CLV Partners

CLV-02

Corporate law

Motivation of white-collar workers

In the first part of our series of articles, we looked at the motivational options available to companies for their physical employees (blue-collar workers). For intellectual employees (white-collar workers), the same options as described above can be applied, but companies may also be interested in other reward possibilities.

It has always been a challenge for employers to retain the talented (executive) management of the company and encourage them for better performance and thus improve the company’s profitability. At the same time, the motivation system works well only, if the business leaders also consider these colleagues as an asset of the company and are willing to “give a slice of their cake”. This is because these executives contribute greatly to the corporation’s success.

“He/she doesn’t look at the firm as his own.” “I paid him/her a high salary for years, yet he/she left us and went to the competition.” We have come across countless times such and similar statements as a consultant. But why would an owner, an entrepreneur expect, whether with an international background or leading a family business, the managers to give their hearts and souls for the company and put their personal life and leisure back, when they do not benefit proportionately from the company’s success? Of course, mapping out the real proprietorship challenge is not a purely legal task. Nonetheless, there are several corporate, commercial, and employment law agreements to motivate management. Not only the owners, but also people who develop the organization by being responsible for HR, coaching, as well as the company’s tax or finance managers should be aware of those solutions.

The following few examples make the benefit system transparent, thus being predictable and strengthening the employer brand, increasing loyalty within the business and encouraging higher performance of key personnel.

Shareholdership – with limitations

Whether a legal person operates in the form of a limited liability (Kft.) or as a private company limited by shares (Zrt.), it has the option to grant shareholdersip with different legal rights with the purpose of recognizing colleagues who play a key role in the profitability. Such solutions do not need to provide equal or proportionate rights (for example, in terms of voting rights or dividend entitlements) and may be for a definite period (i.e. duration of legal relationship with the entity).

Other favorable options

Whether in an employment or contractual relationship, the owner of a company always can formulate favorable rules in relation to employment, and thus, among others, implement tax-efficient performance incentives at the company such the following ones:

  • increased or reduced notice period in proportion to seniority;
  • insurance, health insurance, private health care packages
  • a higher amount of severance payment, based on the number of years spent at the company;
  • “alumni” benefits (either directly or through a fund, insurance company) available after the termination of the employment relationship with the company;
  • benefits provided to the employee’s family,
  • providing longer unpaid leave (sabbatical leave).

The planning and systematization of the above-detailed benefits may have an impact on tax administration, and thus, on the total cost of the benefits. It is therefore worth structuring the benefit plan carefully from a tax perspective, considering the given circumstances.

The loss and replacement of a middle or senior manager imposes a significant financial burden on businesses. That is because not only the time and cost of recruiting the right person should be considered, but also the alternative costs of handing over processes, integrating a new colleague, rebuilding the entity’s reputation, the loss of the company’s know-how, customer base and building long-term loyalty. It is therefore in the fundamental interest of firms to rethink how they can reward the work of their valuable co-workers and support their loyalty through transparent and predictable remuneration systems.

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Sustainability reporting obligations

 

COMPANIES COULD FACE NEW SUSTAINABILITY REPORTING OBLIGATIONS

Introduction

After a long period of time based on the warning signs of the environment, we may have come to realize at an individual level that the existence of the natural conditions around us is not self-evident. It is clear that rampant exploitation has serious natural consequences, and that our daily lives cannot be continued in their present form for long, as they are not sustainable. There are many national and international efforts to protect the environment, as well as awareness and willingness to act at an individual level is growing. Of course, enterprises are not to be left out of this list, as their importance is demonstrated by the fact that the revenue generated by some group of companies can rival the GDP of certain countries.

There is no requirement for companies to report on sustainability in a similar way to accounting reporting. Nevertheless, we see that more and more companies have some form of corporate social responsibility. One example is the widespread use of CSR (Corporate Social Responsibility). In order to make this commitment conscious, transparent and accountable, the European Commission presented a proposal in April 2021 (hereinafter: “Proposal”) to amend corporate sustainability reporting.

