Focus on business transformations (Part II)
In the previous part of our newsletter, we discussed the transformation, merger and division of domestic companies (more details here), and we also mentioned the upcoming change in the regulation of international (cross-border) transformations. This newsletter is dedicated to the latter topic.
As mentioned in our previous newsletter, 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.
It is widely known that EU citizens have the right to free movement within the EU, but it is less well known that this also applies to EU businesses, for example, the freedom to relocate to another Member State (freedom of establishment).
What is the current practice?
In the current legal environment, cross-border transformations take place by the owners establishing the new company in the host country and then merging the two companies through a cross-border merger, or simply dissolving the former company without succession after transferring assets, contracts, etc.
It is easy to see that both methods are time-consuming and capital-intensive, can be difficult to implement, and experience has shown that freedom of establishment is not fully effective in practice.
What's going to be new?
The biggest novelty is that, with a few exceptions, all transactions that are part of a domestic merger or division can be carried out cross-border, so the new rule allows not only mergers but also demergers and spin-offs, thus helping companies with an international network that previously had only a branch in the other EU member state to continue operating there as a company while maintaining the legal continuity.
It is important to note that the cross-border transformation option is only available to capital companies, i.e. limited liability companies or joint stock companies. The new rules will only cover cross-border transformations where all the companies involved are or can be considered to be resident in an EU Member State.
What should the company do if it wants to carry out a cross-border transformation?
First of all, on the basis of a proposal from the company's executive officers, the General Meeting decides whether the members agree to the transformation, decides which company form available in the host member state the company should take and assesses in advance which current shareholders wish to own the successor company and what their financial contribution should be.
If everyone is in agreement, the General Meeting will entrust the Chief Executive with the preparation of the necessary documents (draft terms of transformation, including draft balance sheets and draft inventories) or, if they are already available, they may decide to bring a resolution in a subsequent meeting to go for the cross-border transformation.
The draft terms of transformation must be verified by an auditor, who must report, inter alia, on the adequacy of the cash compensation of any withdrawing members and on the compliance of the draft balance sheet and draft inventory of assets with the legal requirements.
The company must submit the documents to the competent domestic court of registry and, once approved by the court, the successor foreign company will apply for registration with the court of its future domicile.
The most important aspect of the process is that, as of the effective date, the successor company is the legal successor to all the company's assets and liabilities, in particular its contracts, debts, rights and obligations.
The final balance sheet must be drawn up within 90 days of the effective date and must also be certified by an auditor.
Tax advantages
Current European and Hungarian legislation 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.
Who is not eligible for cross-border transformation?
Beyond the cases for non-eligibility set out by Section 3:40 of the Hungarian Civil Code, the company may not decide or carry out a cross-border transformation if the company:
- is bankrupt or being wound up,
- is subject to compulsory liquidation proceedings,
- is undergoing restructuring proceedings;
- is the subject of judicial proceedings for restructuring or reorganisation.
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.
17 August, 2022
* * *
Should you have any questions regarding this newsletter,
the experts of VGD Hungary will be pleased to assist you.
This newsletter provides general information and does not constitute tax advice.
