Kun Péter
Megjelent: Inheritance and the family business: how to deal with inheritance when the main assets are in a family business, 2023. október (szerkesztő: Isabelle Rein-Lescastereyres, LexisNexis).
‘A man will more easily find purpose in life by working in a family business rather than in a multinational company, in which everything is focused on achieving a few percent increase in performance in the given year. A family business can better survive, since they strive for more than simple money. What is crucial is a belief in something, something one can be proud of, especially when the company bears their name. This intrinsic motivation provides an added value to the company leader and to all employees’ – Izabella Zwack – Member of the Board of Director of Zwack Unicum Nyrt, representing the 6th generation of the Zwack family.[1]
The importance of family businesses is becoming increasingly recognised worldwide. In all markets based on the freedom of trade, family businesses play a key role. Nevertheless, the evolution of family businesses cannot be set apart from the evolution of the economic, social and legal environment where the business operates. The notion of ‘family’ also varies from culture to culture and for each different time in history. The recognition of these ever changing economic, social, legal and cultural factors is essential to understand the functioning of the family businesses of a given society.
The brief history of family businesses in Hungary
Family businesses play a crucial role in the modern Hungarian economy. However, it is difficult to locate Hungarian family business that have been able to grow and develop through generations: the history of Hungary in the twentieth century was not conducive to a predictable and stable business environment where private entrepreneurs could build, operate and then transfer to the next generation their own businesses.
Before the First World War, for almost fifty years, Hungary was part of the Austro-Hungarian Monarchy, under the long-lasting reign of Franz Joseph. Flourishing business and a vibrant cultural environment were the result of the political and economic stability of this system: in this period, Budapest was the largest financial centre east of Vienna and in the last decade of the nineteenth century, new bourgeois families pursuing their business in trade, industry, property and finance replaced the ancestral aristocrats on the list of the biggest taxpayers.[2]
This promising period of the Hungarian history ended with the Great War. The peace treaties closing the First World War deprived Hungary of two-third of its territory and obliged the mutilated state to pay huge war reparations. The following social and economic shock paralysed the country for more than a decade; however, from the mid-thirties of the twentieth century Hungary was able to ensure a certain level of stability and growth potential for its local entrepreneurs. Rising GDP, and significant investments in culture characterised this period despite the inflexible social and political structure, but all this came to an end with the catastrophic alliance with Hitler’s Germany and the subsequent demolition of the country during the Second World War.
Following the war, Hungary fell under the sphere of influence of the Soviet Union and the country became a member of the ‘Eastern Block’ of communist states. This radical change of the political system was connected to radical changes in the economy: in the communist system state property held priority over private property, businesses owned by private entrepreneurs were brought under state control. In the seventies a slow transformation of the economy gradually began to develop: small business, such as hairdressers, shoemakers or plumbers could start to operate; nevertheless, their trade was still limited to only domestic customers or later to the countries of the Eastern Block. Nevertheless, these tiny entities planted the seeds of the future family enterprises. With the fall of the Berlin Wall, in the early nineties the wind of change also blew the freedom of business to Hungary. The constitutional system changed from a people’s republic to a republic, the social system from communism to capitalism, while the new legal system protected private property, meaning that state property lost its former priority. Even though law VI of 1988 on Economic Companies was adopted by the last parliament of the communist regime before the first free elections, this law was a milestone in the Hungarian legal system, creating a solid basis for the business environment.
Notwithstanding the new possibilities and opportunities provided by the legal system, the country lacked a stable, economically independent civil society. The forty years of communism had led to a gaping chasm in the organic evolution of the free business environment. Even though the new legal regulations adopted by the first freely elected parliaments were in line with the standards of the democratic countries governed by the rule of law, the business era of the nineties of the twentieth century in Hungary would be better described as ‘wild capitalism’ rather than a well-balanced and predictable free market. Financial success was not always merit-based, but there were no real political obstacles and businesses could operate freely.
