The Hungarian Parliament passed the Act on Foundation Trusts on 5 March 2019. This legal concept has had a long and successful history in German-speaking countries. The main purpose of lawmakers in introducing this concept is to provide a legal framework – in addition to the already operating trusts – to manage, preserve and enlarge private equities owned by families for future generations. Please find below a brief overview of the most noteworthy regulatory features. The Act entered into force on 29 March 2019.
The purpose of a foundation trust
The main purpose of a foundation trust is to manage assets that were given by the founder to the foundation trust in order to achieve the objectives set out in the deed of foundation. This objective could be – in accordance with applicable laws – any private objective. As a practical example, the founder – in order to prevent a division of the estate – makes a devise to the foundation trust, which manages the assets and makes regular payments to the beneficiaries (i.e. family members). A foundation trust can be set up for various public interests as well: it is expected that in the foreseeable future some universities and scientific organisations (currently financed from the central budget) will be financed by foundation trusts. The introduction in Hungary of this new foundation model is justified since the Civil Code strictly restricts economic activities of foundations to the point where they can only carry out activities that are directly related to the achievement of the foundation’s objectives. In contrast, a foundation trust may, as its principal activity, manage assets regarding its own portfolio. That said, it should be noted that the Civil Code foundation rules apply to foundation trusts unless there is a different rule regarding the matter.
The specifics of foundation trusts
A foundation trust has a minimum registered capital requirement of HUF 600 million. The founder can fulfil this contribution in cash or in a consideration other than cash, particularly as a contribution of real estate, movable property as well as a contribution of share capital. At least five natural persons must serve on the board of trustees of a foundation trust. In addition, a supervisory board must also be set up, and a permanent auditor would need to be appointed. The founder can transfer the founder’s rights to the foundation trust or to the board of trustees. In this case, in order to supervise the assets, it is necessary to appoint an independent treasurer to monitor the activities of the board of trustees. Only auditors, attorneys or other trained professionals without a criminal record can serve as treasurer. In addition to the deed of foundation defining the purpose of the trust, an investment guideline must also be created. It serves as the basis for managing the trust’s assets. The guideline defines the investment portfolio as well as its risk management mechanism and sets out the decision-making methods regarding investments, which are binding on the board of trustees. Within the limits of asset management the founder can set in the deed of foundation a minimum threshold on the trust’s assets – this limitation cannot be lower than the registered capital of HUF 600 million. If the foundation trust’s assets drop below the prescribed minimum, payments to the beneficiaries must be proportionately decreased until the assets once again reach the minimum level of registered capital.
The basic differences from trusts
A trust’s essential feature is that the founder does not set up an independent legal entity; rather, the founder appoints a trustee to manage the assets in accordance with a pre-established mandate that is set out in a contract. In contrast, a foundation trust is registered as a legal entity by the court. A foundation trust is suitable for the management of private assets for an extended period of time, even through generations. This is supported by the fact that a trust management contract can be concluded for up to 50 years maximum. At the same time, there is no time limit on the existence of a foundation trust – the legal entity only ceases to exist if its assets fall below the registered capital minimum of HUF 600 million for three years. One exception to this is the extraordinary situation pertaining to a non-public trust when the founder petitions the court to liquidate the foundation trust. This decision does not affect those payments which were already established and due to beneficiaries because the legal entity can only be deleted from the registry after the fulfilment of such payments. Despite the law’s adoption, to the best of our knowledge lawmakers have not yet created the specific tax rules for foundation trusts. With this in mind, it is currently not possible to determine how foundation trusts and their payments will be taxed. One of the most important issues regarding this new legal concept is whether legislators will give foundation trusts a tax exempt status or – like with trusts – they will ensure that foundation trusts are able to operate in a tax neutral state.