New Proposal

The Proposal seeks to reform the Non-Financial Reporting Directive (NFRD), which amends the Accounting Directive. The main objective is to require companies to report in a similar way to accounting reports. The Proposal would change the current system of voluntary commitments and obligations under the NFRD, which only affects a limited number of companies, as follows.

According to the plan the reporting obligations would affect approximately 30% more persons concerned and the known text also specifies in more detail the subject matter and the method of providing information.

The report should be presented in a standardized electronic format, ensuring quick and easy access, same file format, comparability and paperlessness.

One of the most important innovations of the Proposal is that it requires reporting according to uniform standards. This is of particular importance as it will allow companies’ reports to be retrieved chronologically and to be comparable with those of their competitors.

Another innovation is that the content of the report will also be subject to appropriate auditing to ensure its independent and objective validation.

Summary

Although the Proposal is still pending adoption and would only be phased in over a number of years, its practical implementation is of paramount importance. It gives cause for optimism that it will take corporate social responsibility for our environment to a new level. It will undoubtedly impose a significant additional burden on those concerned in the beginning, however it is in the interest of all of us in the long term.

Sustainability expectations will be transparent for companies that they need to meet. Another benefit is that companies will be able to benchmark themselves against their competitors on the basis of harmonized reporting standards. And those that have already committed to sustainability will be able to reduce the unfair advantage of their exploitative peers and even gain a competitive advantage. All of this suggests that there are many benefits to be gained from fulfilling reporting requirements, in addition to compliance, so it is worth making a gradual and conscious effort to prepare starting from now.

Should you have any questions regarding the above, feel free to contact us.

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Changing company law rules

As of 1 January 2022, the Civil Code has been amended on several points. In this article, we have summarised the issues that affect our clients the most.

Regulations affecting the organisation

Changes affecting the supervisory board
Although at first glance it seems that the previous provision on the supervisory board, that not less than a majority of votes may be required, has been deleted, it is still valid under the general rules and it is important that the companies concerned continue to comply with this rule.
A clarification has been made in the legislation: where the supervisory board member is a legal person, a natural person must be appointed to effectively perform the duties.

Repeated meeting of the supreme body
The quorum of the decision-making body shall be constituted when more than half of the votes that may be cast are represented by a person entitled to vote. If the quorum is not present at the general meeting of members of the limited liability company (Kft.) or the general meeting of the private company limited by shares (Zrt.), a new meeting shall be held. In the past, the Civil Code provided for a mandatory minimum and maximum period of time between the initial and the reconvened meeting, which was not practical and made decision-making unnecessarily difficult.
To remedy this, as of 1 January, the statutory time limits are discretionary, i.e. a repeated general meeting may be called for a date other than the date set in the Civil Code.

Composition of the Board of Directors of a Zrt.
The chairman of the Board of Directors of the company has so far been elected by its members. However, as from the first day of the year, this power of decision is only conferred on the members of the Board of Directors if the General Meeting has not exercised it.

Changes concerning limited liability companies

Deferred cash contribution
Although the wording of the legislation changes significantly, it mainly clarifies an objective that has been achieved in practice so far: members may make a cash contribution out of their dividends. Thus, if a member has an outstanding cash contribution, the dividend will first “make up” for this and, if there is still a dividend fund after the settlement, the members may decide on the actual payment of the dividend. It is important to underline that the new rule will only apply to company proceedings commenced after 1 January 2022, so companies applying the previous, partially more favourable rules will not have to change their articles of association due to the amendment of the Civil Code.

One member – several shares
A change is that the Civil Code now states that a member can own more than one share (a so called quota) in a company. Another new rule is that splitting is possible at any time with the consent of the general meeting. The new provision may be of importance in cases where there is an encumbrance (e.g. pledge, other option) on each share, as it will now be possible to separate the obligations on the shares, even though they are concentrated in one company.

