The equity of a Kft (LLC) must always exceed 50% of the issued capital. The Companies Code in principle provides several ways to restore equity: waiver of debt results in a profit taxable under normal conditions, so companies are trying to solve this problem by an additional payment or a capital increase. However, the Hungarian Tax Office may re-qualify these methods when they involve companies in liquidation.
The issued capital of the Kft (LLC is a minimum of 3 million HUF. It is divided into as many parts as there are members but the minimum is set at 100 000 HUF (an LLC has a maximum 30 members).
Additional payment to restricted reserves
According to section №3 183 of the new Civil Code, the articles of association of a corporation may provide that general meeting may require members to make additional payments to the company in consideration of losses incurred. The bylaws shall specify the frequency and the maximum amount payable. The general meeting will adopt the modalities and timing of operation. When the company has made profits, additional payments will be refunded to members who originally paid them.
The additional payments do not increase the share capital of the company but registered in restricted reserves in equity. The Civil Code provides that the additional payment can be made by contribution in kind. The Accounting Law in paragraph №38-4 only mentions the case of payment in cash in paragraph №38-9 but also provides for the use of other assets.
Paragraph 3 of the Law provides that the additional payment must be made by all the members in proportion to their share held in the company. However, the commentary of the Act (LFO-Orac editions) maintains the old interpretation that the general meeting may provide that the members are not required to make additional payment in proportion to their ownership in the company. As a precaution, we recommend all shareholders to contribute in proportion to their ownership in the company.
Objections of the Hungarian Taxation Office
Warning: The Hungarian Taxation Office re-qualified an additional payment made by bank transfer when the company was in voluntary liquidation period.
The Hungarian Taxation Office is also Office is also likely to criticize an additional payment made by contribution of a receivable extended by one member to the company itself if the equity of the company has already deteriorated too much. In fact the Taxation Office will not fail to note that the fair value of the loan to its Hungarian subsidiary no longer corresponds to its face value. So the Tax Office may argue that the additional payment has not been properly realized and that this is an waiver of debt taxable in the recipient subsidiary.
Objections of the Hungarian Tax Office
The Hungarian Taxation Office questioned an additional payment in cash to the petty cash of the company, immediately followed by a cash withdrawal considered as the repayment of a shareholder loan.
The capital increase
A capital increase requires a modification of the articles of association passed by the general meeting. It can be in cash (i.e. bank transfer) or in kind. A capital increase may be accompanied by payment of a premium, registered capital reserves.
The contribution in kind may consist of a debt owed by one of the partners of the company itself, and therefore counted as debt by the latter.
Objections of the Hungarian Tax Office
The Taxation Office re-qualified a capital increase after the opening of the liquidation period.
The Taxation Office also re-qualified a capital increase by contribution of a loan granted to the company by its majority shareholder, when the company was itself in voluntary liquidation.
The partner could not ignore that the company was in liquidation, had not the necessary assets that would have allowed the repayment of the loan and hence the fair value of the receivable in the hands of the member should be reviewed down almost to zero.
Also a capital increase is expected to enable the future development of a society. In the case of a company in liquidation, the taxation office considers this an act without economic justification, only to avoid tax.
As a result, the Taxation Office re-qualified the operation in debt waiver in favour of Hungarian company. This is a taxable profit and the company can use its previous tax losses only up to 50% of taxable profit for the year.