Sole traders and non-corporate property interests – based on the draft

Sole-trader status would not determine the valuation method

Section 13 would establish two valuation systems for sole traders. The dividing line would be whether the trader used taxation based on entrepreneurial income. The first group would undergo a composite business valuation; the second would use the rules governing individual assets. Agricultural primary producers would fall into the latter group. For the definitions of sole trader and primary producer, section 2 would refer to the Personal Income Tax Act, without reproducing its detailed rules.

Classification under section 13 would not create a separate, uniform business tax. The valuation would feed into section 6: the tax base would comprise net assets exceeding HUF 1 billion after eligible debts. The HUF 500 million valuation threshold would serve a different purpose and would not represent a tax-free business allowance.

Combining net business assets and earnings

Under section 13(1)–(2), net business assets would replace equity for sole traders taxed on entrepreneurial income. They would comprise the documented aggregate value of assets owned by or belonging to the trader and used for, or connected with, the business, less actual business debts. The calculation would draw on records referred to in the Personal Income Tax Act, the year-end inventory and supporting documents.

After-tax entrepreneurial income determined under that Act would replace profit after tax, while the ownership per centage would be 100%. Section 13(1) and Annex 1, point I, would therefore combine asset value with earnings capacity. Where net business assets exceeded HUF 500 million, hidden reserves determined under the Annex would also increase their value.

Weighting and adjustments under the Annex

Applying Annex 1, point I, would give equity a single weighting and earnings value a double weighting, dividing their sum by three. Earnings value would normally use average profit after tax from three completed financial years and a 15% capitalisation rate. A negative average would produce a zero earnings value. Point V(a) would accommodate only one or two available years and annualise results from financial years of unusual length.

The Annex incorporated by sections 13–14 would require adaptation to the interest concerned, rather than unchanged application of every provision. Hidden reserves under point IV(c) would reflect positive value differences for specified fixed assets, less related deferred tax liabilities, reviewed by an independent auditor. Points IV(d)–(e) would address differing financial-reporting terminology and dividends subsequently approved or paid but still included in equity.

Asset-by-asset valuation and the limits of private use

Under section 13(4), traders outside entrepreneurial-income taxation and agricultural primary producers would have no separate earnings value derived from their activity. Their property, money and other assets would follow the rules applicable to each asset. Business assets would not thereby be generally excluded: individual calculated values would replace a composite business valuation.

Section 6(4) would override the general exclusion for personal-use movables. The full value would count where a movable was partly used for business or agricultural production, connected with that activity, or subject to expense recognition. However, section 13(3) would prohibit counting an asset or debt again once included in the composite valuation. Full-value inclusion would therefore not authorise counting the same economic value twice.

Only the member’s entitlement would enter the calculation

Section 14(1) would cover property interests in organisations other than business companies. Examples would include individual firms, law and notarial offices, cooperatives, associations of enterprises and forest owners’ associations. The relevant connection would be an individual’s entitlement to participate in the organisation’s assets or profits. The organisation’s name alone would not replace examination of that entitlement.

Under section 14(2)–(5), the formula would already contain the individual’s share of distributable equity and earnings, so no further ownership multiplier would apply. Different asset and profit entitlements would be calculated separately. However, the HUF 500 million adjustment threshold would be tested against the organisation’s total equity before determining whether the individual’s share came from book equity or equity adjusted for hidden reserves.

Minority interests, personal services and refundable contributions

Section 14(6) would primarily use the participation ratio defining the property entitlement for minority adjustments. If unavailable, the individual’s share of organisational assets would govern. Annex 1, point V(b), would permit reductions below 50% ownership: 25% where participation reached 33%, and 30% below that level. A reduction would consequently not attach automatically to every membership interest.

Section 14(7) would exclude remuneration for personal services from earnings value, separating payment for work from profit distributable through membership or capital participation. Subsection (8) would impose another limit: where the member could recover only their contribution, the equity component could not exceed the refundable amount. That restriction would concern the equity component specifically, rather than operate as a general valuation exemption.

Special employee programmes and transparent organisations

Section 6(5) would include employee ownership programme interests only where the programme qualified as special under the referenced Act. Section 14(9) would allocate the organisation’s draft-valued assets, net of debts, according to individual contributions, or equally without contributions. No earnings value would be calculated. The draft would not supply the external programme legislation’s further conditions.

Tax-transparent organisations under section 7(6)–(7) would follow a different approach. Their assets would be attributed directly to members or participants under the governing law, or equally if no ratio could be established. Allocated debts could also pass through, but only if otherwise deductible. Classification under section 2, point 1, would therefore precede deciding whether to value an organisational interest or directly allocated assets.

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