Undercapitalised status
One of the rules on undercapitalisation is that if a company’s equity capital falls below the subscribed capital defined for the company form for two consecutive financial years, the supreme body must decide on a capital replacement or, failing that, on a transformation, dissolution without legal success or merger. Such an undercapitalised situation typically occurs when a company has a high level of registered capital or has been making large losses for a long period of time. The clarified wording makes it clear that in all cases two full financial years covering twelve months must be taken into account to determine the undercapitalised status, so in case of so-called ‘split’ financial years, the first shorter financial year need not be examined in such context.

Additional payment
An additional payment is typically a legal instrument used to temporarily resolve a capital shortage situation. It allows the owners of a company to inject capital into the company specifically to restore solvency. Until now, the capital injection were regulated at the rules of limited liability companies, but from 1 January 2022, general and limited partnerships, and companies limited by shares will be able to use this option. The amended text stipulates that the supreme body may decide that the additional payments not necessary to make up for the loss do not have to be repaid to the members – in a decision which, in our view, can be taken or even modified even after the additional payment has been ordered. It is a reasonable new provision that in case of a one-person limited liability company, no amendment to the deed of foundation is required to make the decision to make a top-up payment.

Should you have any questions regarding the above, feel free to contact us.

 CLV Partners news

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Deductions from the corporate tax base during the state of emergency

On 30 April 2020 another tax relief has been published with regards to the state of emergency.
This time, the provisions of tax base deductions set out in Act LXXXI of 1996 on Corporate Tax and Dividend Tax are extended in the tax years during the emergency and in the taxpayer’s choice in the tax year 2019 as well, in accordance with the following:

1. The pre-tax profit is reduced by the amount of earnings retained and transferred to the reserve in the tax year by the corporate taxpayer and shown as a reserve on the last day of the tax year, but not more than the pre-tax profit and up to HUF 10 billion per tax year (“development reserve”). Prior to the tax relief, the development reserve could not exceed 50% of the taxpayer’s pre-tax profit for a given tax year, this restriction does not apply under the new rules.

2. If the taxpayer chooses to apply the new rule to the 2019 tax year, but has already submitted its 2019 tax return by 1 May 2020, it may form a reserve for the 2019 tax year in accordance with the rules of accounting control within a self-revision procedure. until 30 September 2020.

3. If the tax return has not yet been submitted, but the taxpayer already has an approved financial statement, it may form a reserve for the approved report in accordance with the rules of accounting control.

 

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Certain Tax and Corporate Deadline and Processes

During the state of emergency and the implemented partial curfew, the continuous decision-making of companies could easily become impossible. In order to prevent this, as of 11 April 2020 different rules apply to the decision-making process of the obstructed companies, and the mandate term of certain company officers is also extended for this period.

By definition, the decision-making rules do not apply to companies not obstructed by the exceptional circumstances, for example in the case sole member companies.

During the emergency and until the 90th day after its end, the term of managing directors, board members (e.g. supervisory board members) and auditor may not be terminated as a result of expiration or resignation and these officers shall continue to carry out their duties during this time. This provision also applies to unhindered companies, but of course it is also possible to elect new officers during the state of emergency.

A new rule to be applied to all taxpayers is that the deadline for preparing, disclosing, depositing, publishing and submitting financial statements of the Accounting Act due after 22 April 2020 is extended until 30 September 2020. In the case of the main types of tax (corporate and dividend tax, small business tax, local business tax, etc.), the tax assessment, declaration and payment obligations, as well as the tax advance assessment and declaration obligation to be fulfilled simultaneously with the annual tax returns can also be fulfilled by this extended deadline.

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Changes of Companies Act effective as of 1 July 2018

On 1 July 2018 entered into force the modification of Act V of 2006 on Companies Registration and Winding-up Proceedings amending the rules of winding-up, especially the simplified procedure, the statutory supervisory procedures and also makes possible to file with the court application for the registration of changes prior to the effective date.


Preliminary request for the registration of changes

The request for registration of a (future) change can be submitted in advance so even before the effective date of change. Nevertheless, the preliminary request for registration of future company change cannot be submitted within more than 30 days prior to the date of change.