More than thirty years after the change of the political regime we witness strong and viable Hungarian enterprises acting successfully not only domestically, but in the global business playground, too. These companies were able to survive the wild capitalism of the nineties, the financial crisis of 2008 and the Covid-19 pandemic. Many of these companies are family businesses: in Hungary 70% of companies are owned by families; they generate more than half of GDP and provide work for more than half the employees in[3]. There has also been a significant increase in the number of family businesses which reach or exceed 1bn HUF net annual turnover: between 2020 and 2021 their number grew from 1,100 to 1,285[4]
It is for this reason that the success of the transfer of family businesses, whether inter vivos or by death, is crucial for the national economy. According to estimates, 150,000 to 300,000 family-owned enterprises face challenges related to transfer of ownership nowadays[5]. It may be no exaggeration to claim that these challenges are one of the most vital questions for today’s Hungarian economy. Many of those entrepreneurs who established their business in the beginning of the nineties and have successfully navigated it through the past thirty years are now reaching the age of retirement. However, unlike in societies which have been based on capitalism for centuries, Hungarian civil society was practically demolished during the four decades of communism; therefore, the culture of the well-prepared transfer or inheritance of family businesses is lacking and requires a period of establishment.
Approximately two-thirds of Hungarian family businesses have no plan for the transfer of their business at all. The reason behind this is likely that business owners do not possess the necessary knowledge, and the culture of thought over business transfer is missing[6]. Nevertheless, in the last ten years, promising initiatives have been made both from legislators and civil society. New legal instruments, such as civil law trust and asset management foundations have been introduced to the Hungarian legal system, professional trust companies have been established with a wide range of services and family enterprises have created associations in order to share their knowledge and experiences[7].
The story of the Zwack Family[8]
Probably the best way to fully comprehend the difficulties faced by Hungarian family businesses in the last century is through one of their stories. Despite ultimately ending in success, the challenges this family had to face throughout its history shows that even if the product is unique and the family members are devoted to the business, political obstacles can seriously hinder the development of a company.
‘Das ist ein Unicum!’ shouted the Habsburg emperor, Joseph II in 1790, after tasting the dark-brown bittersweet liquor of Doctor Zwack: distilled from almost forty different herbs from Hungary and other parts of the world, the family history claims this is how the main product of the Zwack family business came to be known as ‘Unicum’. Unicum is a ‘hungarikum[9]‘, one of Hungary’s most famous liquors, the recipe which is still a family secret.
The factory where the liquor was first produced for the market was established in 1840 by Jozsef Zwack and moved to the bank of the Danube at Soroksári út in 1892 where it has been located ever since. The first trademark, named ‘My Treasure Liqueur’ was registered in 1881 and the name ‘Unicum’ in 1883. In its golden age the factory was the largest distillery in the Austro-Hungarian Monarchy, producing more than two hundred types of beverage.
The business-founder Jozsef Zwack was followed by his son, Lajos in 1915 who then left it to his two sons, Bela and Janos in 1926. Even the First World War could not stop the business: the company sold the liquor in flat bottles to enable soldiers to easily carry it to the front. The success of the company continued between the two world wars in spite of the fact that the brothers often refused to talk to each other. According to family legend, a room separated the offices of the brothers, and the lawyer sitting in this room mediated between the brothers.
The family was almost killed in the Second World War but with the help of the Swedish diplomats Raoul Wallenberg and Lars Berg they managed to avoid being shot and dumped in the Danube by a troop of the Arrow Cross party (Hungarian Nazis).
The factory was hit by a bomb in 1945 but the distillery equipment remained intact enabling production to continue after the war. Though the family rebuilt the factory, they were not able to continue their business activities for long: the government of the Communist Party nationalized the factory in 1948 without any financial compensation. Janos Zwack left the country and moved to the United States with the secret recipe in his pocket. Although Bela Zwack decided to stay in the country with his wife to be close to the factory, they were soon deported as ‘class enemies’ to the countryside and the factory was left without any member of the Zwack family.
The state-owned Hungarian Liquor Company (in Hungarian: Magyar Likőripari Vállalat) took over the production of the liquor on the basis of a false recipe given them by Bela Zwack and thus the production of Unicum during the communist regime was based on this.
In 1958, Janos Zwack initiated legal proceedings in the United States against the distribution of the false Unicum and as a result of the legal procedure the export of the drink to the West was prohibited.
