real estate in Hungary.
This regulation may be easily circumvented as according to the original regulation the purchase of a holding company having an ownership ratio of 100% in the project company owning real estate was not subject to the land transfer tax. The explanation was clear stating that the acquired holding company did not own directly a real estate in Hungary.
The new provisions define the “company owning a real estate in Hungary” (“SPV”) and – compared to the original provisions – extend the affected share deals significantly as not only the direct real estate owner companies are concerned. A SPV means henceforward (i) a company owning directly a real estate in Hungary, (ii) a company having at least 75% ownership ratio in the company defined in clause (i), or (iii) a company that indirectly owns an ownership ratio of at last 75% the company defined in clause (ii). The indirect ownership ratio is calculated according to the ownership ratio(s) of the affiliated companies between the purchased company and a company owning a real estate directly in Hungary.
The new regulations intend to eliminate the loopholes mentioned above but may not correspond with the logic of the original provisions and there is still some inconstancy. In light of the new provisions the collateral share acquisition of the affiliated companies shall only be accumulated if a SPV-purchase might be identified.
We think that with some creativity of the counsellors and appropriate transaction structure there is a possibility to avoid the payment of the land transfer tax according to the law.
We take the view that system of land transfer tax payment obligation still offers some possibility for investors to optimise their intended transactions.
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