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The most important, recent changes affecting the Accounting Act

News, Corporate law /

At the end of last year, Act LV of 2024 on amending certain tax laws was published, which, among other things, amends certain provisions of Act C of 2000 on Accounting (the “Accounting Act“). In our article, we summarise the most important changes of the Accounting Act.

Changes effective from 29 November 2024

  • Consequences of non-compliance with the audit requirement

If the company fails to comply with any publication or deposit obligation under the Accounting Act, including the auditing obligation, any third party (e.g. natural person, legal entity, public authority) may initiate a legal supervisory procedure before the Court of Registry.

  • New provisions relating to sustainability reporting

The Accounting Act states that companies who are required to prepare a sustainability report or a consolidated sustainability report, as well as persons who voluntarily undertake to do so, must appoint an auditor or audit firm that is a member of the Chamber of Auditors and has a sustainability qualification. The result is that only an auditor with a specific qualification can proceed in the case of a sustainability report. This circumstance shall be taken into account when engaging and appointing the auditor concerned. According to the transitional provisions, in the case of the sustainability report and consolidated sustainability report for the financial year 2024, instead of the company’s supreme body the management of the company will elect the auditor or audit firm that is a member of the Chamber of Auditors, no later than the balance sheet date.

 Changes effective from 1 January 2025

  • Increase in the threshold for statutory audit

As a general rule, all double-entry bookkeepers must be audited. However, there are exceptions to this obligation, subject to certain thresholds and number of employees. The Accounting Act has amended (doubled) the threshold amount, so that an audit is not required if, on average over the two financial years preceding the financial year

  • the company’s annual net turnover did not exceed HUF 600 million, and
  • the average number of employees of the company did not exceed 50.

If any of the above conditions are not met, the company is obliged to be audited.

The amended conditions apply for the first time to the accounts for the financial year starting in 2025.

  • Changes for the threshold for simplified annual accounts

Another general rule is that companies that keep double-entry accounts must prepare annual accounts and annual reports. However, there is indeed an exception to this rule, depending on the threshold and the number of employees. In view of the doubling of thresholds, a double-entry bookkeeper may now prepare simplified annual accounts if, for two consecutive financial years, any two of the following three values do not exceed the following thresholds at the balance sheet date:

  • the balance sheet total does not exceed HUF 2000 million,
  • the annual net turnover does not exceed HUF 4000 million,
  • the average number of employees in the financial year does not exceed 50 persons.

The general rule is that the new, increased thresholds apply to the accounts for the financial year starting in 2025, but the companies may choose to apply the higher thresholds for the financial year starting in 2024 .

In light of the entry into force and applicability of the above accounting rules, all concerned parties are encouraged to consider to what extent and in what way they affect their current and future operations and practices.

(Image Source: Tima Miroshnichenko, pexels.com)

New year’s changes related to TEÁOR codes

News, Corporate law / / ,

Introduction

Over the last two decades, the economy has undergone a major transformation, as a result of which the previous statistical classification of economic activities (“TEÁOR”) could no longer adequately reflect real business processes. In response to that, the European legislator has amended the NACE classification system, which means that from 1 January 2025, TEÁOR’08 – used since 2008 – will be replaced by TEÁOR’25. In our article, we have collected the most important information and obligations related to the change of TEÁOR.

The process of the conversion:

  • In case of the main activity

As of the first days of January 2025, the Hungarian Central Statistical Office (“KSH”) has converted the main activity codes of all economic entities according to TEÁOR’25, which will automatically change the statistical identifier of all companies. It must be stated that it is possible that the new main activity automatically defined by the KSH may not fully reflect the real business activity of the enterprise, as the scope of activity defined under the previous classification may have been split into several different new classification categories.

  • In case of other business activities

In the case of other business activities, the National Tax and Customs Administration of Hungary (“Tax Authority”) carries out the conversion. However, for these activities, the Tax Authority only performs its task if the codes are clearly conversable according to the official translation key (i.e. 1:1 correspondence between the old and the new TEÁOR system). Therefore, in cases where an activity code cannot be converted explicitly (i.e. the previous code is split into several parts), the Tax Authority does not modify the activities. In that case, if the entity concerned does not initiate the change to the new nomenclature by 30 June, the non-transferable activity will be deleted.

The KSH also informs businesses about the change of the main activity via the company gate, at the same time the codes of the translated main activities will be sent to the Tax Authority. The Tax Authority is obliged to forward the main activity codes it receives, and other activity codes converted by itself to the company registration authority by 31 January at the latest. Companies will therefore also be able to find out their activity codes according to TEÁOR’25 through the Companies Gazette and the services of the company information service available on the internet for a free of charge.

If the company concerned does not wish to accept the main activity code set by the KSH, or if the automatic conversion of other activities has not been carried out, it may request the NAV to amend the activities concerned or to record new activities by 30 June, using a form provided for that purpose. If a company does not initiate the change, that will be deemed to have accepted from 1 July. As a result, the main activity code will be the one provided by the KSH, whereas other business activity codes that cannot be expressly converted will be deleted by 31 August at the latest.

