While the government is once again proposing to amend the tax rules governing fiduciary asset management, it would also make tax audits mandatory in respect of existing fiduciary asset management arrangements. The measure aims to uncover structures created primarily to obtain tax advantages and to recover tax benefits obtained through the abuse of rights.
Brace for Impact…
It is unusual for the Hungarian tax authority not to define its own target objectives for fiduciary asset management audits, but rather to have them mandated directly by the legislature via statute. Yet that is precisely what is happening now. If enacted in its current form, a draft bill will require the tax authority to conduct tax audits on fiduciary asset management arrangements, as well as private foundations, starting from August 31, 2026.
According to the current draft, audits will be carried out in two phases: in the first phase, the tax authority must examine managed assets whose asset manager was registered prior to September 12, 2023. This will be followed, as of January 1, 2028, by a general audit covering all managed assets.
Indicative of the proposal’s rigor, the termination of the fiduciary asset management relationship offers no way out; in such cases, the tax authority will conduct the audit in respect of the settlor, founder, or the joining party. However, the proposal does not override general tax statute-of-limitations rules, meaning the tax authority can only review asset management structures within these statutory time limits.
What to Expect?
The draft does not set out specific procedural rules for these audits, so they will be conducted under general procedural provisions. In principle, therefore, it is left to the tax authority’s discretion whether to subject individual asset management arrangements to a less intrusive tax compliance audit or to conduct a full tax audit.
What Are They Looking For?
The purpose of the audits is expected to be to identify and challenge fiduciary asset management structures established to enable previously acquired assets to be transferred into the structure at an increased value, allowing the parties involved to gain immediate, tax-free access to the resulting uplift in value. Audits are also expected to check the completeness of documentation and impose a default penalty in cases of inaccuracy. Furthermore, the tax authority is expected to uncover payments disguised as distributions to beneficiaries that conceal other business motives.
During the audit, the tax authority must assess fiduciary asset management arrangements based on their actual substance rather than their formal designation. In this context, the tax authority must consider who initiated the settlement of assets, whether the settlement of assets served any purpose other than obtaining a tax advantage, who exercised effective control over the asset management, and when and why distributions were made.
The proposal specifically highlights the duration of the fiduciary asset management relationship, as well as the time elapsed between the settlement of assets and the first distribution, as key criteria to be examined.
This will almost certainly mean that arrangements in which beneficiaries received distributions shortly after the settlement of assets will be subject to particularly strict scrutiny.
Based on the non-exhaustive list of criteria, the tax authority must explicitly examine the preparatory activities of advisors and attorneys involved, including advisory communications encouraging the parties to enter into the agreement and the preparation of various draft agreements. This also raises the question of how communications covered by attorney-client privilege can be handled during the evidentiary process.
Consequently, the audit is expected to go well beyond a mere review of the fiduciary asset management agreement: the tax authority may request and cross-reference pre-establishment correspondence and draft agreements, asset valuations, decisions of the asset manager, distribution requests, banking and accounting records, and the entire flow of funds and assets from the initial settlement through potential sales to final distributions. During this process, the tax authority may request formal statements from the parties involved and verify whether the asset manager genuinely acted in their fiduciary capacity, as well as whether the accounting records, tax returns, data disclosures, and actual cash flows align with one another.
What Could the Outcome Be?
If the tax authority concludes that the structure was primarily intended to circumvent the tax laws, or that it disguised another agreement, the tax authority may deny the tax advantage, recharacterize the transaction according to its true substance, and assess a tax deficiency. This may be coupled with a late-payment interest and, as a rule, a tax penalty equal to 50% of the tax shortage. In cases of tax shortages involving concealed revenue or false, forged, or destroyed accounting documents, books, or records, the tax penalty can reach up to 200% of the shortage. Additionally, inaccurate or omitted records, returns, or disclosures may trigger a separate default penalty, even without a tax deficiency.
Better to Prepare Than to Improvise
Based on the proposal, a comprehensive wave of audits impacting all parties involved in fiduciary asset management arrangements should be anticipated. To prevent the tax authority from judging the perceived or actual purpose for which the assets were placed under management, based solely on the agreements entered and the distributions made, it is essential to prepare with properly compiled documentation before the tax authority initiates contact.
During an audit, it will be crucial to present documented evidence showing the relationship between the settlor, asset manager, and beneficiaries (whether through contemporaneous informational materials, correspondence, or consistent statements from the parties). It is also essential to prove that the valuation at the time of settlement — especially relative to the acquisition cost — was appropriate, ideally supported by independent appraisers using market data. Furthermore, documenting full compliance with anti-money laundering (AML) regulations during the settlement process is vital.
Similarly, accurate and transparent records should demonstrate how the assets were managed, how the composition of the managed assets changed, and why, in what circumstances and in what manner distributions were made. Only then can it be demonstrated, if challenged, that the asset management arrangement was established for genuine economic and/or family purposes.