In 1970, Peter Zwack, the son of Janos, returned to Europe, and by this time the original Unicum was already being successfully marketed and distributed in Italy. Following the invitation of the Hungarian government, Peter decided to move to Hungary with his family and entered into a joint venture with the Hungarian State in 1988 in order to run the business. Following this, in 1991, in the framework of the privatization of the state assets, Peter Zwack & Consorten AG purchased the Hungarian Liquor Company, which had thirteen factories and employed 1,300 employees at that time.
Peter Zwack has seven children, two of whom are actively involved in the family business. Before his death in 2012 Peter had handed over the presidency of the Board of Directors to his son Sándor while his daughter Izabella also became a member of the Board of Directors. They represent the sixth generation in the Zwack family business.
Notion of family in Hungary
The actual content of the term ‘family business’ in any jurisdiction cannot be determined without knowing how the given jurisdiction defines the meaning of ‘family’.
The ‘common European definition’ of a family business, published on the website of the European Commission,[10] is the following:
1. The majority of decision-making rights are in the possession of the natural person(s) who established the firm, or in the possession of the natural person(s) who has/have acquired the share capital of the firm, or in the possession of their spouses, parents, child, or children’s direct heirs.
2. The majority of decision-making rights are indirect or direct.
3. At least one representative of the family or kin is formally involved in the governance of the firm.
4. Listed companies meet the definition of family enterprise if the person who established or acquired the firm (share capital) or their families or descendants possess 25 per cent of the decision-making rights mandated by their share capital.
This definition is proposed by the final report of the expert group of the European Commission issued in November 2009, and the group recommended exploring opportunities to introduce this definition at national level[11]. As this definition includes such legal categories as ‘spouses’, ‘parents’, ‘children’, ‘family’ or ‘kin’ it goes without saying that the actual content of the ”common European definition’ in each Member State will be different, since the domestic law of the Member States gives different meaning and interpretation of these legal categories.
In relation to Hungary, the notion of family is strictly limited to heterosexual couples and their children. As set forth in Article L of the constitution, called the Fundamental Law, ‘[t]he basis of the family relation is the marriage and the parent-children relation. The mother is a woman, the father is a man.‘[12] As the institution of marriage is only reserved for heterosexual couples[13], neither civil partnerships of same-sex couples nor non-married unions of different or same sex partners are not considered ‘as the basis of a family relation’. This means that in Hungary only those companies are considered family business where the members meet the requirements of a family in Hungarian domestic law. Nevertheless – with some exceptions, for example in connection with adoption – the registered same-sex civil partners have the same rights and obligations as married couples, including inheritance rights[14].
Succession in Hungary[15]
Hungary is a civil law jurisdiction with ipso jure succession system. This means that the estate of the deceased passes upon death as a whole to the heirs. The succession procedure falls to the competence of the notary designated by law, determined by the place of the last residence of the deceased and the month of death
Succession can be intestate, where the general rules of succession law determine the distribution of the estate, or testate, where the testator’s intention for the passing of their assets takes the form of a legal instrument such as a will or inheritance contract. The will of the testator is limited by the obligatory rules of forced share.
Intestate succession rules give preference to the descendants in a direct line as addition to the surviving spouse, but the Hungarian-specific rule of family-branch succession – meaning that assets inherited or received from the ascendants of the deceased shall be treated differently if the heir is not a descendant of the deceased – could also have an effect on the distribution of the estate.
The right to inheritance is a perpetual claim of ownership under Hungarian law whilst the right to the forced share is not a right to inheritance, it shall be claimed from the heirs within five years, failing to do so the claim will be prescribed.
Will and inheritance contracts are regulated within the rules of testate succession, as well as donation upon death and disposition mortis causa. These widely-known instruments are considered as ‘classic’ tools of estate planning in Hungary.
The Hungarian tax system provides a wide range of exemptions and allowances to family members in connection with inheritance. As an example, the share of the estate inherited by direct line descendants (including adopted children), ascendants, surviving spouses and siblings is exempted from inheritance stamp duty. The exemption also applies to registered same sex civil partners. The general rate of inheritance and donation tax is 18%, except for real estate where the tax rate is 9%. The tax base is the net market value of the estate[16].
