The Hungarian Trust - Facts and misunderstandings

„May anyone claim that the historical background of the one or the other legal systems is more valuable or that the concept of bifurcation of ownership (legal and equitable) provides a better solution than the contractual solution? I do not think so.”[1]

Hungary introduced its own trust law in March 2014 as part of the brand new Civil Code.[2] Since Hungary belongs to the family of continental civil law countries and follows the German-Austrian based legal traditions, the introduction of the concept of trust was not free from sharp professional debates during the preparation and drafting period which took almost two decades. However these debates also fortified a very implementable professional concept which may lift the Hungarian trust among the appreciated and successful solutions and structures of home and international wealth-, estate- and tax planning.

The purpose of this article is dual. First, giving an outlook to the main characteristic features of the Hungarian trust, a kind of fact sheet, to all of those who are open to new instruments and solutions and ready to think about the way of implementation, and second, clearing up some misunderstandings based on wrong, mostly academic interpretations.

I. Trust in Central-Eastern Europe

The Hungarian is not the first trust legislation in the Central-Eastern European region. Czech, Romania and Russia has definitely ahead Hungary in the legislation. However the basic difference is that while the trust has remained to a practically dead legislation in these countries without almost any practice, until a new trust industry was born in Hungary in a vibrant professional environment (congresses, seminars, articles, books[3], postgraduate university degree etc.). It seems that the Hungarian professional community is keenly interested in the concept of trust, at least much more than in the other countries in the region with similar legislation. Thanks to this professional interest shown, international organizations like STEP also could take a firm stand in Hungary, so currently the strongest STEP branch of the region is just in Hungary.   

II. The Pillars of the Hungarian Trust

a/ Contract made trust

Trust can be created in Hungary only by contract between the settlor and the trustee (or by a last will). This comes from the continental legal traditions of the country and makes the fundamental theoretical difference to the Anglo-American trust. Some authors say that the contract based trust is not a real trust, only pseudo trust or “merely a contract variant”[4] since “the Anglo-American trust is not contractual relationship, but a sui generis legal/equitable relationship”[5]. These opinions are lost, I guess, in the jungle of the academic theories and neglect the practical approaching of a legal instrument. If we are spending the energies rather to the comparison of the practical use of the UK, US and Hungarian trusts we’ll discover at the end of the day the functional identity among them.

b/ Trust friendly legal environment

One of the secret of the quick “startup” of the Hungarian trust is that not only the Civil Code rules were successfully implemented but the connecting legal environment (administrative, licensing, tax and accounting rules) was harmonized to the new trust law rapidly and successfully. (This harmonization is completely missing in the above mentioned countries of the region which makes their trust rules fully inoperative.) The swiftly harmonized comprehensive legal environment helps a lot in the daily implementation of the trust. It also serves in the building of confidence to a before unknown legal phenomena.

c/ Permissive rules

The other stand of the Hungarian trust is the dipositive (permissive) feature of the rules, which means that the Civil Code provides almost an absolute freedom to the parties to set up their own tailor made trust. Only the following five rules must be considered as obligatory:

• only written instrument (contract or will) creates trust;
• the maximum length of the trust is 50 years;
• the trustee cannot be the sole beneficiary of the trust;
• the trust asset must be separated from the trustee’s own assets and other trust assets;
• the trustee cannot be instructed either by the settlor, protector or the beneficiary.

