István Csővári

Ever since it was introduced eight years ago, the long-term investment account (TBSZ) has been a source of continuous excitement for tax advisors and their clients interested in saving on tax. This is not surprising, as the TBSZ allows business owners to take the income generated by their companies without any tax liability. And although some classic approaches to tax planning based on the TBSZ have closed over time, others are still available.

Shares of private limited companies on a TBSZ

Under the original concept, someone who bought financial instruments (e.g. securities) through an investment service provider and deposited them on a special securities account (TBSZ) could enjoy certain related tax benefits: after a three-year holding period the return on the securities is taxed at a preferential rate, and after five years it is completely tax-free. It did not take long for savvy tax advisors and investment advisors to realise that the statutory requirements could also be met in the case of a private company limited by shares if the parties involved an investment service provider in the purchase of the shares. So more and more business owners transformed their limited liability companies (kft.) into private companies limited by shares (zrt.), then deposited the shares thus issued on a TBSZ, so that five years later they could take the company’s profits tax-free.

Depositing the shares of zrts on a TBSZ – and the tax-free income withdrawal thus attainable – was obviously contrary to the legislators’ original goal. In response, a few years ago legislators expressly forbade individuals from putting shares issued by zrts on a TBSZ. All this, however, does not spell the end of all TBSZ-based tax planning options for individual business owners.

If not shares of private limited companies, then…

Half public, half private

Closing the loophole for zrts did not affect the shares of public companies limited by shares (nyrt.): logically, they can still be deposited on a TBSZ. Hence the idea: is it technically conceivable for an individual business owner to transform his business into a nyrt and put the shares of this company on a TBSZ?

In general, operating a nyrt and listing it on the stock exchange entails much higher costs than operating a zrt. Furthermore, a nyrt must also comply with several statutory reporting obligations, not to mention that public operation obviously comes with a number of disadvantages. However, the “technical” category introduced as the Xtend platform of the Budapest Stock Exchange effectively does not set excessive additional requirements with regard to the above-mentioned restrictions for shares that are not intended to actually be traded on the exchange. Therefore, shares “half-listed” on the stock exchange may still allow TBSZ-based tax planning.

A technical circumstance should definitely be taken into account, though. As a prerequisite for the TBSZ to be tax-free, the shares must be deposited on the TBSZ in a transaction completed at a price that is not below market value. In the case of zrts this was not really a problem, as pursuant to the applicable provision of the personal income tax legislation the parties could use the value of equity per share, which is usually much lower than fair market value. With public companies, however, determining actual market value raises some questions, especially if there are effectively no trades in the given share.

Buying options not shares

Still, business owners do not have to give up completely on the idea of using their zrts in their TBSZ-related tax planning. While the legal provisions do exclude the shares of zrts from TBSZ eligibility, they do not exclude derivative transactions for the shares of zrts, such as call options.

So it may be enough to write an option on the shares of the zrt, and deposit the option, as a derivative, on the TBSZ with the help of an investment service provider. In this case, if the option holder can later sell the call option at a high value (because the value of the underlying shares has also increased), the gain derived from the transaction may still be tax-free.

Investment funds instead of private limited companies

The investment units issued by private investment funds – which have enjoyed increasing popularity in recent years – are also not excluded from the TBSZ.

Setting up an investment fund is more time-consuming than forming a company. After it is set up, however, the investment fund is not prohibited from investing in a particular company – the business owner’s zrt or kft. Furthermore, the funds are not subject to corporate tax either. Therefore, income from kfts, zrts or other investments that cannot be directly deposited on a TBSZ can flow through the investment fund to individuals completely tax-free.

Slowly but still steadily

The big loopholes in TBSZ-related tax planning have been closed. However, the broad legal definition of “financial instruments” that may be deposited on a TBSZ – with only the shares of zrts excluded – may still allow some innovative structures. Nevertheless, these possibilities require more caution and preparation than before if you want to maximise your tax benefits and manage your tax risks.