Corporate structures are constantly evolving: mergers, demergers, and transformations are complex legal and business tools that companies use to optimize their taxation, enhance asset protection, and improve operational efficiency and transparency.
Companies operating on a calendar year basis should make their decisions as soon as possible, as the annual reports approved in May can be used to initiate transformation processes only until June 30.
In Hungary, corporate transformations – such as merging, demerging or changes in corporate forms - can serve a variety of strategic purposes. Among other things, corporate transformations can be used to establish a holding structure that enhances asset protection and enables more efficient taxation; to carve out a business unit intended for sale, or to merge independent enterprises as part of an ownership restructuring. These processes can also provide more effective frameworks for implementing employee share ownership schemes.
However, timing is key!
For companies with a financial year aligned with the calendar year, annual reports finalized in May can be used to initiate transformation procedures until June 30. Therefore, if there is an intention to implement any of the objectives above, it is advisable to make a decision as soon as possible.
Forms of corporate transformations
1. Merger (by merger or merger by acquisition)
Operating as a standalone entity within a corporate group is not always justified from a business perspective – especially when there is no longer a distinct business activity behind it whose separation would bring clear benefits, or when its continued existence simply adds unnecessary complexity to the group structure.
Merger should be considered in the following cases:
- Unjustified Separate Operation - Structural Simplification
Operating as a separate entity may become unjustified when a company no longer has significant independent business activity, or if its functions overlap with those of another company within the group. In such cases, a merger or merger by acquisition may be implemented, where the affected company ceases to exist as a legal entity, and its entire assets – including contracts, employees, and equipment – are transferred to another company (the so-called successor entity).
This step can reduce administrative and operational costs, simplify corporate governance, and increase efficiency by pooling resources. Such integration may also be carried out partially through separation by acquisition or division by acquisition, meaning that specific functions (typically back-office or administrative services) are carved out from each group company while retaining their core activities. If employees are transferred to the successor entity, the relevant labour law regulations must be observed throughout the process.
- Integration of an Acquired Company
In the course of corporate growth through acquisitions, the purchase of an independent company is only the first step; real value is created when the target company is effectively integrated into the corporate group.
In Hungary, one possible method of integration is merger by acquisition, in which the acquired company ceases to exist as a separate legal entity and is fully merged into the parent company or into another operational entity within the group that performs similar functions.
The goal of integration is to achieve operational consistency and transparency: parallel administrative systems are eliminated, and contract management, IT, accounting, and decision-making become unified.
This lowers expenses, simplifies management and improves inside processes.
It is also quite common for one shareholder to buy out another using bank financing. In such cases, a commonly used structure involves financing being provided for a special purpose vehicle (SPV) established specifically for the acquisition. The loan agreement typically requires the SPV to merge into the target company, a condition set by the bank to ensure that the acquisition loan is transferred to the operational company itself – a mechanism known as a 'debt push-down'. This structure provides additional security for the lender, while allowing the financing costs to appear on the books of the operating company.
- Mergers and joint venture-style partnerships
To achieve greater market share, enter new markets, facilitate knowledge sharing, or capitalize on economies of scale, independent entities may decide to establish a joint venture aimed at a specific objective by combining certain activities or business units of their existing companies. In such cases, it is common for the parties to conclude a shareholder or syndicate agreement to regulate the operation of the joint venture.
2. Demerger
Companies may find themselves in situations where it becomes reasonable to reorganize their existing operations, assets, or business units into separate legal entities. In Hungary, one of the most common legal solutions for such a restructuring is a demerger, during which the company’s assets are transferred to two or more independent legal entities. Depending on the type of demerger (division or separation), the new company or companies are organized around specific business units.
Demerger most commonly serves two fundamental purposes: asset protection and enhanced operational transparency.
