CMS Expert Guide to cash pooling in Hungary

a) Legal framework for cash pooling

There is no specific law or regulation in Hungary that contains detailed rules on cash pooling. Nevertheless, Sec. 3.4.12 of Appendix 3 of Decree No. 55/2021 of the National Bank of Hungary (“HNB”) does differentiate between, and thereby accepts, the two concepts of cash pooling noted in the introduction to this brochure: physical cash pooling and virtual (or notional) cash pooling. In addition, Hungarian banking legislation requires those participating in commercial lending to seek the authorisation of the Hungarian financial services regulator (the HNB), except for financial transactions between a parent company and its subsidiary or between subsidiaries that are carried out jointly in order to ensure liquidity or for the purpose of allocation, which do not require authorisation – provided that the companies are not classified as financial institutions. Group companies should therefore be able to pursue an active cash pooling arrangement in Hungary without the need for HNB authorisation.

b) Hungarian company law: the maintenance of share capital

Pursuant to Hungarian company law, a Hungarian company’s equity must exceed the minimum level of registered capital required for the given company form on a statutory basis. If it does not meet this requirement in two consecutive full financial years (both years including 12 months), known as a situation of negative equity, then the shareholders are required to provide enough equity to ensure that it does within 3 months following the adoption of the annual report of the second financial year. If the 3-month-long deadline elapses without the provision of additional capital, the company has to decide on its transformation into another form of company, its merger with another company or its termination without a legal successor within 60 days following the expiry of the 3-month-long deadline. According to a court decision, if the deadline for providing equity has passed, the shareholders can only decide on the transformation or termination of the company (i.e. the company cannot be “saved” by providing equity at this stage). In practice, if there is no counterparty with colliding interests, the court might be willing to approve the remedial capital injection even after the expiry of the statutory deadline.

In case the shareholders do not adopt a decision on the remedial of the negative equity situation, a judicial supervisory proceeding may be initiated against the company. In the course of a judicial supervisory proceeding, the court may take certain measures, e.g. impose fines, convene and call upon the shareholders to adopt a remedial decision or appoint a supervisor to the purpose of restoring the lawful operation of the company. In case the lawful operation of the company is not restored, the court bans the company from further operations, declares it wound up and initiates the forced liquidation of the company.

This clearly has consequences for cash pooling arrangements. Directors should be careful to ensure that the company’s contributions to the cash pool do not cause the company to enter into “negative equity”, particularly if the contributions may not be recoverable (e.g. due to the insolvency of another cash pool participant).

In addition, directors have a duty to convene without delay an extraordinary general meeting in situations where the share capital of the company is threatened. An example is where the equity of a limited liability company (Kft) has fallen to or below half of the amount of its registered capital due to losses or if the equity is below the statutory minimum amount of registered capital. The subsequent members’ meeting must take rectification measures (e.g. make additional capital payments or decrease the registered capital). Parent companies should therefore be concerned that the cash pooling arrangement does not result in subsidiaries overextending their contributions at the expense of the equity on their balance sheets.

Hungarian law also strictly stipulates when shareholders of a company can receive payments (i.e. dividends) from the company. The company may effect any distribution from its equity to a shareholder, on account of being a shareholder or otherwise, during the company’s existence - with the exception of the reduction of the registered capital - from the untied retained earnings supplemented by the previous financial year’s after-tax profit. No distribution shall be made if the company’s adjusted equity is below its registered capital or it would drop below the registered capital if the distribution was made, or if the distribution would jeopardize the company’s solvency. No deviation is allowed from these rules in the deed of foundation of the company. Withdrawals from the cash pool account by the parent company and payment into it by the subsidiary should therefore not infringe these rules, or else there will be a risk of invalid distribution.

c) Liability of shareholders and directors

As a general rule, the directors of a company involved in cash pooling must ensure that the company does not fall into insolvency owing to the arrangement. The shareholders as well as the directors of the Hungarian company must also keep the above capital preservation rules and will also want to avoid a situation of negative equity, as described above.

In addition, the shareholders and directors should be aware of the following:

d) Piercing of the corporate veil

If a limited liability company or company limited by shares is terminated without a legal successor, a shareholder cannot rely on its limited liability if it has misused such protection and unsettled creditor claims remained because of this. There is an abuse of liability in particular, if the shareholder disposed over the assets of the company as if they had been its own, the shareholder pursued a permanently disadvantageous business policy or the shareholder passed a resolution in respect of which it knew or should have known given reasonable care that such resolution was clearly contrary to the lawful operation of the company.

In addition, if a shareholder holding at least 75% of the voting rights conducts, as shareholder, a business policy that is permanently disadvantageous to the company and the termination without legal succession was due to such business policy, the shareholder shall have unlimited liability for the unsatisfied debts remaining after the termination without legal succession (this does not apply in the case of ordinary, voluntary winding-up). The claim aiming to establish the liability of the shareholder having at least 75% of the voting rights may be filed during the liquidation proceedings or within 90 days after the closure of the liquidation proceedings.

In the above cases, the shareholders of a company may have joint, several and unlimited liability for the unsatisfied debts of their company.

The above liability issues mainly arise if the shareholders do not take any of the actions required by law to resolve an unlawful situation, such as a negative equity situation, or if they have disposed of assets in a way that they knew or should have known would result in the company being unable to pay its debts when due. In a cash pooling arrangement, such a situation may arise if, for example, the parent company withdraws contributions from a subsidiary, leaving it without liquidity and forcing it into insolvency.

