In the few months since Hungary’s Private Foundation Act came into force on March 29, 2019, it has already significantly grown in terms of financial importance.
Highlights of the Private Foundation in Hungary
A private foundation is an atypical form of a foundation that is mainly established in order to prevent the fragmentation of the private property and to ensure proper asset management. Private foundations are generally considered to be outstanding legal structures and asset management instruments for companies and high-net-worth individuals. Especially in the case of high-net-worth individuals, private foundations are created by founders who grant certain assets to realize the purpose of the foundations and determine how the assets shall be managed both while they are alive and after their deaths. Private foundations may have named beneficiaries and as such may prove to be a great tool against fragmentation of family estates through inheritance. A founder’s intention to provide for the integrity of his or her private wealth may, however, also prove to be legitimate during the founder’s lifetime, should the founder not want to be engaged in the operation of the assets to the extent he or she was before, but, for instance, allocate more time to other life time activities.
In essence, a private foundation is a legal entity, separate from its founder and from its administrating officers, of which the founder may be a dominant member. It is also separate from the beneficiaries, who may receive various types of financial benefits from the private foundation in a regulated way as provided for by the founder. The right to revoke a foundation and to transfer the assets back to the founder as well as the founder’s capability to become a beneficiary are also ensured. Without reference to certain tax provisions with attractive benefits for founders and beneficiaries, the concept of the private foundation provides considerable incentives for funds to be transferred into the domestic economy.
Public-Benefit Private Foundations vs. Private Interest Foundations
The Hungarian Private Foundation Act distinguishes between private foundations based on their objective. Public-benefit private foundations are made for public interest such as education, healthcare, research, or sporting activities; thus, the scope of the beneficiaries is open. The foundation shall support and/or cover the funding for the purposes of the public interest, or support institutions which carry out such activities. The Corvinus University for Economic Studies in Budapest is a well-recognised example for a public-benefit private foundation. By contrast, as a private foundation’s objective is private, the scope of the beneficiaries can be closed. In this case, beneficiaries shall be named or otherwise described in the statutes.
Capital Requirements and Capital Control
Although the procedure to establishment a private foundation is similar to that for the establishment of a non-private foundation, there are some differences. In Hungary, there is a minimum capital requirement of HUF 600 million (approximately EUR 1,775,000). These assets – which can be provided either in cash or in kind – have to be defined in the statutes in sufficient detail to enable their individual identification.
In order to provide the greatest safety for the founder’s assets, there are several control and monitoring mechanisms required by law, and further protective functions and procedures can be detailed in the statues. For example, a Hungarian Private Foundation must safeguard the assets provided by the founder. This provision ensures that the funds are preserved and managed to that their value does not fall under the level of the minimum capital; thus, providing appropriate protection by requiring the board of foundation to exercise due diligence during the administration of funds.
If the minimum capital requirement cannot be met, payments to the beneficiaries shall be lowered or withheld. Furthermore, if this situation continues for three consecutive years, the foundation shall dissolve, as it is deemed to not have reached the goal set out in the statues. In addition, dissolution can be initiated at the request of the body or person who exercises the rights of the founder at any time.
Monitoring the Management of Assets
Founders may transfer their rights to the foundation’s board or other organs. If they do so, a property administrator shall be appointed, whose most important tasks are to oversee whether the management of assets is in accordance with the statues and to monitor the exercise of the founder’s rights. If the property administrator finds that the latter violates the provisions of law or the statues, judicial oversight proceedings can be initiated.
An important aspect of the establishment of a private foundation is the obligation to draft an investment policy, describing the portfolio and its risk-management and decision-making mechanisms regarding envisaged investments in detail. This way, the founder can specify the way he or she wishes the assets to be managed and shape their future management. All in all, the investment policy ensures that the assets are guarded and used by the private foundation according to the will of the founder.
Management and Controlling Bodies in a Hungarian Private Foundation
The main decision-making and managing body of the Hungarian Private Foundation is the board of directors, which must consist of at least five natural persons. These members are the executive officers of the private foundation, and – in order to ensure that the assets are safeguarded with the highest competence – educational or other requirements can be defined in the statues as a requirement for these roles. The supervisory board must be both set up and operated with an auditor.
Hungarian Private Foundation Act – Future Prospects
Since the entry into force of the Hungarian Private Foundation Act, the private sector has shown considerable interest in this legal construct. The possibility of establishing a private foundation enables the safe and successful transfer of private wealth by lowering or eliminating the risk of fragmentation or the effects of mismanagement. The concept of private foundations is appropriate to fulfil their designated role by providing various safeguards. Even though the minimum capital requirement is considered slightly high, there is a strong intention on the legislator’s side to significantly reduce this amount, which would give an even greater boost to the success of this legal instrument.
By Eszter Kamocsay-Berta, Managing Partner, and Bálint Éberhardt, Junior Associate, KCG Partners
This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.