Hungarian government proposes tax reviews of asset growth of public officials

The Hungarian government has published a Draft Act to protect public assets and restore public trust by seeking to ensure that any increase in the wealth by leading public officials is consistent with their taxable income. To this end, the Draft Act would introduce a new mandatory procedure: an individual risk assessment conducted by the National Tax and Customs Administration. Although the Draft Act primarily targets public sector actors, its impact extends to their family members and business partners.

The following article summarises the Draft Act and outlines which types of transactions could warrant the Tax Authority’s scrutiny.

Subjects of the Risk Assessment

Under the Draft Act, the Tax Authority would be required to investigate the following officials: members of the National Assembly, ministers, state secretaries, administrative state secretaries, and government commissioners. The investigation would also extend to the officials’ relatives, including spouses, domestic partners, parents and children living in the same household, including adopted and foster children.

For the business sector, the most significant aspect of the Draft Act is that the Tax Authority could also investigate individuals and companies an official has directly or indirectly transferred assets to or provided financial benefits for, provided that the beneficiary’s increase in assets is attributable to that transfer. 

Where the benefit is granted to a business entity, including through the transfer of an ownership stake, the Tax Authority would investigate the business entity within the framework of the official’s risk-assessment procedure.

Transactions triggering a risk assessment

The Draft Act would grant the Tax Authority broad discretion in determining whether an asset transfer has occurred, particularly considering that the concept of an "indirect transfer" is not expressly defined in the Draft Act. Although the future practice of the Tax Authority would likely provide greater clarity, the text of the Draft Act suggests that the following categories of transactions are likely to attract scrutiny:

• Transfer of company shares or equity.
• Real estate transactions: The land registry office would provide the Tax Authority with quarterly land registry data. In addition, a one-off retrospective data transfer covering year-end ownership records for the period 2020 to 2025 would be required.
• Transactions involving intermediaries: Given the Draft Act's reference to benefits provided "indirectly", the Tax Authority may seek to examine asset transfers effected through intermediary entities, holding structures or other indirect arrangements.
• Cross-border transactions: The Tax Authority may also request data from foreign authorities’ databases. Asset transfers abroad may also be analysed. 

Scope of data used by the Tax Authority

The Tax Authority could rely on its own records, the databases of other domestic and foreign authorities, and publicly available data. Upon request, it could also obtain the non-public asset declarations of the individuals concerned from the Integrity Authority. 

Of importance to the financial sector, the Draft Act would amend four sector-specific laws: those governing investment firms, payment service providers, credit institutions and collective investment schemes. As a result, confidentiality rules would not prevent the Tax Authority from requesting data for risk assessment purposes.

Deadlines 

The Draft Act sets down the following procedural steps:

• Initiation of the risk assessment procedure: to occur within 30 days after the end of the second year of an official’s mandate. If the official's mandate terminates, the procedure must be initiated without delay and no later than 30 days after the termination of the mandate.
• Duration of the procedure: 60 days.
• Initial findings: Based on the risk assessment, the Tax Authority will summarise its findings in a “final document”.
• Follow-up review: The Tax Authority conducts a follow-up review after four years following the preparation of the final document and compares its initial findings with information that has become available in the intervening period.
• Retrospective review: For officials whose mandates ended during the five-year period preceding the entry into force of the Draft Act, the Tax Authority must initiate the risk assessment within 30 days following the act's entry into force.

Legal consequences

If the risk analysis gives rise to suspicion of a criminal offence, the Tax Authority must file a criminal complaint with the competent investigative authority, such as the prosecutor’s office, the police or National Asset Recovery and Asset Protection Office. Additionally, where the findings of the risk assessment indicate a failure to fulfill tax obligations, the Tax Authority would be obliged to initiate a tax audit. 

Attention should be paid to the Draft Act's public disclosure regime. Where an official is found to have a personal income tax deficiency of at least HUF 5 million, the Tax Authority would publish the individual’s name, position and the amount of the shortfall in an accessible format. The individual would remain on the register until the outstanding tax liability has been paid in full, but at least for 90 days.

This threshold is significantly lower than the one generally applicable to other taxpayers. By comparison, individuals who do not fall within the personal scope of the Draft Act are included on the tax authority's list of major tax debtors only where their outstanding tax debt exceeds HUF 100 million. The proposed rules subject officials to a substantially more stringent public disclosure regime, reflecting the Draft Act's enhanced focus on transparency and accountability in the public sector.

Next steps

Given the Draft Act’s proposed entry into force on the day following publication and its five-year retrospective reach, the window for preparation may be limited. Individuals and businesses that could fall within the scope of the new regime should therefore begin assessing their potential exposure before the legislation enters into force.

Financial institutions should also prepare for information requests from the Tax Authority and, where necessary, review their internal data reporting procedures to ensure that they can respond efficiently to such requests.

For more information on how the Draft Act could affect your Hungary-based business, contact your CMS client partner or the local CMS experts who authored this article.

The article was co-authored by Menta Szabó and Zsombor Bálint Bucsánszky.