An additional type of piercing of the corporate veil liability relates to the transfer of shares in bad faith. If the debtor has an amount of debt outstanding which exceeds 50% of the registered capital of the company, the court may declare that the former majority shareholder who transferred his shares within three years of the commencement of the liquidation proceedings is liable without limitation for the debtor’s unsettled debts, except when the former shareholder is able to prove that at the time of transferring his shares the debtor had still been solvent, the accumulation of debt has only happened after, or, even though the debtor was threatened with insolvency or was insolvent, the shareholder has acted in good faith and considered the interests of the creditors during the transfer.

A situation where the liability of a majority shareholder is applied in a similar way to the above is the forced annulment of a company (which means a solvent dissolution), when the court annuls the company notwithstanding that the company left behind unpaid debt.

If the cash pool arrangement entered into between several Hungarian companies qualify as a de-facto group of corporations as per the provisions of Hungarian law and any of the controlled member companies is subject to a liquidation proceeding, the dominant member company shall be held liable for the unsatisfied debts of such controlled company being under liquidation. The dominant member may be exempted from the liability if it is able to prove that the insolvency of the controlled company is not originating from the unified business policy of the group of corporations.

e) Directors’ liability for damages

Under Hungarian company law, directors of a company are obliged to act with the care expected of a person holding such office and making the interests of the company as a priority and they are liable to the company for any damage it suffers as a result of the directors’ activity under the rules of breach of contract. The damage that a company may suffer includes damage suffered directly by the company, or damage caused by the directors to third parties (e.g. creditors) where such third parties have received compensation from the company.

The directors of a company should therefore be careful to ensure that, amongst other things, in setting up and operating the cash pooling account they have the necessary capacity under the company’s constitution to do so and should seek the shareholders’ consent if not. They should also ensure that the risks posed to a company by a cash pooling arrangement, such as the loss of liquidity if another participant becomes insolvent, do not jeopardise the company so as to put them in breach of their duties.

However, a director will not be liable to the company if he can prove that the breach was caused by a circumstance falling outside of his/ her controlling scope, not foreseeable, and it could not have been expected that the director would avoid the circumstance or prevent the loss or damage.

f) Directors’ liability for debts

If a situation occurs that threatens the solvency of a company, the directors must perform their obligations taking into consideration the interests of the creditors of the company (arguably, the interests of the company should also be considered, although this is not clear from the law). If this obligation is breached as a result of which the company’s assets are diminished and the company enters into liquidation, a director (or a person who was a director during the 3 years preceding the commencement date of the liquidation) may be held to have unlimited liability for the unsatisfied debts of the company unless he can prove that following the threat of insolvency he took all measures that could be expected of him in such a situation to reduce the loss suffered by the creditors. The same liability rule applies to any person having a de facto decisive influence on the decision-making of the company (which can include the parent company).

In light of this, directors who are aware that another participant in the cash pool is having solvency problems, putting the cash pool at risk, may wish to withdraw the company from the arrangement so as to prevent and minimise any potential loss to the company’s creditors.

In addition, it would be sensible for the directors of group companies involved in cash pooling to have a right of information as to the solvency of the other group companies, so as to spot any early warning signs.

a) Interest limitation rules

Hungarian interest limitation rules are aligned with the EU Anti-Tax Avoidance Directive (Directive 2016/1164/EU). Exceeding borrowing costs are deductible up to 30 percent of the adjusted pre-tax profit or up to HUF 939,810,000, whichever is higher.

Interest deduction capacity (30 percent of the annual adjusted pre-tax profit less the annual exceeding borrowing costs) may be used as a tax base decreasing item in the actual or in the subsequent five tax years, if the company recorded less exceeding borrowing costs in a given year than the above limits.

b) Interest deductibility

The tax-deductibility of interest paid in respect of money withdrawn from the cash pool should be recognised by the Hungarian tax authorities as long as the loan serves the business purposes of the taxpayer.

c) Corporate Income Tax

Any income earned from interest earned in a cash pool forms part of the general accounting pre-tax profits of a company, and is taxed at the rate of 9%.

d) Transfer pricing rules

If the pool members are considered related parties for corporate income tax purposes, the following transfer pricing requirements must be observed by the Hungarian pool members:

• notifying the Hungarian tax authorities of related party transactions within 15 days of entering into a contractual arrangement for the first time; and
• maintaining sufficient documentation of the related party transactions (master and local files),
• applying arm’s length prices or adjusting the corporate income tax base to reflect the situation as if market prices and market conditions had been applied.

e) VAT rules

As a general rule, for services supplied to businesses the place of supply is the place where the customer is established. Financial services (such as lending) are exempt from VAT. It therefore needs to be considered whether the cash pooling services provided will be subject to this exemption and, if not, where the place of supply is. It is recommended that this issue be clarified with a Hungarian tax professional prior to setting up a cash pooling structure.

f) Financial transaction tax

Financial transaction tax is applicable from 1 January 2013 on various financial transactions. Such financial transaction tax applies – inter alia – to all wire transfers, at a rate of 0.3% of the transaction value, with an upper limit of HUF 10,000 (EUR 25) per transaction. The tax is payable by the financial institution, which can then pass the cost on to its clients. Although cash pooling transactions seem to be exempt from the financial transaction tax provided that all participants keep their accounts at the same bank, a careful analysis of the details of each cash pooling arrangement is required to determine whether any elements of the cash pooling structure may actually still be subject to the tax.