ESOP (Employee Share Ownership Programme) entities have been springing up like mushrooms in Hungary since last year, and the acronym itself has become something of a buzzword. And this is hardly surprising, as ESOP entities can be a tax efficient vehicle for paying out work incomes. Caution is advised, however: alongside the many advantages, the regulations also conceal a number of pitfalls.

It is becoming a practice that companies involved in cartels are being sued by market players who have suffered losses as a consequence of a cartel and now want to recover the extra costs they have incurred. The new provisions based on an EU directive and adopted in Hungarian legislation early this year to help the effectiveness of claims for damages are slowly achieving their objective.

One of the most frequent areas of dispute between the tax authority and taxpayers relates to the conditions under which a taxable entity participating in a chain transaction can deduct the VAT passed on to it. The tax authority (NAV) was recently struck another blow in the tussle when the Supreme Court, in a precedent-setting ruling, took issue with the tax authority’s practice of regularly reclassifying the participants in chain transactions as agents. What’s more, the Curia’s ruling goes significantly further, and questions in general the tax authority’s right to reclassify the transactions of taxable entities on a whim.

There is no use of winning a lawsuit against the tax authority if the enterprise goes bankrupt before the judgement is rendered. And such an outcome is by no means uncommon, as under the current laws the tax authority can initiate enforcement proceedings against a business while the suit is still in progress. What’s more, experience shows that the tax authority doesn’t shy away from enforcement even in the absence of the solid legal grounds for pursuing that route.

In our traditional beginning-of-year review, we again counted the number of taxes levied in Hungary today. This time we got 59. Although the number of taxes has decreased by one since last year, the scale and structure of the tax system has not changed. In terms of tax revenue generated, VAT continues to top the list, bringing in approximately HUF 3,300 billion in 2016.

Under current practice the Tax and Customs Administration (NAV) fines taxpayers that are caught with a VAT shortfall even if the budget has sustained no losses. An opinion recently published by the Advocate General of the European Court of Justice could spell the end for this extremely unfair and much criticised procedure.

Financing banks only had a short time to make use of the collateral structures transformed due to the revised pledge rules of the new Civil Code. A resolution recently passed by the Highest Court presents banks with a new challenge: financiers will, again, need to reconsider the collateral structures that have been developed and used over the years.

While dividends are the result of a happy process, namely the profitable operation of one’s business, the restrictions and difficulties associated with dividend payment have always given grounds for frustration. Particularly troublesome is the treatment of dividends in the course of corporate acquisitions, as the buyer and the seller need to elaborate special techniques for sharing the dividends among themselves.