Category: Hungary

Due to the state of emergency related to the coronavirus outbreak, sooner or later many business owners, company managers, and chief legal or financial officers will be relieved of their more routine, day-to-day work. This is a time when it might be worthwhile to sort out the company’s legal or financial issues that you may not have had time for during your day-to-day operations. Here are five tips worth considering.

1. Review your contract templates

 Everyone negotiates and signs numerous contracts on a day-to-day basis. Many of these contracts are based on pre-existing templates or ones taken over from others. However, in many cases, whether due to changes in the company’s life or operation or due to regulatory changes, these contract templates are no longer up-to-date and need to be revised. The time freed up by slow business is a great opportunity to update these contracts as needed and bring them into line with the changed realities of the company’s operation. 

2. Clarify certain legal and tax issues in your operations

 In their day-to-day operations, many companies run into issues whose tax or legal implications are unclear. Given the frequent pressures of time, we often overlook these issues. Because of this, they often remain unclarified until an official audit – when the stakes are already high. Therefore, it may be worthwhile to look at these processes during this less busy period. And if we are unable to arrive at a clear position on a particular issue, it may be advisable to seek a legal opinion or even a ruling of the authority on the matter. 

3. Develop the company structure

 In the course of the growth and development of a company, business owners tend to focus primarily on meeting business needs, and so they may neglect thinking about whether the company’s organisational structure is still appropriate for the company’s activities. Yet, the structure established for a start-up may no longer be optimal for a company with more serious business potential – either from a taxation or from an asset protection point of view. Therefore, it may be worth considering restructuring the company. Would it make sense setting up a holding company over the existing companies? Would it be a good idea to spin off some of the company’s assets into a separate company or companies? The expected temporary shutdown provides a great opportunity to think these options over. 

4. Making the most of corporate tax allowances

Many businesses are unaware of what corporate tax benefits are available. In fact, in the current uncertain business environment, a tax benefit could come in twice as handy. Fortunately, before the 31 May deadline for submitting corporate tax returns, we still have enough time to look at what benefits or allowances we can avail ourselves of. Almost all financial managers should pay particular attention as to whether or not their company is eligible for any kind of R&D tax breaks or royalty-type allowances related to intellectual property. By reviewing the company’s operations, with a little thinking and possibly by supplementing a few documents, there could well be a chance to take advantage of these breaks.

5. VAT on non-recoverable claims – a windfall

From a business point of view, it’s always a nasty shock if one of our customers fails to pay us due to insolvency. In addition, under the old rules, this also means that you lose the VAT content of the invoice issued to a non-paying customer. However, under the rules that came into force on 1 January, the amount of VAT on bad debts became reclaimable, subject to strict limits. It may be worth considering which of our invoices we can reclaim the VAT on. More importantly, by 21 April, according to the ruling of the European Court of Justice in the Porr case, it is possible to reclaim the amount of VAT on non-recoverable claims where Hungarian law does not allow for such a refund. Given the short deadline, it’s worth considering this issue as soon as possible.

By Akos Barati, Attorney, Jalsovszky

In the framework of the Hungarian ‘Public Administration and Public Service Development Strategy 2014-2020’ a single building authority system was introduced as of 1 March 2020.

Until now the state carried out the construction permitting activities in a twofold way: while local governments also had responsibilities, some construction issues were with governmental departments. This not only slowed down the administration, but also obliged the country to double its resources. In addition, from this date it is not possible to appeal the resolutions of the government authorities, but customers can exercise their right to appeal directly at the court.

Another important development in the construction authority is that it will be possible to commence certain activities more easily, which until now have been unjustifiably tied to having a license. Procedures are established in which certain activities can be commenced within 30 days of notification. During this time, the state may verify the conditions and prohibit the activity if it deems necessary.

As of 1 March 2020 all assets and pecuniary rights of the local municipalities which ensured the performance of the building administrative tasks of the city notary were transferred to the use of the state. The right to use is exercised by the principal and county government offices. The district offices of the principal and county government authorities performing building and building examination authority tasks at first instance had to hand over all documents of building and building examination cases to the principal and county government authorities until 29 February 2020.