Any avoiding from the above rules makes the trust nil and void.

d/ Transfer of the title of property

No trust is created without transfer of the property from the settlor to the trustee. This comes also from the continental civil law traditions which don’t know the concept of dual (i.e. legal and equity) ownership. The owner of all times is the legal and also the beneficial owner of the property. Splitting these two positions is simply prohibited in the civil law regimes. Therefore by the transfer of the property the trustee will be not just a legal owner, but also beneficial owner. The illusive prohibition of the bifurcation of ownership however opens certain gates and provides advantages in the era of the endless detection of the Ultimate Beneficial Owner in all parts of the business and financial operations (think only to a “simple” bank account opening transaction which is getting to a nightmare nowadays). In other words, according to the Hungarian trust rules the Ultimate Beneficial Owner of the trust asset (bank account, company participation, tangible and intangible, receivable, etc.) is the trustee itself, which – with some exception – has no right to identify the settlor unless his prior approval. Can any Anglo-American trustee say it about itself?

e/ Transparent taxation

The taxation of the trust is very favorable. First of all there is no any entry tax on the asset putting in trust. Second, the taxation of the income of the trust is very transparent since the trust itself – having its own tax registration number – is subject to the corporate income taxation. (The current Hungarian corporate tax rate is 10% up to tax basis of appr. EUR 1,6 million, and 19% on the exceeding part.) Finally third, the taxation of the distributed asset varies depending on the feature of the asset (i.e. capital or income) and the person of the beneficiary and its link to the settlor. In a properly designed trust only the income of the trust will be taxed at distribution. But since there is not gift or heritance tax in Hungary in relation to direct ascending and descending line and also marital spouses, the trust can be a perfect tool of the tax free estate planning.

f/ Treaty shelters

Since the trust is considered as corporation by tax aspects, the Hungarian trust also enjoys the treaty shelters of most of the ninety Double Tax Treaty and many Investment Protection Treaty of the country. That makes the trust also as a perfect tax planning and investment tool in international structures. However – and this still keeps waiting unfortunately – Hungary is yet not member of the Hague Convention on the Law Applicable to Trusts and Their Recognition, although the Hungarian trust meets in all sense the definition of the trust as defined in this treaty.  

g/ Unlimited purposes

The Civil Code does not specify the purposes of the trust. It leaves to the liberty of the contracting parties which means that the Hungarian trust can be set to any kind of purposes what have been characterized in the law books of many centuries unless one exception: the agricultural land. The sale of this asset is currently strictly limited by the Hungarian rules in general i.e. not particularly in relation to trust. However out of the agricultural land only the human fantasy set borders to the application of trust.

h/ Type of trustees

The Civil Code does not specify the detailed operational rules of the trustee. However, another law[6] separated the “business vise” (or professional) and “not business vise” (or non-professional) trustee. The first category is falling under government license (currently provided by the Hungarian National Bank as the supervisory body of the Hungarian financial market) which can be issued only to those corporate applicants who can perform quite a lot and strict professional, personal and financial conditions continuously during their whole operation. In complex and high profile cases or in case of high net value assets only this kind of trustee can guarantee the secured asset management. Currently only three licenses were issued and further two applications are under licensing. The licensing procedure takes several months. Literally anyone (corporate or individual) can be the latter kind of trustee (“not business vise”) since the law does not create any condition to be like that. The only limitation is that the trustee like this cannot take more than one case a year and the trustee fee cannot be higher than 1% of the trust asset (currently is debated that the 1% can be understood as yearly fee or a fee for the whole period of the trust). The not business vise trustee is obliged to file all of its contracts (trust deeds) with the Hungarian National Bank which keeps a registry of these instruments. Although this registry is not open to the public, open to any state authority. The business vise trustee has no a filing obligation like this. 

III. Past, Present, Future

Since the Hungarian trust was implemented only hardly more than two years ago, it is very difficult to talk about the “past”. Although the industry was born, that is still small and less developed but very keen which is headed by a handful of enthusiastic professionals with significant practice in application of Anglo-American type of trusts in the last 20-25 years. Since there are no court cases yet, we cannot talk about court practice either. The responsible state bodies are at least neutral, sometimes helpful and cooperative but definitely not hostile. The interest and demand is however growing, so all the conditions are given that the Hungarian trust be wildly used internationally also in the not too far future.

by Dr Gabor B Szabo, Primus Trust Corporation and Ecovis Hungary Legal, Hungary

Published in Offshore Investment Magazine, August 2016