On 15th of March 2014, Hungary introduced the legal structure of “trust” in its legal system. Similarly to the Anglo-American trust, the Hungarian trust consists of three actors, namely, the settlor, the trustee, and the beneficiary. The settlor is the owner of the assets, whereas the trustee manages the settlor’s assets. Subject to certain conditions, the beneficiary becomes entitled to the settlor’s assets and/or allowances from the income generated by them. The beneficiary should be specified in a contract concluded between the settlor and the trustee. It is worth mentioning that the settlor may be one of the beneficiaries of a Hungarian trust.
The Hungarian trust can be used for various purposes, including, but not limited to, tax planning, protection of assets against potential creditors, overcoming inheritance issues, asset management, and protection of business secrets.
What laws govern the Hungarian Trust?
The Hungarian Civil Code and the Trustees Act govern Hungarian trusts. While the former governs trusts in general, the latter regulates the activities of professional trustees and obliges non-professional trustees to register the trusts in which they participate.
The rules regarding trusts in the Hungarian Civil Code are mainly dispositive. The settlor is not obliged to comply with dispositive rules. However, there are certain mandatory rules, e.g., (1) the trustee must separate the trust assets from trustee’s own assets, (2) the trustee is not allowed to be the sole beneficiary, (3) the trust arrangement must be stipulated in writing, (4) the beneficiary and the settlor are not allowed to instruct the trustee, and (5) the trust period cannot exceed 50 years. Any deviation from the mandatory rules is considered null and void.
The Trustees Act imposes a number of obligations on professional trustees. For example, a professional trustee can be only a company registered in Hungary or a Hungarian branch of a company registered in the European Economic Area. A professional trustee is allowed to conduct only asset management activities. Furthermore, the name of the professional trustee must make reference to property management. Professional trustees must hold appropriate licenses and fulfill strict requirements regarding their employees and equipment.
Is the Hungarian Trust a real trust?
It is widely agreed that the Hungarian Trust falls within the scope of the definition of trust as defined in the Hague Convention on the Law Applicable to Trusts and Their Recognition. Although some authors argue that Hungarian trust differs significantly from its Anglo-Saxon counterpart, the two legal structures provide the same level of protection for the beneficiary. The difference between the two types of trust lies in the means for providing such a protection. The Hungarian trust relies on contractual rights, whereas the Anglo-Saxon trust relies on the law of equity.
Can a Hungarian Trust be created for charitable purposes?
The Hungarian Civil Code contains a provision stating that the beneficiary may be described by reference to a class of beneficiaries. This provision can be used for the creation of charitable trusts.
What documents are needed for concluding a trust agreement?
The documents necessary for concluding a trust agreement differ depending on whether the settlor is an individual or a legal entity. Professional trustees usually require individuals acting as settlors to present the following documents: (1) passport; (2) personal ID or driver’s license; (3) address card (if not available, a public utility invoice should be presented); (4) declaration about the source of the funds; (5) Politically Exposed Person (PEP) declaration; (6) persons who can be linked to the United States must present W-forms. Legal entities acting as settlors may need to present a (1) certificate of good standing with apostille; (2) beneficial owner declaration; (3) PEP declaration; (4) declaration about the source of the funds; and (5) W-form.
What taxes apply to Hungarian Trusts?
Hungarian trusts are subject to corporate tax on their worldwide income. The rate of the corporate income tax is 10% for net income not exceeding HUF 500,000,000 and 19% for net income equal to or exceeding HUF 500,000,000. Trusts are subject to a local business tax varying between 0% and 2%, depending on their location. Trusts are entitled to all benefits and allowances of the Hungarian companies.
Capital distributions from a Hungarian trust to Hungarian resident individuals are tax free. Capital distributions from a Hungarian trust to non-Hungarian resident individuals are taxed in accordance with the tax rules of beneficiary’s residence. Income distributions from a Hungarian trust to Hungarian resident individuals are subject to personal income tax of 16%. Income distributions from a Hungarian trust to non-Hungarian resident individuals may subject to withholding tax of 15%, but the double tax treaties may reduce the rate of the withholding tax to 0%.
Hungarian corporate entities receiving capital distributions from a Hungarian trust must pay corporate income tax on the distributed capital. Non-Hungarian corporate entities receiving capital distributions from a Hungarian trust are not subject to withholding tax in Hungary. No tax applies to income distributions from a Hungarian trust to Hungarian corporate entities. Non-Hungarian corporate entities are not subject to Hungarian withholding tax on income distributed by a Hungarian trust.
European investors willing to establish a trust no longer need to use structures located outside continental Europe. Hungary has brought the advantages of the Anglo-American trust in the heart of Europe.
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