Tasks in connection with the articles of association

Given that only the company itself can amend its articles of association, the question may arise as to the timing at which companies need to implement changes related to the new TEÁOR codes.

Although the wording of the legislation and the information letters issued by the authorities raise a number of questions of interpretation, in our view, an enterprise that accepts the code automatically translated by the KSH for its main activity must amend its articles of association at the first other data change (affecting the articles of association and the register of companies itself) after 1 July. On the other hand, if the company concerned does not agree with the translated code, it must notify the new TEÁOR code identifying its main activity to the Tax Authority (by 1 July at the latest) on the basis of the new TEÁOR’25 code and at the same time arrange to notify the change in the data in its articles of association to the commercial court by amending its articles of association.

Companies are required to transfer changes to other activities and to initiate the corresponding change registration procedure when they make their first change to their data in the other companies register after 1 July.

An advantage in relation to the amendment of the instrument of incorporation is that the procedure at the Court of Registration is free of charge of fees and publication costs if the amendment of the instrument of incorporation is made solely to comply with TEÁOR’25.

Summary

It is clear from the above that the shift to TEÁOR’25 will affect all economic operators. To ensure that the changes take place in accordance with the real economic activity of the company, it is worth monitoring the process, and in the first weeks of February comparing the former and current status, so to ensure that the company’s list of activities is uptodate.

(Image source: Adem Podrez, Pexels.com)

As of 1 January 2024, the rules of Act V of 2006 on company registration, court proceedings and winding-up (Ctv.) will be amended and new provisions will be introduced.

News, Corporate law / / ,

We describe below the most important changes.

1. Changes to the company registration procedure

As of 1 March 2024, the Court of Registry will provide the Articles of Association attached to the application with an electronic signature and electronic time stamp and will ensure that the Articles of Association is accessible through the registry. The searchability and quick access of the company documents is made possible by displaying a link in the company details section of the Articles of Association. This service will be available for applications registered on and after 1 March 2024 for the articles of association of incorporation (changes), i.e. in a staggered manner.

In the case of applications for company registration and registration of changes submitted on and after 1 January 2024 the procedure will be simplified, legal representatives will not be required to provide each document with a qualified electronic signature and a qualified time stamp but will only need to sign the application itself in this way.

2. Change in the details of a pledge on a quota of an Ltd.

As of 1 January 2024, in the case of a limited liability company, the registry will not only contain the fact of the pledgee, but also the amount of the claim secured by the pledge or the amount up to which the pledgee may seek satisfaction and, if stipulated, the prohibition of alienation and encumbrance or prohibition of alienation of the quota.

A novelty is that data on the secured pledge created by pledging a quota is also included in the business register. The quota pledge is registered or cancelled on the basis of a request for change registration by the member (pledgor) or the pledgee.

The Court of Registry only examines the contract of pledge whether the details of the company and its member in the contract of pledge match the details in the registry and whether the details requested for registration match the contents of the contract of pledge.

In the case of a quota pledge already registered before 1 January 2024, the new data must be requested in the next amendment to other data of the registry, submitted by 31 December 2024 at the latest, without payment of fees and publication costs. After the deadline, the submission has the general fee and publication costs.

3. Changes related to the new legal instrument of detachment

Prior to the amendment, a legal person could be divided into several legal entities by way of complete division or partial division under the Civil Code. In complete division, the legal person shall terminate and its assets shall pass to two or more legal persons created by the division as legal successors. In partial division, the legal person shall continue to operate and a part of its assets shall pass to another legal person created by the division as a legal successor

With the amendment, a new legal institution, detachment has been introduced as a sub-case of partial division. In the case of a detachment, the separating legal person survives and creates the successor legal person with part of its assets by becoming its sole member.

4. Data transfer

The data received (updated) through the Business Registers Interconnection System (BRIS) must be entered in the Hungarian registry by the Court of Registry. However, the data content received may not fully correspond to the data content required by the company register. According to the law effective as of 1 March 2024, the court will enter the information received via BRIS in the registry and, if it finds that not all the data required by the relevant act are included in the registry, it will simultaneously call on the company to report the missing data within 60 days.

Motivation of white-collar workers

Company groups, Corporate law, Employment, labour law, Medium-sized companies, News / / , , , , , ,

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.

Sustainability reporting obligations

Company groups, Corporate law, Medium-sized companies, News, Start-ups, Trade affairs / / ,

 

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

Company groups, Corporate law, Medium-sized companies, News, Start-ups / / , , , , ,

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.

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Deductions from the corporate tax base during the state of emergency

Company groups, Corporate law, Medium-sized companies, News, Start-ups / / , , ,

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.

 

Certain Tax and Corporate Deadline and Processes

Company groups, Corporate law, Medium-sized companies, News, Start-ups, Trade affairs / / , , , , ,

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.

Changes of Companies Act effective as of 1 July 2018

Company groups, Corporate law, Medium-sized companies, News, Start-ups / / , , ,

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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