Who am I connected with??  Who is my affiliate Company?

It depends on the purpose for which the related parties’ connection is required. In this newsletter, we briefly explain how each law defines related parties and which definitions should be taken into account to meet the most common obligations.

The most common tasks related to related companies:

• accounting disclosures
• notification of associated companies to the tax authorities
• establishing transfer pricing obligations and preparing documentation
• reporting information in corporate tax returns and determining the size of the company
• assessment of the innovation contribution liability

Accounting disclosure

The accounting disclosure requirements are determined based on Act C of 2000 on Accounting (hereinafter referred to as Act on Accounting). Pursuant to paragraph 3 § (2) of the Act on Accounting, the following are associated enterprises:

• the parent company,
• the subsidiary
• and the jointly controlled entity.

1. parent company: an enterprise which, directly (holding more than 50% of the voting rights) or indirectly through a subsidiary, is able to exercise a significant influence over another enterprise (hereinafter referred to as a subsidiary), i.e:

• the right to elect or dismiss the majority of executive employees or members of the supervisory board, or
• votes with other owner(s) with the same content (by agreement) if together they hold more than 50% of the votes, or
• other owner(s) exercise their voting rights through the parent company, if together they hold more than 50% of the votes.

2. subsidiary: an enterprise over which the parent company is able to exercise a significant influence;

3. jointly controlled entity: an entity in which in the parent company (or the consolidated subsidiary of the parent company) on the one hand and one (or more) other undertaking(s) on the other hand hold the rights under point 1 on a parity basis, i.e. with at least 33 per cent of the voting rights. A jointly controlled company is jointly controlled by the shareholders.

Pursuant to the provisions of the Act (§§ 88 - 94/A), companies must disclose in the supplementary notes on the accounts their affiliated companies as defined above and the transactions with them.

In addition to the above, the balance sheet and income statement require that values attributable to related parties be highlighted or presented as a separate line item in each balance sheet and income statement line.

Notification of affiliated enterprises to the tax authorities

The reporting obligation applies to affiliated companies within the meaning of the 2017 CL Act on the Rules of Taxation (hereinafter referred to as the "Art). The Art. refers back to Act LXXXI of 1996 on Corporate Tax and Dividend Tax (hereinafter referred to as the Tao Act), since an affiliated company within the meaning of the Tao Act is considered an affiliated company pursuant to Section 7 (28) of the Art.

Let's see how the concept of an associated enterprise is defined in Section 4 (23) of the Act on Corporate Tax. Associated company shall mean

1. 1. the taxpayer and the person in which the taxpayer directly or indirectly has a majority control
2. 1. the taxpayer and the person who directly or indirectly has a majority control in the taxpayer.
3. 1. the taxpayer and another person, if a third party has directly or indirectly majority control in both of them, with the proviso that close relatives who have a majority control in the taxpayer and the other person are recognized as third parties.
    

Majority control can exist not only with direct owners but also with indirect owners. It is also important that direct and indirect ownership or voting rights of close relatives are summed up.

It is important to emphasise that the majority control used in the concept of the Act on Corporate Tax is determined in Section 8:2 (1) of Act V of 2013 on the Civil Code (hereinafter the Civil Code).

The taxpayer has a reporting obligation pursuant to Section 16 (4) b) of Government Decree No. 465/2017 (XII.28.), according to which the taxpayer must report to the tax authority the following changes affecting the tax liability

• the name, seat and tax identification number of the other company who is an affiliated enterprise within 15 days of the date on which they first conclude the contract
• the termination of the associated relationship within 15 days after the termination.

Transferpricing obligation and the scope of transactions

In order to determine the arm's length price, the taxpayer is required to keep records under the Act on the Rules of Taxation if a as carried out with an affiliated enterprise based on a valid contract or agreement (hereinafter together referred to as "contract") in the tax year.

To meet the legal requirements, the issue needs to be considered from two perspectives. On the one hand, who is obliged to prepare transfer pricing documentation and, on the other hand, with whom and what transactions must be included in the documentation.

1. Who has to prepare a transfer pricing documentation?

Under the provisions of the Act on the Rules of Taxation, a company that is not a small enterprise (i.e. a medium or large enterprise) on the last day of the tax year is obliged to determine the market price until the submission of the corporate tax return in accordance with the provisions of the relevant Decree of the Ministry of Economy.

In determining the size of the enterprise, the provisions of Act XXXIV of 2004 on Small and Medium-Sized Enterprises (hereinafter referred to as the SME Act) must be taken into account.

Under the SME Act, a small enterprise is an enterprise

1. in which the total number of employees is less than 50, and
2. has an annual net turnover or balance sheet total not exceeding EUR 10 million.

It is important to note, however, that in order to determine the size of a company, not only the company's own indicators (number of employees, turnover and balance sheet total), but also those of related companies and partner companies (domestic and international) should be taken into account.

Related companies are within the meaning of the SME Act those in which one enterprise holds a majority of the shares or voting rights of another enterprise. Another important rule is that enterprises, in which a natural person or natural persons acting jointly hold a majority of the voting rights, where they carry out all or part of their activities in the relevant market or in neighbouring markets, are also considered related enterprises.

According to the SME Act, partner companies are, among others, enterprises which are not affiliated enterprises and in which an enterprise holds exclusively or jointly with several affiliated enterprises at least 25% of the registered capital or voting rights of another enterprise.

2. Transactions to be analysed

In their transfer pricing documentations, companies must present their contracts with their affiliated companies in accordance with the relevant Decree of the Ministry of Economy. In this case, affiliated companies are enterprises defined in Section 4, Point 23 of the Act on Rules of Taxation, referred to above.

In order to determine the size of the company in the corporate tax return, the provisions of the SME Act must be taken into account.

Innovation contribution

Pursuant to Act LXXVI of 2014 on Scientific Research, Development and Innovation (hereinafter referred to as Inno tv.), a company subject to the Accounting Act and a foreign company's establishment (including the Hungarian branch of a foreign company) within the meaning of Act C of 1990 on Local Taxes (hereinafter referred to as Htv.) are obliged to pay an innovation contribution.

Exempted from the obligation to pay the contribution are - among others - companies that qualify as micro or small enterprises under the SME Act.

The classification of companies for the purposes of the innovation contribution must therefore be based on the SME Act as a whole. The starting point for the classification is the concepts of small and micro enterprises, related and partner enterprises and the financial indicators of the SME Act, as already explained in the transfer pricing obligation.

It can therefore be seen from the above that it is important to take into account the legislation under which the associated relationship is to be determined. It also follows from the different legislative background that the scope of related enterprises depends on the legislation under which they are assessed, and therefore the related enterprises defined by each legislation may differ.

Our advisers will be happy to assist you in determining the associated enterprises.