Tax issues in fiduciary asset management
Assets under management is subject to corporate tax, has its own tax number. But its tax obligations (filing, declaration, payment of taxes, etc.) are fulfilled by the trustee. This strange line-up raises many questions on the part of the trustees. And sometimes also on the part of the tax authorities. Tax issues in fiduciary asset management in Hungary.
Tax liabilities of the Hungarian trust
The fiduciary asset management agreement (hereinafter: trust) is subject to corporate tax, local business tax (LBT) or other local taxes (e.g., estate tax) and duties. The tax obligations of the trust – prepare and submit declaration, tax payment, advance tax payment – is the obligation of the trustee as well. After the conclusion of the contract, the trust must request a tax number. The tax number indetify the trust when the trustee file the tax returns. The tax liability of the trust begins on the effective date of the contract.
In connection with the tax issues in fiduciary asset management in Hungary, a distinction should be made between the tax issues of taking over and alienating of assets under management and the issues of yields on assets under management.
Corporate tax and local taxes
As the trust is subject to corporate tax. The tax base is determined in accordance with the provisions of the Corporate Tax Act. So it may apply tax base deductions that can be interpreted as assets under management (e.g., deduction of dividend income from the tax base or deduction for intangible assets from the tax base).
If the subject of the corporate tax can reduce its tax base. The trustee may account for the part of the trust that has already been transferred to the beneficiary. In case the settlor has recorded the inventory and the assets under management as self-employed person, the income corresponding to its current market value must also be recognized at the time of transfer.
If both the trustees and the beneficiaries of the contract are exclusively private individuals and the trust has only financial income the profits of the trust are not subject to corporate tax.
Local tax is rarely paid on trust (it does not engage in active business activities). It does mainly financial or other type of income which do not have to be included in the local business tax base. Other type of income for example the royalty.
However, there may be an estate tax liability. If there is real estate in the trust and the local government has this type of tax as well.
Value added tax
The trust is not subject to VAT. The question of the VAT liability arises in the case of assets placed under asset management by a VAT subject. In such a case, the VAT Act favors the parties to the contract with rules similar to contribution-in-kind. If the trustee is also subject to VAT and takes over the tax liabilities of the settlor related to the trust (VAT deduction, monitoring the deduction rate for 5-20 years). The Settlor or the Trustee don’t have to pay VAT on the transfer if the Settlor is not VAT payer.
Personal income tax
The beneficiary is liable to pay tax depending on whether he receives the trust or the yield on the trust at the time of payment. According to the provisions of the Personal Income Tax Act, the beneficiary is taxed on the income received from the yield on the trust according to the same rules as the dividend. According to the PIT rules, the benefit received from the trust is not normally taxable. But according to the Duties Act, a duty on gifts must be paid afterwards.
According to the provisions of the PIT Act, the benefit received from the capital of the trust may also be taxable. But in this case, it will not be subject to duty. If it was received by the beneficiary as consideration or if it is not possible to determine the value of the trust and the value of the yield from the accounting of the trust. In this case, the total amount of income received is treated as other income. Other incomes are currently subject to 15% personal income tax and 13% social contribution tax (SZOCHO) in 2022.
The trustee is allowed to open a long-term investment account for the beneficiaries. So if the conditions are met, the beneficiary does not have to pay PIT after the yield.
Tax issues in connection with the duties
When releasing the trust, the general rules require the beneficiary to pay a duty on gifts. The general rate of the duty on gifts is 18%. If the real estate is residential property, the rate of the tax is 9%. Whether a fee is payable also depends on the relationship of the beneficiary to the settlor, as the tax liability must be established as if the benefit had been received directly from the trustee. Gifts between direct relatives, siblings and spouses are free of duty on gifts.
The trust can be transferred to the trustee free of duties. Which means, that the transfer of the real estate does not involve a payment of a duty. Unless the fiduciary contract has not been duly notified to the competent authorities.
The release of assets is also tax-free when the settlor receives the trust because he was (also) the beneficiary of the contract.