Ádám Fischer

A growing number of family businesses are coming up for sale these days. This is partly due to the favourable investment environment, and partly to the difficulties to pass on businesses to the next generation. A critical aspect in such deals is: what kind of tax implications the sale will have for the sellers. While, in some cases, the sale can be made tax-free, at other times a private individual divesting his or her share in the business can be faced with a tax liability of up to 34.5%.

Holding structure is still a viable option

A long-established method of avoiding the tax liability of the individual arising upon the sale of a company is the transfer of the shares to a holding company before the sale. In this case, the holding company becomes the seller, which enables the sale to be completed tax-free.

This solution might be especially attractive if the private individuals who own the company have no intention to spend the proceeds of the sale on items fulfilling a personal need, but want to reinvest them in other ventures or business ideas. If a private individual wants to withdraw income from the holding company, however, this will still give rise to a 15% personal income tax liability.[1]

Selling as a private individual

If an owner who is a private individual does opt to sell his or her share in the business directly, then the proceeds from the sale will be taxed under the rules applicable to capital gains. This means that a personal income tax of 15% is payable on the difference between the revenue from the sale of the venture and the cost of its acquisition. The devil is in the details, however, so it’s best to be clear about what constitutes revenue, and what is considered as cost of acquisition for the purposes of the above rule.

The complex rules on revenue

The revenue arising from a sale is the sale price, as determined for the day of signing the sale contract. If the sale price is received in several instalments, the taxpayer has to pay the tax proportionately to these instalments. In other words, the seller has to calculate the total income by adding up the purchase price instalments and pay them pro rata based on the proportion of the full price represented by each received purchase price instalment. But what happens if the total sale price isn’t known at the time of sale? Upon the sale of a company it is a common arrangement to make part of the sale price depend on the future performance of the sold company. This is where things start to get complicated.

In the simplest scenario the seller receives a fixed sum if certain contractual conditions are later met. In this case, the seller just has to calculate the income based on the assumption that the conditions will be met. If this turns out not to be the case, and the subsequent purchase price instalment does not fall due, then the excess tax paid at the time of the first instalment can be retrospectively reclaimed with a self-revision.

The solution is more complicated, however, if the future conditional payment is not a fixed amount. Sale and purchase contracts often stipulate that the seller is entitled to receive a specified percentage of the company’s financial performance, generated in the years succeeding the sale. In these cases, even if we assume that the condition will be met, at the time of concluding the contract it is impossible to determine the maximum sale price and the tax liability it will incur. The tax regulations cut through this Gordian Knot with a rule that is extremely simple, but disadvantageous at the same time for the taxpayer: if you can’t determine the potential future income from the sale in advance, then all further purchase price instalments received in addition to the basic sale price are taxed not as a capital gain, but as “other income”, on which a 19.5% healthcare contribution is payable on top of the 15% personal income tax.

This, obviously, begs the question of how to avoid the extra 19.5% payment obligation in these cases. There is one slightly convoluted solution to this, and another, simpler one. First, if instead of receiving additional income, the future results can only lead to a purchase price reduction, then, based on the wording of the law, the problem does not arise. In such case, the tax should first be paid on the higher amount, and later the eventual excess tax paid is reclaimable through a self-revision. As a more obvious solution, the seller may – as described earlier – transfer his or her shareholding to a holding company before the sale. In such case, regardless of the final purchase price, the income can be taken out of the holding company as dividend, taxed at a flat rate of 15%.

How can tax be saved on the cost of acquisition?

The acquisition cost of a shareholding is the total amount spent by the private individual on acquiring the shareholding, either in the form of purchase price or as capital contribution provided upon the establishment of the company. If the owner, later, injects further capital into the company (e.g. through a capital increase), then this amount also constitutes a part of the cost of acquisition.

It’s barely known, however, that for the purposes of calculating the capital gain, not only the acquisition cost but also other costs related to the acquisition can be deducted. Based on the respective legal rules, the tax base may be reduced by all certified expenses incurred by the private individual in connection with the acquisition, holding or transfer of the share. While the legislature primarily intended this opportunity to allow certain transactional, bank or securities account management fees related to the holding of the share to be deducted from the income, this also leaves scope for deducting a broader range of costs. The generally accepted position is that the fees of intermediaries and advisors (including lawyers or financial advisors) assisting with the acquisition or sale of the shareholding may be deductible as an expense. So, it might be a good idea to keep those lawyer’s invoices somewhere safe!


[1] Here, for the sake of simplicity, we will disregard the 14% healthcare contribution, which is capped at HUF 450,000.