- Spin-off for Business Sale
One of the most common motivations is the intention to separate a business activity or division in preparation for a sale. A separation enables the company to prepare for the transaction: the separated unit operates with standalone financial statements, transparent processes, and clearly defined assets, making it easier to transfer to a new owner or investor. This structure not only simplifies the technical side of the transaction but also increases the business unit's value by demonstrating its independent viability and financial performance. When considering a division or separation, it is also important to verify whether bank financing agreements or grant funding conditions require prior approval from third parties for such restructuring.
- Establishing a Holding or Asset Management Company
Another common reason for demerger is not the intention to sell, but to retain certain activities or asset groups while placing them into a separate legal entity – typically as a risk-mitigation measure. A typical example is when company owners transfer valuable real estate or high-value assets from an operating company to one or more separate asset or property management entities. In this way, previously accumulated wealth is protected from operational risks, can be managed separately, leased (even within the group), or used as collateral for financing.
A separate asset management entity also allows for selective future asset sales without impacting the entire corporate structure.
Tax and legal advice on setting up a holding structure
- Generational Change and Family Wealth Planning
Demerger is often a precursor to changes in ownership structure or generational succession, allowing a company’s operations, assets, or business lines to be separated and transferred in an organized manner.
This can ensure a smoother transition of control, with specific activities or assets designated to particular owners (e.g., family members).
For example, in family businesses, parents may spin off certain business units or shareholdings into separate companies they intend to pass on to individual children.
This allows for structured intergenerational wealth transfer during their lifetime and prepares for clearer separation of operational and asset management roles. For more complex succession planning, establishing a trust structure after the demerger may also be advisable.
3. Spin-off
A relatively new form in the field of corporate transformations is the spin-off, which has emerged as a specific subtype of separation. It opens up new strategic options for corporate restructuring.
In a spin-off, the company does not cease to exist, but continues operating while creating one or more new companies from a portion of its assets. The newly established company is wholly owned by the original, predecessor company.
This approach can be particularly beneficial from a business perspective when the company intends to operate certain activities in a separate, clearly structured subsidiary for risk management, financial, or strategic reasons.
4. Transformation of Legal Form
In some cases, companies may opt for a transformation of legal form, for instance:
- to limit shareholder liability (e.g., from a general partnership to a limited liability company);
- to prepare for capital raising (e.g., transformation into a public company);
- or to introduce new types of shareholders (e.g., employees) by transforming from an LLC to a private company limited by shares.
Transforming an LLC into a private limited company can also be a suitable step in implementing an employee share ownership plan.
Use of annual reports
Corporate transformations – whether mergers or demergers – are strategic decisions that require thorough legal and financial preparation.
One key element is the accurate presentation of the company’s financial position, for which annual reports play a crucial role.
Balance sheets and asset inventories are essential tools for assessing the true financial status of a company. According to Hungarian accounting and civil law, the latest annual balance sheet can be used as the basis for the transformation balance sheet and asset inventory, provided that:
- the balance sheet date is no more than six months prior to the final transformation decision;
- no revaluation has been performed; and
- the annual reports have been audited, if the company is subject to audit requirements.
This means, for example, that an annual report dated December 31, 2024, can be used for transformation purposes until June 30, 2025, assuming the above conditions are met.
Naturally, if a company’s financial year differs from the calendar year, the six-month period should be calculated from the balance sheet date.
Is an Audit Required?
It is important to note that within 90 days following the effective date of the transformation (i.e., the date of court registration or the date specified in the registration), a final balance sheet must be prepared for both the predecessor and the successor legal entities.
These documents reflect the financial position of the company at the moment of succession – i.e., which assets and liabilities are transferred to the newly formed or surviving company. Unlike the transformation balance sheet, the final balance sheet and asset inventory are based on actual, closed accounting data and are essential for the lawful completion of the transformation. The audit of the final balance sheet is mandatory.
Additionally, if the company is subject to audit, the draft transformation balance sheet and asset inventory must also be reviewed and verified by an independent auditor. The purpose of this is to confirm that the annual reports have been prepared in accordance with Hungarian accounting standards and reliably present the company’s financial position, performance, and results of operations.