Transfer of family businesses
It is widely agreed among professionals that well-planned succession is essential to preserve the wealth of the deceased. The same applies to family businesses, where unplanned succession can easily result in the cessation or fragmentation of the business, since in this case the general rules of intestate succession apply. The risk of contentious inheritance procedure is much higher if the succession is not well planned, and the application of the general rules of intestate succession may lead to highly unfortunate ownership structures. In relation to family businesses, unplanned succession may have catastrophic consequences for the company: incompetent persons may obtain decisive rights in the business, family members ‘incompatible’ with each other or even lacking legal capacity may acquire shares in the company. These events could very quickly block the operation of the enterprise completely, resulting in the downfall of a business which had been carefully built up by the founder for decades. According to studies, approximately 30-35% of family businesses do not survive generation change worldwide, and because of the lack of experience and the necessary knowledge, this number may well be even worse in Hungary[17].
A significant characteristic of companies owned by family members is that apart from financial interests, emotions and ethics could also play a key role in business decisions. Emotional, ethical, and even moral considerations in the company management may provide a special character to a business and could distinguish the company from its competitors. As these considerations can have a positive effect on the business, they can also represent a serious operational risk. The ethics of the founder of the company ‘cast in stone’ in the last century may hinder innovation and the ability to adapt to the ever-changing business environment. Emotional considerations, love and hate among family members can block effective decision making.
A well-considered and carefully planned succession preserves the values of the family, takes into consideration the different personal and financial interests of family members and guarantees the professional management of the family business. To reach this ideal status, at least three important elements should be present at the same time: willingness of family members, professional financial, legal and even psychological advisors, and a supportive legal environment providing tools for refined succession planning.
New estate planning vehicles under Hungarian law: the civil-law trust and the asset management foundation
Realising the fact that the classic tools of succession law such as wills and inheritance contracts may not provide a convenient solution for succession planning in all cases, in the last decade new legal instruments have been introduced to the Hungarian legal system.
The two most important estate planning vehicles: the trust and the asset management foundation will be dealt with in this chapter. The common characteristic of these two instruments is that both are designed carefully by the legislator to facilitate and promote wealth management in Hungary, ensuring a business-friendly and investor-protecting environment. The tax treatment of the trust and the asset management foundation is based on tax neutrality, the trustee and the foundation are treated as an intermediary both from a tax and stamp duty perspective; therefore, the transfer of the assets to the trust or to the foundation does not trigger taxation. Significant tax benefits[18] and high-level privacy protection[19] are also provided in connection with these vehicles.
These legal institutions are under continuous development. For example, with the latest amendment of the Arbitration Act[20], the legislator made it possible for all trust related disputes to be subject to arbitration. With this amendment Hungary became one of the first civil law jurisdictions which has opened in full this confidential and professional forum for trust disputes. Needless to say, family businesses could benefit from this possibility, since it is highly likely they will prefer the confidentiality provided by the arbitration court over the public nature of a state court procedure.[21]
The Hungarian Trust
The trust agreement[22] was introduced to the Hungarian legal system with the new Civil Code which came into force on 15 March 2014. The Hungarian trust is a civil law contract that, within the limits imposed by certain mandatory legal requirements, grants the settlor and the trustee considerable freedom to agree on both the management of the trust assets and its transfer to a beneficiary. Although Hungary is not a party to the Hague convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition (the Hague Convention), the key points of Hungarian law relating to such trust arrangements are substantially the same as those governing trusts under the Hague Convention.[23]
Since its introduction the trust has enjoyed increasing popularity in estate planning in Hungary. One probable reason for its success is the general liberalism of the Civil Code which also applies to the trusts. This provides an opportunity for practitioners to tailor the trust to the needs of the family, respecting the different interests and considerations of family members.
