Act V of 2013 on the Civil Code, which entered into force on 15 March 2014 (new Civil Code.) contains substantial changes to the minimum share capital for limited liability companies (LLCs). The new rule requires companies to increase their registered capital from the current HUF 500,000 to HUF 3 million by 15 March 2016.

The change in legislation is expected to affect almost 200 thousand businesses, with the additional capital requirement resulting from the mandatory capital increase amounting to approximately HUF 490 billion.

In the case of limited liability companies, the professional is confronted with two problems: the problem of raising subscribed capital and the problem of equity.

When increasing the share capital, it is not enough to look only at the amount of the share capital, as the equity capital requirements must also be met: i.e. after a capital increase, the equity capital cannot fall below 50% of the share capital.

It may be advisable to optimise the size of the capital elements, or, taking into account tax considerations, to keep the optimal capital structure in mind.

A combination of several solutions may be appropriate in this case, so in the first step the loss can be negated by a supplementary contribution (from 2015 onwards, assets can also be contributed as a supplementary contribution, but this option must be included in the company agreement), and in the second step the necessary increase in subscribed capital can be carried out. In a third step, when the equity situation of the company allows, the previous additional contribution can be repaid. This, however, requires continuous monitoring of the company's operations and very serious consultancy work in the background.

There are several options for increasing share capital, with their advantages and disadvantages:

• with financial contributions from members;
• non-monetary contributions (contributions in kind) from members;
• charged to the profit and loss reserve;
• by cancelling a member loan;
• by porting in a member loan;
• by waiving dividends.

Increase in subscribed capital by a cash contribution from members

The increase of subscribed capital by a cash contribution from members may be made by transfer to a bank account or by cash payment. It is also important that these are properly documented because the Companies Court will require proof of payment. In addition, the company's cash management regulations will need to be amended to take account of the title and amount of the payment.

The disadvantage of raising share capital from a cash contribution is that

• must be done with taxed money,
• actually need to move the money,
• may result in an additional cash surplus.

Increase of share capital by contribution

The contribution can only be a marketable asset, the ownership of which is transferred to the enterprise (typically: real estate, cars, machinery, equipment, rights, shares, securities). When increasing the share capital from a contribution, the value of the contribution must be determined, for which an auditor is required.

The disadvantage of raising capital from a contribution is that

• value may induce a tied capital increase and
• an asset may be effectively placed at the disposal of the enterprise which the enterprise cannot use.

Increase in share capital from retained earnings

Only free (uncommitted) retained earnings may be used to increase the share capital.

Act CXVII of 1995 on personal income tax (Income tax tv.) according to § 77/A (2) par. "the value of assets acquired by an individual in the form of securities is not income if the individual acquired them by increasing the registered capital of the partnership by way of a charge on its own capital".

Thus, the liability to pay income tax is only due when the share capital is reduced - possibly on liquidation - but until then the taxpayer is obliged to keep records.

Increase of share capital by cancellation of member loan

Act C of 2000 on Accounting (Accounting tv.), the forgiven member's loan is recognised as extraordinary income and is only included in the profit and loss reserve at the time of the adoption of the balance sheet, from which a subscribed capital increase is possible.

The forgiveness of a member's loan gives rise to a corporate tax liability, as the company cannot reduce its pre-tax profit when determining its tax base.

The remission of the member's loan may also trigger the obligation to pay the gift tax. Only the transfer of a claim by way of a gift between business entities is exempt from duty. Otherwise, the 18% gift tax is payable at the time of the waiver and, on the part of the individual, there is also an obligation to report the acquisition to the NAV within 30 days by submitting a deed recording the acquisition.

Increase of share capital by capitalisation of a member loan

In addition to the subscribed capital, it is also possible to increase the capital reserve in this way. However, this solution has tax risks, as it may lead to a wealth test for the individual owner and a comprehensive audit for the company.

For example, the ownership of the company may change significantly because of the forgiven member loan. In order to maintain the original ownership structure, the owner who has acquired a majority stake through the retention of a member loan may give away his or her stake to the other owner, which may result in a levy liability and a wealth test for the individual owner.

In a comprehensive audit, an increase in share capital by means of a member loan is problematic if the assets of the company do not actually cover the member loan. This significant tax risk may arise from the recognition of costs that are not related to the revenue-generating activity or from the failure to account for the revenue side. If the member loan was not granted for the purpose of acquiring assets, but to compensate for a negative result, which is in fact an element 'slipped' from equity, then the tax authorities will quite rightly identify a corporate tax gap.

Share capital increase with dividend waiver

According to the Accounting Act, the dividend waived - like the member loan waived - must be recognised as extraordinary income.

The difference is that the company can reduce its pre-tax profit when calculating the corporate tax base, and from 1 January 2014 there will be no liability to pay the levy.

"1 forint Ltd." founding

The minimum share capital required under the new Civil Code may discourage start-ups, for which the "HUF 1 Kft." can be a temporary solution.

The new Civil Code. 3:162 of the new Act allows that until the application for registration, the member raising capital must pay less than half of the value of the contribution in cash or a period of more than one year from the registration of the change is set for the payment of the outstanding amount.

A limiting rule, however, is that the Civil Code. According to § 3:162 of the Civil Code, the company may not pay dividends to the members until the share capital has been replenished to the extent of the share capital, and until that time the members are liable for the company's debts up to the amount of the unpaid contributions in cash.

Summary of the equity problem

In summary, the problem of equity capital in a company involves not only a one-off injection of subscribed capital, but also the ongoing provision of equity capital.

A solution is usually possible in several steps, which requires a strong legal framework (possibility of top-up payments), continuous monitoring of the result (in which accounting plays a prominent role) and - last but not least - a well thought-out equity strategy, in which the result generated can be properly decided.

Source: www.penta.hu

Edited by György Lovász ICT Europe, Dr. Balázs Termel ICT Europe