The legal rules of real estate acquisition in Hungary differ dependent on whether the acquisition is for arable or non-arable land (residential and commercial properties), by Hungarian residents or non-residents and whether by natural or legal entities. Such diversity in the regulation is due to the fact that real estate is viewed as limited in number or volume and, particularly in relation to arable agricultural land, is considered to be a very precious natural resource. Strict legal regulation of the trading of real estate is additionally justified by its high market value and the risk of speculative transactions.
In many cases, it can be more cost effective to acquire a business entity that owns real estate, as far as transfer tax and company tax on income resulting from sale of ownership interest are concerned.
Restrictions, Limitations on Acquisition of Ownership to Real Property
Non-agricultural Real Estate
Hungarian individuals and legal entities may acquire ownership right to non-agricultural real estate (residential, commercial or industrial property) freely, without any restriction. Foreign individuals or legal entities, however, need permission for the acquisition of the ownership right to non-agricultural real estate in Hungary (with the exception of EU citizens). Similarly, the acquisition of historic and protected buildings and monuments is subject to permitting by the competent authorities and undertaking of serious maintenance and other obligations.
Agricultural Real Estate
Title to agricultural land (including all agricultural areas) may not be acquired by foreign or Hungarian legal entities, nor by non-EU individuals. As from May 1, 2014, arable land in excess of one hectare may only be acquired by those Hungarian or EU citizen individuals who also qualify as farmers, with certain exceptions. Arable land may only be leased by farmers or by legal entities registered as agricultural producing entities. Farmers may own up to 300 hectares and may lease up to 1,200 hectares of arable land; agricultural producing entities may lease 1,200 hectares and, in certain special cases, up to 1,800 hectares of agricultural land.
Transaction Structuring: Share Deal or Asset Deal?
Transfer Duty Considerations
Until recently, while the Hungarian state levied high transfer duty fee (10% of the purchase price) on purchasers of real estate, those who acquired ownership interest in a company whose main or only asset consisted in one or more real properties was not subject to such a duty or tax. This differentiation changed when the general transfer duty fee payable by the purchaser upon the purchase of a real estate was decreased to 4% of the purchase price: the transfer duty payment obligation was extended, with some exceptions, to the acquisition of an ownership share in any company owning real property in Hungary.
Currently, the general transfer duty is 4% up to a commercial value of HUF 1 billion (approximately €3.25 million) per property, and 2% for the value exceeding HUF 1 billion, the upper limit of any transfer duty payable being HUF 200 million (approximately €645,000 or US$690,000) per real property.
The 4% general transfer duty on the acquisition of ownership interest is only payable if the purchaser (together with its majority owned enterprise and its affiliated companies) acquires at least 75% of the company’s total capital.
Effective from January 1, 2017, for asset deals, the rate of transfer duty is 3% for real estate trading and licensed financial leasing enterprises that undertake to re-sell the real property to an independent third party within two years or give the real property into a financial leasing resulting in the transfer of ownership. The transfer duty is 2% for licensed real estate funds and, for the above described enterprises, if they undertake that the transfer contract is completed and fulfilled with the acquisition of title of the buyer.
The transfer of real property or business shares of a company owning real property is exempt from transfer duty if the companies involved are recognized as affiliated under the Act on Corporate Tax and Dividend Tax, provided that the buyer’s business activity is renting and operating of own or leased real estate, or buying and selling of own real estate.
Notwithstanding the above, the share deal for a real property transaction might have certain advantages vis-à-vis the asset deal depending on the particulars of the case and the main objectives of the investor.
|Share Deal||In case of sale/acquisition of a development project (including sale of plans, permits, licenses, contracts, etc.) allows for more flexibility for the parties’ negotiations||Thorough due diligence might be required in order to get a clear picture of the corporate, financial, legal, labor, compliance, etc. status of the company to be purchased and the related risks|
|In case of sale/acquisition of a building with tenants the lease agreement continues without any change in the lessor’s person||More complex administration with court of registration requiring formal corporate resolutions and documents|
|Possibility to account for accrued losses (profits)||Representations and warranties section of the transfer agreement needs to be very detailed|
|Flexibility in establishing the share price|
|Exempt of VAT|
|Asset Deal||Simple administration with the land registry regarding registration of transfer of title||Certain permits granted to the benefit of the owner/developer might not be smoothly transferrable|
|Tax authorities may establish the amount of the transfer duty based on the value of the property as estimated by the tax authority itself and not on the purchase price agreed by the parties|
|A company dedicating as its main activity to the sale and purchase of real properties only pay a transfer duty of 2% upon acquisition||Exempt of VAT with limitations|