The application of preferred shares at a Hungarian company can obscure the ultimate beneficial owner of the business. This can protect their privacy, but it decreases transparency and might attract the scrutiny of the authorities.

Shares and dividends at the company

Normally, owners of a business can take dividends at the end of the fiscal year, based on how much profit the company made and in proportion to the shares they own. Advance payments are also possible, although they require special administration.

Nevertheless, the general meeting of the owners or shareholders may decide to assign some of the shares a preferential status. This means that the owner of these preferred shares may receive a fixed sum or a bigger proportion of the profit before other shareholders are paid. This is possible not only in the case of joint stock companies, where we traditionally talk about shares being issued, but also for limited liability companies, where the shares of the business owners are held by a smaller circle.

Preferred shares at a Hungarian company

The nominal value of a preferred share must remain below 50% of the share capital. However, the dividend payment for preferred shares may be up to 99.99% of all dividends. When talking about dividends paid out based on preferred shares, they are called preferred dividends.

At the same time, the ownership of preferred shares often comes with reduced voting rights in the general assembly of the company.

Preferred shares obscure ultimate beneficial owners

Transparency of ownership is a basic requirement in the European Union. This is reinforced by how the ownership structure of businesses must be kept up to date both in the company registry and with the Hungarian Tax Authority, indicating every individual holding at least 25% of the shares as ultimate beneficial owners.

The use of preferred shares, however, can obscure who receives the profits of the company as long as the ownership they represent remains below 25%. While even ownership of just a few per cents of the shares can entitle the holder of the majority of the profits, such a shareholder is not required to be registered with the Tax Authority as an ultimate beneficial owner. Moreover, if the company has issued physical shares, these can be traded without registration as long as they represent ownership below 25%. This will decrease transparency of the ownership structure.

Privacy and transparency

If you worry about the privacy of the ultimate beneficial owners of your Hungarian business, assigning preferred shares to them is a way to protect their identity. At the same time, this practice reduces transparency, and may prompt the authorities to apply increased scrutiny to the company’s transactions.

Helpers Finance provides accounting services mostly to small and medium-sized businesses in Hungary, focusing on working with foreign owners. That includes providing information and explanations about European and Hungarian business and tax rules, complete with assistance in preparing an easy-to-digest the organizational structure for the company, which will be necessary when opening a corporate bank account.

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