According to section 6:310 § (1) of Act No V of 2013 on the Civil Code of Hungary (‘the Civil Code’), on the basis of the trust agreement, the trustee shall manage the rights and claims (‘the trust assets’) transferred by the settlor into the trustee’s ownership under its own name and for the benefit of the beneficiary, for which the settlor shall be obliged to pay a fee. The few obligatory rules that shall be respected when creating a trust are as follows: the trust agreement shall be in writing, the trustee shall not be nominated as the sole beneficiary, the trust assets shall be separated and recorded separately from the trustee’s own assets and from the other trust assets, the trustee shall not be instructed either by the settlor or by the beneficiary after the conclusion of the trust agreement and the trust agreement shall not be established for a period longer than fifty years. Apart from these obligatory rules the parties enjoy full freedom to determine the content of the trust agreement. It is important to mention, that assets transferred to trusts shall be added to the basis of calculation of the forced share[24] which means that the obligatory forced heirship rules of the Hungarian succession law shall prevail the rules governing the trust agreement. In practice, this generally means that the forced heirship rules shall be considered in connection with the determination of the distribution of the trust assets.
This liberal approach allows the values of the founder, as well as the interests of the family members to be reflected in the regulations of the trust deed, while at the same time allowing professionals to be appointed for the management of the family business. As the trust agreement is a civil law contract, the parties have freedom to agree in every aspect of the disposal of the ownership rights over the company shares transferred to the trust and about the management of the company. The settlor, who is generally the founder of the business, may stipulate his intentions, for example in form of a letter of wishes, which can be attached to the trust deed and which determines the guidelines for the trustee. It is also possible for the settlor to appoint a protector in order to represent his interests and provide control over the trustee’s activity.
The trust can be established inter vivos or upon death in the form of a will. Nevertheless, the latter is very rarely used in practice, since one of the most important advantages of the trust agreement is that by transferring assets to the trust before the death of the settlor, the long and burdensome succession procedure can be avoided.
The trustee can be a professional trust company licenced by the National Bank of Hungary or an ad hoc trustee; however, the ad hoc trustee shall not be party to more than one trust agreement at the same time.
The Asset Management Foundation[25]
Together with the trust agreement, in 2014 the Civil Code made it possible for the founder and his or her relatives to be beneficiaries of the foundation within certain limits[26], thus creating the legal environment for family foundations. The business activity of the foundation remained however highly limited: a foundation may pursue a business activity only if it is directly linked to the realisation of the purpose of the foundation[27].
The trust agreement is considered a flexible estate planning tool, but its duration is limited to 50 years. The asset management foundation, introduced to the Hungarian legal system by Act. No XIII of 2019 (‘the AMF act’) is intended to satisfy the need for a long-lasting wealth management vehicle, facilitating the preservation of family wealth throughout generations.
The asset management foundation can be established both for private and public purposes. The asset management foundation is entitled to manage not only the funds provided by the founder but also other the assets transferred to the foundation by the trust agreement, where the ultimate beneficiary of the trust agreement is the foundation itself.[28] The assets transferred to the foundation by the trust agreement after the establishment of the asset management foundation shall be managed according to the purpose of the foundation determined in the foundation deed. The Hungarian asset management foundation is therefore a ‘unique hybrid legal solution, mixing the trust’s and the foundation’s concept.’[29] Unlike with the trust agreements in general, the trust relationship regarding the assets transferred to the asset management foundation is not limited in time; therefore, in this case the duration of the asset management is not limited to fifty years[30].
The deed of foundation shall contain the main purpose of the management of the assets, but shall not be limited only to this: the founder may provide detailed instructions about the decision making and the investment of the assets trusted to the foundation.
The AMF Act provides several options to the founder to dispose over his rights: he or she may preserve them but may assign them to the foundation itself and may appoint a board of trustees or asset protector to exercise the founder’s rights.
The minimum capital requirement of the asset management foundation is 600 million Hungarian forints which may be considered high compared to other jurisdictions[31].