Executives without right of representation
It is also mandatory to register those company executives who do not have right of representation for the company. This amendment concerns in particular companies where the management is constituted by a board of directors where not all directors have right of representation for the company.

Legal supervisory procedure
Any person claiming to have a legal interest in starting a legal supervisory procedure against a company may only start a legal supervisory procedure in its own name as applicant therefore no name application is not possible.

Winding-up, simplified winding-up procedure
Any company form (this including private limited companies (in Hungarian “Zrt”) and limited liability companies (in Hungarian “Kft.”) may choose to terminate itself by simplified winding-up procedure, provided that is not subject to mandatory audit. In the case of simplified winding-up, no administrator is required to be appointed, the administrator’s duties are performed by the company’s executives (i.e. managing directors). The simplified winding-up procedure shall be at first reported to the Hungary Tax Authority who shall automatically inform the company court that shall publish a notice thereof in the Company Gazette.

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About the changes of seat services

Regulation No. 7/2017 (1 June) of the Ministry of Justice about registered seat services entered into force on 1 July 2017 in connection with the amendment of the Companies Act which set out among others the following important regulations:
The agreement shall be in writing between the principal (company) and the agent who provides the seat service.

The agreement shall not be a fixed-term contract only if the company was established for a fixed period of time. The right to terminate shall not be exercised during the first year after the conclusion of the contract.

Only those properties may be used as the seat of a company which are exclusively owned by the agent who provides the seat service or for which the provider’s user rights have been registered at the Land Registry.

The agent shall ensure that the mails addressed to the company are taken over at the registered seat and shall also notify the company on that fact within one working day after the receipt of any mail.

The Regulation No. 9/2017. (VII. 18.) of the Ministry of Justice on the amendment of the above Regulation was published on 19 July 2017 and entered into force on the day following its publication in which the most important changes are the following:

The agent shall be entitled to provide seat service if the owner of the property gave prior written consent to providing seat and one of the following conditions is fulfilled:
a) the parties are affiliated companies or companies linked by virtue of participating interests under the Accounting Act,
b) the agent is registered in the Trade Registry as the company’s delivery agent, or
c) further from providing registered seat for the company there is a civil law relationship between the parties for providing long-term accounting services.

The parties shall harmonize their existing agreements for providing seat with the new regulations until 30 June 2018, the latest, and if there was not any written agreement between them, such contracts have to be put in writing.

The existing agreements for registered seat services shall be ineffective on the following day the above deadline (i.e. 30 June 2018) if the contract does not correspond to the aforementioned new regulations.

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Modifications in corporate law

In July 2017, modifications were carried out in acts of Public Company Information, Company Registration and Winding-up Proceedings.

According to the Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings („Ctv.”) modification made in June 2017 the National System of Company Information and Company Registration (Company Information Service) will be responsible for providing access to the Business Registers Interconnection System (BRIS) by linking the national central registers, commercial registers and business registers.

By connecting the European countries’ company registers, certain data, the consolidated articles of associations, annual reports of the limited liability companies, corporations and European corporations will be available in BRIS which system is operated by the European Commission. The basic data can be accessed free of charge, in other cases the data can be obtained against payment of an administrative fee.

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Amendment of the Civil Code – managing directors

Until now, the company and the managing director were jointly and severally liable towards third persons for non-contractual damages caused by the managing director in his executive capacity. Pursuant to the new provisions, only then will the managing director be jointly and severally liable with the company against third persons, if he has caused the damages wilfully in his capacity as managing director.

Furthermore, the amendment clarifies that the managing director’s liability for wilfully caused damage extends not only to non-contractual damages but also to contractual damages (until now contractual damages could only be claimed from the company, and not from the managing director).

 

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Higher ranking for our law firm on Legal 500

The Legal 500 research team has ranked higher CLV Partners Hungary in the EMEA 2016 directory than in the previous years in Employment and Commercial, Corporate M&A practice areas. The results are based on appreciation of the Firm’s profile, complexity, the excellent quality of works undertaken and the new hires and growth of the practice groups.

Please click here and check the Legal 500 website for further information.

13 April 2016