Back in the day, buyers and sellers were better off selling shares in a company with possession of the property, rather than the property itself; but over the years, legislators have chipped away steadily at the benefits of acquiring property through a company purchase. Contrary to common belief, however, buying real estate through a company can still bring a number of tax advantages; and the range of these is set to expand from January of next year.
It’s a well-known fact that acquiring properties in Hungary entails the payment of transfer duty. And what’s more, the seller – whether resident in Hungary or not – is also liable to pay tax on the capital gain derived from any increase in the property’s value. In the past, however, these tax burdens were easy to avoid if, either before the sale or at an even earlier juncture, the owner stated the property on the books of a company as a non-cash contribution to its equity; because in this case it was not the property itself that changed hands, but the shares of the company that possessed it, and this did not incur either a transfer duty liability or – in the case of a foreign seller – an income tax liability. The only loser of this otherwise ‘win-win’ situation was the Hungarian state budget.
Recognising these obvious tax loopholes, legislators have introduced several new rules in recent years. One the one hand, the acquisition of what are classed as companies with domestic property assets (where domestic real estate accounts for at least three quarters of their assets) now incurs a transfer duty payment obligation, and on the other, foreign sellers are now liable to pay tax on the capital gain from the sale of a stake in a company with property assets, in the same way as if they had sold the property directly. If we also take into account the fact that the sale and purchase of a company carries a significantly higher risk than the direct purchase of a property, these rules have led to a substantial drop in the number of property acquisitions through company purchases in Hungary.
But is buying property through a company still attractive?
It would be premature to say that the measures described above have led to the complete disappearance, from the Hungarian market, of property sales packaged as a company sale. Firstly, although the duty payment obligation has been extended to company acquisitions, the regulations still contain some opportunities that can be leveraged through precise tax planning. For example, given that the transfer of companies between related parties incurs no transfer duty liability, or bearing in mind that duty is only payable on the purchase of a stake of 75% or more (but not, say, on two 50% shares acquired by two independent buyers), a duty liability can be avoidable by selecting the appropriate corporate structure. And what is more, Hungary is party to a number of double taxation treaties (such as our treaty with the Netherlands, and with Russia) that do not permit the taxation, in Hungary, of the proceeds from the sale of a company with property assets, if the seller is foreign.
The sale of a property as part of a company’s assets also makes the VAT on the transaction much easier to manage. While the sale of a company stake is VAT-exempt, the complexity of the VAT rules applicable to property sales means that in many cases it isn’t even clear whether a VAT liability have been incurred on a property transaction, or whether the tax is payable in accordance with the general rules or within the reverse charge mechanism. And this poses always a problem, either for the seller that doesn’t charge VAT – because the option of operating as a non-VATable entity has been chosen – or for the buyer that would like to reclaim the tax. And to make matters worse, reclaiming a large amount of VAT always triggers an audit by the tax authority. And then, even if the buyer is able to reclaim the VAT, the parties are lumbered with a financing requirement for several months.
2017: a new argument in favour of selling through a company
Starting from next year, a new VAT rule will further boost the tax advantage of selling property by way of a company sale. Under the new rule, the place of delivery of services related to a property, for the purposes of VAT, will be the country in which the property is located. For example, if a foreign buyer uses the consulting services of a Hungarian lawyer in connection with the purchase of a Hungarian property, the lawyer will have to charge Hungarian VAT to the foreign buyer with respect to this service. The same applies if a foreign buyer uses the services of an architect for the conversion of a property in Hungary. While it’s likely that the foreign client will recoup the charged VAT sooner or later, the hassle and financing requirement that this entails will certainly give a foreign buyer reason to consider buying the property as part of the assets of a company. Because in this case, under the present interpretation of the law, the Hungarian adviser would be able to bill his or her services without VAT, as before. Of course, this interpretation may change over time; there’s no such thing as an eternally valid rule when it comes to taxation.