Summarising the above it can be established, that even if the asset management foundation is a new legal institution, because of its hybrid constitution it can be highly effectively used for estate planning, providing ‘a unique opportunity for families to maintain both their privacy and control over their assets.’[32]
[1] HR Portal 09/11/2011 – https://www.hrportal.hu/hr/zwack-izabella-egy-csaladi-vallalkozas-generacios-kihivasairol-20111109.html
[2] John Lukacs: Budapest, 1900, Európa Könyvkiadó Budapest, 1999, (translation of Klára Mészáros on the basis of John Lukacs, Budapest 1900, A Historical Portrait of a City and its culture, Wiedenfeld and Nicholson, New York, 1988) p.102
[3] Noszkay, Erzsébet: Tapasztalatok a családi vállalkozások átörökítésének dilemmái kapcsán (in English: Experiences about the dilemmas of the transmittal of family entreprises) Vezetéstudomány/Budapest Management Review, XLVIII. évf. 2017. 6-7. szám ISSN 0133-0179 DOI: 10.14267/VEZTUD. 2017.06.08, p.64
[4] Opten database: OPTEN » Egyre több a milliárdos családi vállalkozás, opten.hu, 08.06.2021
[5] Noszkay, 2017 p. 65
[6] see Noszkay 2017, p70 and Bogáth Ágnes: Utódlástervezés családi vállakozásoknál (in English: Succession-planning at family businesses) Vállakozásfejlesztés a XXI. században, Budapest, 2016, p.24.
[7] FBN-H – Association for Responsible Family Businesses in Hungary (in Hungarian: Felelős Családi Vállalkozásokért Magyarországon Közhasznú Egyesület and Association of Family Businesses (in Hungarian: Családi Vállalkozások Országos Egyesülete)
[8] This chapter is based on the following sources: (i) Hungarian Digital Museum: History of a unique drink and a unique family; (ii) dr. Antal Szabó: Family businesses in Hungary, MEB 2012 – 10th International Conference on Management, Enterprise and Benchmarking
[9] „hungarikum’ is a collective term of different products, know-hows, cultural heritage etc. that represent special value and has unique Hungarian character (www.hungarikum.hu)
[10] https://ec.europa.eu/growth/smes/supporting-entrepreneurship/family-business_en
[11] Final Report of the Expert Group – Overview of Family-Business-Relevant Issues: Research, Networks, Policy Measures and Existing Studies, European Commission Enterprise and Industry Directorate-General, Ref. Ares (2015)2102740-20/05/2015, p. 4.
[12] Fundamental Law of Hungary, Article L section (1)
[13] Article 4:5§ section (1) of Act No. V of 2013 on the Civil Code of Hungary
[14] Article 3§ of Act No. XXIX of 2009 on Registered Civil Partnerships
[15] Book Seven of Act No V of 2013 on the Civil Code of Hungary contains the regulations of Hungarian material succession law. This chapter provide a very brief summary of the main characteristics of Hungarian succession law without describing the rules in detail.
[16] Act No. XCIII of 1990 on dutis, Sections 12§, 16§ (1) i, j, 16§ (2) p, w)
[17] Noszkay, 2017 p.64
[18] See in details in Ákos Menyhei: Tax benefits of asset management foundation and trust in Hungary, Trust & Trustees, Vol.00, No. 0, 2021, pp. 1-6, Oxford University
[19] See in details in Ákos Menyhei and János Zsoldos: Privacy protection in Hungary, Trust & Trustees, Vol.26, No.6, July 2020, pp. 542-549
[20] Act No. LX of 2017 on arbitration
[21] Peter Kun: Trust arbitration in Hungary, STEP JOURNAL Issue 1 2021, p. 78-79
[22] Trust agreement under Hungarian law is also referred to as „fiduciary asset management contract‘, which is the mirror translation of the legal term of the Civil Code, „bizalmi vagyonkezelési szerződés‘. The regulations governing the ‘Hungarian trust’ have a lot in common with the fiducie governed by French law.
[23] Kun, 2021, p. 78-79
[24] Section Section 7:80 § (1) of the Civil Code
[25] Detailed analyses of the asset management foundation in Ákos Menyhei: The new Hungarian asset management foundation, Trust & Trustees, Vol.25, No. 6, July 2019, pp. 599-610 and comparative legal analyses in István Sándor: The asset management foundation in international comparison (in Hungarian: A vagyonkezelő alapítvány nemzetközi összehasonlításban, Jogtudományi közlöny, 2021.1. szám. p.3-11.
[26] Section 3:386§ of the Civil Code
[27] Section 3: 379§ (1)-(2) of the Civil Code
[28] Section 2§ of the AMF Act
[29] Menyhei 2019, p. 601
[30] Section 2§ (3) b) of the AMF Act
[31] Sándor, 2021, p.9
[32] Menyhei 2019, p. 610