Tax exemption could be achieved on future capital gains on previously non-reported participations from 2024 onwards
As part of the year-end tax package, companies could benefit from a one-off tax amnesty in 2024 for the retrospective reporting of previously acquired and non-reported participations. This will allow taxpayers who failed to report their acquisitions of participations in previous years to be exempt from paying CIT upon a potentially profitable sale.
Capital gains on the sale of participations and the CIT liability
If a company sells its shareholding (participation) in another company at a capital gain, i.e. the sales price of the shareholding exceeds its book value, CIT obligation may arise. The CIT liability (9%) may arise on any capital gain realized from disposal.
CIT exemption by declaring the acquisition
As a general rule, a company may be exempt from paying CIT on the sale or transfer of a share in course of an in-kind contribution, if it reported the acquisition of such participation to the Tax Authority within 75 days of the acquisition.
According to the rules, if the acquiring company did not report the acquisition of the shareholding (participation) to the Tax Authority within the statutory deadline, the special rules related to the reported participations, including the possibility of CIT exemption, are lost upon the subsequent sale of the participation.
How long can a previously acquired and non-reported shareholding (participation) be reported with tax amnesty?
It is possible to report the acquisition of a shareholding retrospectively until the deadline for the CIT return for FY2023, which means that for taxpayers with a tax year following the calendar year, this deadline is May 31, 2024.
Please note that this deadline is peremptory, those who do not act by the deadline will not be able to claim the CIT benefit later!
Why is it beneficial to report the acquired shareholding retrospectively now?
If a company decides to take advantage of the opportunity for retrospective reporting, it can now pay its CIT obligation at a favourable tax rate, and the subsequent sale of the participation could be exempt from CIT.
This is subject to the condition that an independent valuation expert is consulted to establish the market value as at 31 December 2023 of the shares to be reported. A one-off - reduced - corporate income tax liability will arise on 20% of the positive difference between the determined market value and the net book value of the participation as at December 31, 2023, which must be settled by the deadline for the CIT return for the FY2023.
In other words, a favourable CIT of 1.8% will be payable, which will replace the CIT consequences of a potential future sale. This includes the CIT on capital gains from market value growth occurring after 31 December 2023.
This could result in tax savings of up to several millions of forints for the companies concerned - as can be seen in later examples.
Who could benefit from retrospectively reporting their non-reported participations?
Companies where the market value of the previously acquired shareholding exceeds or is expected to exceed its net book value in the future may particularly benefit from retrospective reporting of their non-reported participations. The biggest beneficiaries of this retrospective reporting option may be companies where the net book value of their participation in a subsidiary is currently close to its market value but is expected to increase significantly in the future.
What steps should companies take to achieve tax amnesty?
1. Review of reported and non-reported participations
If a company has multiple participations, it is advisable to check which ones of them are registered as reported participations with the Tax Authority. With an expert’s guidance, you have the option to explore the reported participation status of any specific company.
2. Decision on the retrospective reporting of previously non-reported participations
It is advisable to consider seeking independent tax support, when it comes to the retrospective reporting of participations. It is essential to evaluate which companies could benefit from reporting their participations retrospectively, taking into account various factors considering the specifics of the subsidiaries.
3. Retrospective reporting of shareholdings to the Tax Authority
The reporting of shareholdings naturally involves administrative tasks. There are specific methods and content requirement details of the retrospective reporting to the Tax Authority. Tax advisers, with their established practices, are ready to relieve your company of this burden, including smooth communication with the Tax Authority.
4. Assessing and validating the market value of the participation
The legislation stipulates as a condition for tax amnesty, thereby ensuring the lawful practice, that the determination of the market value of the relevant participation must be determined by an independent expert. For this purpose, it is necessary to seek the assistance of company valuation specialists (or auditors) who will prepare the company valuation based on internationally accepted valuation methodologies approved by the Tax Authority or assist in the independent expert review and validation of an existing company valuation. The independent company valuation prepared for 31 December 2023 must be available at the time of submission of the CIT return of FY2023.
