The summer tax package set out a special tax regime applicable to wealth management foundations, a new asset protection and estate planning arrangement introduced into Hungarian law in March 2019.
A wealth management foundation is an entity established for the purpose of managing the assets granted to it by its founder and to distribute assets and the proceeds of its wealth management activity to the beneficiaries. The foundation can be established with an initial endowment amounting to at least HUF 600 million (approx. EUR 1.8 million). The guiding principles of the management of assets granted to the foundation should be stated in an investment policy.
The foundation is governed by a board consisting of at least five individuals. The foundation is required to appoint a statutory auditor and to have a supervisory board consisting of at least three individuals. Furthermore, in certain cases a so-called protector must be appointed.
A wealth management foundation serves asset protection purposes. The founder's creditors could only lay claim to assets managed by the foundation if these were transferred to it by the founder fraudulently in order to avoid settling his/her debts by diminishing his/her assets. Moreover, the creditors of the beneficiary may only seek to settle their claims from assets managed by the foundation provided that the foundation’s obligation to transfer assets to the beneficiary is due.
The tax regime applicable to wealth management foundations not qualifying as a public benefit organization is essentially modelled on the rules applicable to Hungarian trusts with one notable exception: a wealth management foundation may incur transfer tax liability in respect of assets contributed to it. This liability could only arise in respect of certain assets (e.g., real property or shares in entities that qualify as real-estate holding companies), therefore, it should not arise when making a cash-contribution to the wealth management foundation. Wealth management foundations are subject to corporate income tax ("CIT") meaning that any tax benefits granted to Hungarian tax-resident entities could also be available to wealth management foundations. A wealth management foundation is exempt from CIT if (i) it is founded by one or more individuals, (ii) it only has individual beneficiaries and (iii) it only realizes income from owning or disposing of financial investments, securities, receivables or liquid assets. Therefore, a wealth management foundation could be used for various domestic and international tax planning purposes.
If a wealth management foundation distributes the yield of assets to a private individual beneficiary, the beneficiary would be obliged to pay personal income tax ("PIT") at a rate of 15%, provided that the wealth management foundation does not qualify as a public benefit organization. Social tax would also be payable at a rate of 17.5% as long as the total amount of the beneficiary's income either included in the consolidated PIT base or qualifying as separately taxed income for PIT purposes does not exceed twenty-four times the minimum wage (i.e., HUF 3,576,000 in 2019, approx. EUR 10,800) in the tax year. If a wealth management foundation not qualifying as a public benefit organization only manages assets transferred to it by individuals, the managed assets must be categorised as capital and yield in connection with the distribution of assets. In contrast to the above mentioned tax treatment of the yield, the distribution of capital to individuals as beneficiaries is, as a general rule, exempt from both PIT and social tax, however, a gift tax liability may arise at the level of the beneficiary.