Utlimate beneficial owner registry and what you should know about it

Authorities with the appropriate authorization and certain service providers will are able to request data from the registry since 1 February 2022. On top of that third parties will also be able to request data from 1 July on with certain restrictions.

After lengthy preparations, Act XLIII of 2021 on the Creation and Operation of the Data Reporting Background for the Identification Duties of Financial and Other Service Providers (“Afad Act”) entered into force on 21 May 2021.

As per in the preamble of the Act, the stated objective of the legislation is to create a data reporting framework for the identification duties of financial and other service providers, to make the ownership of economic and social actors more transparent and to promote the effectiveness of the fight against money laundering and terrorist financing by establishing and operating a central registry of beneficial ownership, bank accounts and safe deposit services.

One of the reasons for the new ruleset is the, by Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 that also aims to establish a registry for beneficial owners.

Plans for regulation to combat financial money laundering, terrorist financing, tax evasion and corruption has long been on the EU’s agenda. The system, also referred to as the UBO (ultimate beneficial owner) registry, has undergone several conceptual changes before the current regulatory approach was chosen, under which data collection and related services are provided by the Hungarian Tax Authority (NAV). As part of the operation of the registry, the organization concerned is assigned a national registration number and a so-called TT index. This index assesses the registered organization on the basis of their reliability in providing accurate data. The TT index classification rules entered into effect as of 1 February 2022 and the possible sanctions will only follow first from 1 July.

Who are the beneficial owners and to has a duty to report?

A beneficial owner is the person who ultimately benefits from the activity of an enterprise. The Afad Act refers back here to the rules of the Money Laundering Prevention Act (Pmt Act), according to which beneficial owners are natural persons who directly or indirectly hold at least twenty-five percent of the voting rights or ownership interest in the specified company or otherwise exercise effective management or control.

According to the provisions of the Afad Act, the duty to report apply in particular to:

  • business entities and legal persons registered in Hungary,
  • Hungarian branches of foreign companies registered in Hungary,
  • voluntary mutual insurance funds and private pension funds registered in Hungary,
  • non-governmental organisations registered in Hungary,
  • in the case of trusts, fiduciaries, if the activity is carried out in Hungary or abroad, more precisely outside the EU, but the business relationship is established in Hungary or real estate is acquired in Hungary in accordance with Pmt Act,
  • legal entities partly owned by the state or local government with at least 25 percent non-state ownership.

Who provides the information?

According to the provisions of the Afab Act, account-holding banks are the ones obligated to upload data on beneficial owners to the registry based on information previously collected from their customers. Banks are obliged to provide data on their customers on a monthly basis.

What is the subject of the reporting?

According to the law, the data must include the following information on the beneficial owner or owners

  • the surname and first name of the beneficial owner;
  • the name and surname at birth of the beneficial owner;
  • the nationality of the beneficial owner;
  • place and date of birth of the beneficial owner;
  • the address of the beneficial owner, or, in the absence of an address, the place of residence;
  • the nature and extent of their interest in accordance with Article 3, Section 38, points a) and b) and d) to f) of the Pmt Act;
  • the TT index of the actual ownership data

TT index and client classification

Based on the registry, those obligated to report are assessed on the basis of a 10-point reliability index. Each data subject is assigned 10 points at the time of the first recording. In the event that any authority detects a material discrepancy between the data known to it and the data entered in the register, it may notify the tax authority.

On the basis of such a notification, the NAV will reduce the TT index of the client concerned. If the client’s TT index is reduced below 8 points, the client’s designation is changed to uncertain and unreliable below 6 points. The tax authority publishes the name, tax number and rating of the entity concerned immediately in the case of an unreliable rating and after 180 days upon receiving an uncertain rating. Service providers must treat clients with an unreliable rating as high-risk as per the PMT Act and refuse to execute transactions above HUF 4.5 million for them.

How long will the data be included in the register?

In order to prevent and combat money laundering and terrorist financing, the registry will keep the data of the data provider in the beneficial ownership registry for 8 years from the date of the data provider’s dissolution without legal succession.

What will change with the new law on corporate restructuring?

In 2019 the Directive (EU) 2019/1023 of the European Parliament and of the Council (Restructuring Directive) has become effective. The legislation transplanting the directive into Hungarian law was ratified on 1 July 2021, but the practical use of the various proceedings contained in the legislation can only start from 1 July 2022. How exactly can these new laws aid companies?

Let’s take for example the extraordinary circumstances caused by the COVID-19 pandemic since the spring of 2020 that’s effected every aspect of the economy. Usually, it’s very rare for companies with great potential employing numerous people to come under liquidation. A crisis like this can emerge at any moment as we have experience back in 2008 as well as 2020 and can lead to unexpected circumstances. An economic crisis of such magnitude can lead many business owners and employees to face hardships.

The purpose of the new legislation is to introduce a new legal institution that can save otherwise healthy businesses facing financial hardships. The restructuring process can help for example businesses suffering from the protracted financial strain caused by the covid pandemic. As of right now bankruptcy proceedings are the only possible way to handle the unsecured debt accumulated by a business, however the slow and burdensome process, that also includes of the debtors in some the decision-making process of the business can carry a stigmatizing effect as well. The new process is expected to provide a new, efficient legal tool that can be used to save businesses.

One of the main advantages of the restructuring process, is the fact that it’s in essence governed by the parties of interest, and the courts are only present in a limited fashion. Furthermore, it is up to the debtor to chose which creditor they wish to involve in the process as not all creditors are necessary to be involved by law. However, from the creditors the debtor has involved, a delay in payment can be requested in order to carry out their negotiations but regular payments must be made towards the creditors not involved in the restructuring process. The legislation provides flexible tools for debtors in order for them to maintain their business, meanwhile allowing for the company to arrange negotiations with their most important creditors, those most vital to their operations. Should a debtor decide to involve all their creditors the delay in payments is universal, making the process public. Such a public process also means a larger involvement of the courts.

During the process the debtors may be aided by restructuring experts, should the debtor or the creditors involved see a need for such assistance. The experts – as moderators – are also tasked with helping the debtor to create a restructuring plan, assisting, or directing the negotiations with the creditors and are responsible for the proper execution of the restructuring plan. Guidance from such experts can be very influential as it is important for debtors to set up a realistic restructuring plan. Experts can also aid the negotiations by mediating problems as a neutral third party. These negotiations are important for both sides as debtors and creditors need to agree to a restructuring plan resulting in the renewed solvency and operation of the debtor. There is no strict legal parameter established by the new regulation for the possible restructuring process, the parties are free to use and agree to any solution that’s beneficial for both the debtor and the creditors. Of course, some legal conditions are still applicable – as for example the rights of employees can not be infringed due to the restructuring agreement – and these conditions are monitored by the courts.

The main benefit of the restructuring process is that it can be approved by simple majority resulting in a compulsory agreement. Therefore, it’s no longer possible for a situation to arise where a single dissenting creditor can cause the agreement and therefore the continued operation of the debtor to fall through. Furthermore, unsuccessful negotiations will no longer necessarily result in insolvency proceedings for the debtor. In summary the new restructuring process will strengthen the position of businesses and therefore the position of creditors in the Hungarian market, resulting in long term positive effects on the economy as well.