5. Preparation of a non-reported shareholding calculation
Once the market value has been established, a calculation must be made to determine the amount of tax liability on the newly reported shareholding. Here, the company also has the option of engaging a tax expert either to calculate the liability or for the professional validation of the company’s internal calculations.
Last but not least, the company must create and maintain a separate registry in a specified format to support the entitlement for tax neutrality.
How much tax can be saved by retrospective reporting of a participation?
The following example shows cases where retrospectively reporting of shareholdings might be beneficial, along with the quantifiable corporate tax savings.
Here are some scenarios to illustrate how tax liabilities are incurred in the following cases:
- the company reported its shareholding after the acquisition,
- the company did not (and will not) report its shareholding, or
- the company did not report its shareholdings originally but now the retrospective reporting is applied
1. In the case where the company reported its shareholding after the acquisition (within the deadline),there is no CIT
In our basic case, company Alpha acquired the participation of company Beta in 2022. The acquisition and net book value of Beta were HUF 200 million and this shareholding was reported to the Tax Authority within the 75-day deadline by Alpha. In 2025 Alpha is going to sell this shareholding for HUF 400 million. The market value of the participation at the time of sale exceeds the book value (HUF 400 million vs HUF 200 million),so Alpha will have a HUF 200 million capital gain in 2025. This capital gain would be part of the pre-tax profit for FY2025. However, as it is a reported participation for CIT purposes, the amount of the HUF 200 million capital gain can be deducted from the CIT base of Alpha, so the relating CIT (HUF 200 million x 9% = HUF 18 million) is exempted in the share deal, i.e. due to the participation exemption rules, this future capital gain on the share deal will therefore be CIT-neutral.
2. 9% CIT liability on the alienation of non-reported participation
Continuing from the same example, in the present case, the shareholding of Alpha in Beta was not reported to the Tax Authority within the statutory deadline at purchase. In this case, the total amount of the capital gain of HUF 200 million will be subject to CIT on the potential sale in FY2025. Therefore, Alpha will have to pay the corresponding CIT of HUF 18 million (HUF 200 million x 9%). Overall, without reporting the acquisition, a 9% CIT impact should be considered in the case of a future sale with capital gain.
3. A tax amnesty in 2024 will replace the current 9% CIT with a more favourable effective 1.8% tax rate on the future profitable sale of participation
Given the current tax amnesty framework, although Alpha initially failed to report the acquisition of its shares in Beta, it will now exercise the option to retroactively report its participation in Beta in 2024. Alpha, with the assistance of an independent expert, determines the market value of Beta’s participation as at 31 December, 2023. Based on the independent expert’s valuation of the company, Beta’s market value is HUF 300 million.
For 20% of the difference between the market value of Beta's participation at 31 December 2023 and its book value at the same date (HUF 300 - 200 million = HUF 100 million),Alpha is subject to CIT at the rate of 9%, even if the Alpha’s CIT base is negative. In this example, instead of the HUF 100 million latent capital gain of Alpha on the growth in the market price of the participation, only 20% of it is taxable, i.e. instead of HUF 9 million, Alpha is liable to pay HUF 1.8 million CIT at the same time as submitting the CIT return for FY2023. Further, if Alpha sells its participation in Beta in at a later time, the related capital gain will be CIT-neutral and the sale of the participation will not trigger a CIT liability later on.
The payment of the 1.8% CIT now, which is generally considered to be favourable, is the "price" of a future tax-neutral sale.
Of course, the difference between the net book value and the market value of the shares is unique for each company. This amount could significantly exceed the HUF 200 million amount mentioned in our simplified example, so companies may even obtain a more significant tax advantage through retrospective reporting. In specific cases and for particular participations, accurate and careful calculation is essential, which a tax expert can precisely perform, taking into account all other factors and circumstances, and providing a supporting documentation that is acceptable to the Tax Authority.