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Financial Participation

The legal background of employee financial participation has its origins - with some exceptions - in the privatization process. There are three major forms of participation: share ownership, profit-sharing and the cooperative movement.

Share ownership

Employee share ownership had mainly three sources: the employee privatization on preferential terms, stock ownership programmes and holding shares in private companies.

Employee Privatization

Employee privatization on preferential terms was regulated by two laws: the 1991 Privatization Law abolished in favour of a new Privatization Law adopted in 1995, the 1995 Law XXXIX on Realisation of Entrepreneurial Property in State Ownership. According to this law, employee ownership in the course of privatization is possible through three financial techniques: price reduction, purchase by instalment and purchase on credit. A discount of up to 150% of the annual minimum salary can be granted, but the nominal value of shares acquired this way may not exceed 15% of the company’s registered capital and the discount may not exceed 50% of the purchase price. The allowance can be used either individually, or in an organised form.1

ESOPs

ESOPs were first regulated by the 1992 Law XLIV on Employee Share Ownership Programmes, amended later in 2003 by Law CXIX. A distinction was made between two types of ESOPs: so-called ‘privatization’ and ‘non-privatization’ ESOPs. The privatization ESOPs bought properties from the State Property Agency or municipalities with related incentives. The non-privatization ESOPs bought shares or business shares not at the disposal of the State Property Agency, e.g., already existing securities or securities issued as capital increases also foreseen by the ESOP law. The difference between both forms is that there are no specific incentives encouraging companies or employees to establish non-privatization ESOPs. According to the law, ESOP participants have to be employed by the given company for at least half of the official work time and must have an existing employment contract with the company for at least six months. An employee can be a member of only one ESOP organisation at a time, though it is possible that within one company two ESOPs exist since there is a threshold of 40% employee participation. Retired employees can decide if they wish to remain a member. New employees, or old ones who did not want to join the organisation at the time it was established, can become members of the ESOP at any time. A three member organising-committee must be elected by the employees, whose duty it is to negotiate with potential sellers (company) and creditors (e.g. banks) and to prepare the credit application and purchase offer. Upon registration the ESOP organisation becomes a non-profit organisation with the members’ meeting as its highest decision-making organ. The organisation ceases to exist when the ownership of all shares is transferred to the participants of the ESOP, unless the employees decide that the ESOP organisation should remain, which requires them to develop regulations for the period after repayment (e.g. rules of marketing shares). Nonetheless, as a result of legal regulations and because the established forms of operating the asset (such as setting up a limited company) involve considerable costs, the overwhelming majority of ESOP organisations ceased to exist after the loans were repaid. Until the shares are transferred to the participants of the ESOP, the organisation is the owner of the shares. With regard to the exercise of property rights, participants have voting rights in proportion to their registered shares, but up to a maximum of 5% of the property acquired by the ESOP organisation. However, in many issues related to decision-making in an ESOP organisation the law gives a wide discretion to the members of the organisation to establish ‘internal’ rules in this field. In the case of ‘privatization’ ESOPs only credit is available to employees on preferential terms, but the own resources of the organisation must be at least 2%.

Private Companies’ Shares

The 1988 Law on Business Associations gave employees the possibility to hold shares in a company for the first time. This law was replaced in 1997 with the Law CXLIV on Business Associations. It states that employees’ shares are registered shares and can be issued free of charge or at a reduced price in accordance with its provisions. Employees’ shares may be issued with a simultaneous share capital increase of the joint-stock company, up to a maximum of 15% of the increased share capital. Employees’ shares are only transferable to a limited extent. In case of death of an employee or termination of the employment relationship (excluding the case of retirement) his/her heir or former employer has the right to transfer the employees’ shares in question to other employees of the company within six months. If this deadline expires, at the first shareholders’ meeting thereafter the company can decide between withdrawing the employees’ shares in question with a corresponding reduction in its share capital and selling the shares, after transforming them into ordinary, preference or interest-bearing shares. This limited transferability reduces the value of employees’ shares.

The new 2003 legislation allows companies to set up state-recognised, tax qualified stock plans. For a programme to be recognized as an approved programme, the organiser of the Employee Securities Benefit Programme has to submit an application for the recognition of the programme as an approved programme to the Ministry of Finance which informs the relevant Tax Authorities about its decision. The programme must meet several conditions – for instance, only securities issued by the applicant company or its majority shareholder may be offered in the programme; statutory threshold levels are set at 10% employee participation at a minimum, a management stake of less than 25%, with the total stake being less than 50% of the total share value. Companies have no withholding or reporting obligations in connection with employee stock options or purchase plans. The first HUF 500,000 of shares meeting the vesting requirements are not taxable on exercise or vesting. Any shares not qualifying for the programme are taxed as normal employment income. As already mentioned, the incidence of employees’ shares in Hungary is insignificant.

Profit-Sharing

The only regulation in Hungary regarding profit-sharing is Section 5 of Law XXII of the 1992 Labour Code. This states that an employer may grant any benefit to its employee as long as this is provided in a non-discriminatory manner. There are no specific incentives (such as tax allowances or other subsidies) for employees or employers,.

Cooperatives

The first law on cooperatives was adopted in 1992 (“1992 Law I on Cooperatives”) and was replaced in 2000 by Law CXLI on New Cooperatives. The new law, just like the old one, requires a minimum of five persons (both natural and legal persons) to establish a cooperative, but does not place much emphasis on the property notes representing shares in the cooperative. Cooperatives have to keep a register of members and their contributions, although members have equal rights in the cooperative, irrespective of their contribution. The cooperative’s highest decision-making body is the members’ meeting which also decides on the dividend; decisions are made with 50% plus one vote of the members present at the meeting, with public voting. The board of directors elected by the members’ meeting manages the cooperative’s everyday activities. The cooperative is taxed as an organisation and is subject to the Law on Corporate Tax and Dividend Tax. Shares in the cooperative are considered securities, according to the provisions of the Law on Personal Income Tax, and all income related to them is taxed accordingly.

Wilke, Maack and Partner (2014) Country reports on Financial Participation in Europe. Prepared for www.worker-participation.eu. Reports first published in 2007 and fully updated in 2014.