Focus on business transformations (Part I)
After the disclosure of the Hungarian statutory financial statements at the end of May, many accounting professionals will have a well-deserved rest, but for business managers and business owners, the freed-up capacity also provides a great opportunity to restructure and rationalise their companies. They can therefore decide to merge (merger by amalgamation, merger by acquisition), de-merge (division, separation) or change their legal form (also considered a business transformation type under the Hungarian corporate laws).
When can a business benefit from a transformation?
Mergers are used to expand through acquisitions. In addition to promoting economies of scale and efficiencies, they enhance synergies, allow a company to gain ownership of intellectual property, increase market growth by penetrating new customer segments and geographic regions, diversify risk by broadening client portfolio or product diversity, and increase the security of supply.
Demergers allow companies to dispose of the debts and risks associated with one of their subsidiaries, and to concentrate on core competency, which can significantly increase profitability by streamlining workflows and allocating capital rationally. Last but not least, it is a way to ensure appropriate separation of assets and a more tax-efficient corporate structure.
Changing the company’s legal form helps owners to better adapt to the changing market environment. For example, the transformation from a limited liability company (Ltd.) to a private company limited by shares (Plc (Ltd.)) allows for the raising of new equity capital and more flexibility in changing ownership.
Why is summer (and winter) the best time to decide?
The recently published Hungarian statutory financial statements for the 31 December reporting date can be used to support equity until 30 June 2022, so it is advisable to time the transformations to this period. This saves resources, as the draft balance sheet and draft inventory of assets do not need a separate accounting closing and can be audited more quickly and at less cost. It is important to note that the 6-month interval is only applicable if the option of accounting revaluation is not exercised during the transformation - if it is, then the data from the last financial statements can only be used for 3 months.
The technical steps of transformation - what to be prepared for?
The ownership decision triggers the process, then an accounting closing should be carried out and the final asset balances should be certified by an auditor. If the company (or one of the companies involved in the transformation) is otherwise subject to an audit, the draft balance sheet must also be audited. However, the audit of the balance sheet cannot be carried out by the selected auditors and should be certified by an independent auditor.
From the accounting perspective, the process of transformation can be divided into two stages: the preparation of (i) the draft balance sheet(s) and asset inventory(s) and (ii) the final balance sheet(s) and asset inventory(s). In both cases, both the balance sheet, which is used to support the assets and equity of the company and the detailed inventory, which details the assets and liabilities of the predecessor and successor company(ies), should be prepared.
The purpose of the draft balance sheet and inventory of assets is to support the owner's decision on the transformation and to support the procedure before the Court of Registration. The purpose of the final balance sheet and inventory of assets and liabilities is twofold: first, to demonstrate that the amount of capital registered with the Court of Registration on the basis of the draft balance sheet(s) of the successor company(ies) remains available and, second, to provide the basis for accounting for the changes that have occurred during the transformation.
From a taxation perspective, we highlight the Hungarian institution of beneficial transformation, which, in line with the EU Merger Directive, provides for the deferral of taxation for the transformed company(ies) and their owners, subject to certain conditions, until the realisation of the actual capital gain, which is only expected on the future sale of the company or capital divesture.
Important law amendments related to cross-border company transformations
From 1 September 2022, the re-codified legislation governing the company law background of cross-border transformations will enter into force, significantly expanding the possibilities for company transformations within the EU, allowing, among others, a Hungarian Ltd. company to be transformed into a German GmbH while maintaining the legal continuity of the company.
In our next newsletter, we will outline the essential elements of this legislative change and the new opportunities it brings.
Our services
VGD Hungary has a team of experts with extensive experience in domestic company transformations and restructurings, providing a full range of audit and tax advisory services to make the process smooth.
23 June, 2022
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This newsletter provides general information and does not constitute tax advice