By Lidia Suveges, Attorney at law, KCG Partners Law Firm

In its judgement of 2 March 2020, the Court of Justice of the European Union (CJEU) established that Member States are free to impose registration obligation for foreign suppliers and levy penalties on foreign entities for incompliance with the obligation, even if resident entities are exempt from that obligation. The judgement, however, also contains that the Hungarian legislation is disproportionate and as such, it is incompatible with the EU rules.

The background of the case is that in January 2017, the Hungarian tax authority found that Google Ireland (Google) had failed to comply with the then newly introduced registration obligation for tax on advertisement, and levied a total of HUF 1 billion (approximately EUR 3.1 million) within five days.

Google brought an action for the annulment of those decisions before the court, stating that the Hungarian legislation is discriminative and constituting a restriction on the freedom to provide services in the European Union. The court decided to stay the proceedings and to refer questions to the CJEU for a preliminary ruling.

According to the judgment of the CJEU, a Member State that imposes on advertisers established in another Member State an obligation to register in respect of their tax on advertisement liability is not contrary to the freedom to provide services under Article 56 Treaty on the Functioning of the European Union (TFEU). The CJEU secondly examined the penalty regime applied to foreign entities and found that a regulation that allows multiple, automatically increasing penalties imposed within a few days of time regardless of the nature or seriousness of the infringement without the competent authority giving the supplier the time necessary to comply with its obligations or the opportunity to submit its observations, is disproportionate and thus in breach of Article 56 of the TFEU.

It is clear from the decision that Member States are free to require registration from foreign entities even if resident entities are exempted from the obligation. The judgement also states that Article 56 precludes the application of the current penalty regime, however, one might imply also that penalties on foreign entities only contrary to EU rules unless disproportionate.

Finally, it is worth noting that in the meantime the Hungarian Parliament effectively suspended the application of tax on advertisement by temporarily reducing the tax rate to 0% from May 2019 by the end of 2022.

By Balint Zsoldos, Head of Tax, KCG Partners Law Firm

Hungarian online invoice data reporting obligation is set to be extended practically to all invoices by 2021 in two steps. Companies – for some as a totally new requirement – should be ready to allocate development capacity in order to comply with the reporting on time.

Online invoice data reporting was introduced in Hungary in 2018 to combat VAT fraud and to facilitate digitalization of VAT reporting. The reporting obligation requires taxpayers to provide data to the tax authority electronically in a pre-defined format. Up until now, the scope of live invoice reporting was limited to business to business (B2B) transactions with VAT charged over HUF 100,000.

The Hungarian Parliament passed a legislation in December 2019 that amended the VAT Act in two steps. As of 1 July 2020 the threshold for live invoice data reporting will be abolished (i.e. brought down to zero). This implies that taxpayers should consider all of their B2B invoices regardless of VAT amount, including transactions subject to reverse charge or VAT exemption. As the second step, from 1 January 2021 the reporting will be further extended to business to customer (B2C) transactions as well.

For development purposes, as of 1 April 2020 reporting should be performed via the ‘2.0 schema’ only. Specification and test environment for the new reporting interface is already available on the website of the tax authority, production environment is also expected to be deployed by mid-February 2020.

The tax authority already indicated that they are also working on their next tool against VAT fraud, i.e. the standard audit file (SAF-T). SAF-T (already introduced in some EU countries e.g. in France, Poland, Austria) requires a wider range of data to be provided in a standardized format. This requirement is still under development and early consultations have just yet started.

By Balint Zsoldos, Head of Tax, KCG Partners Law Firm

The coronavirus outbreak is unfortunately having an impact on every aspect of our lives, and sets to affect a considerable number of businesses. For this reason we’ve summarised the five most important legal considerations that no business can afford to ignore at this time.

1. What commitments can you (and can’t you) fulfil?

Firstly, you need to think about what sort of consequences the present situation will have in terms of fulfilling your commitments: what exactly are the obligations that you’ve undertaken in your contracts that you can’t fulfil at all, or that you can only fulfil with a delay?

This will not only provide clarity in legal and business terms, but is an essential tool that help to comply with our contractual commitments.

2. Take a look at your force majeure clauses!

Many contracts contain what are known as force majeure clauses. These typically determine what the parties regard as unavoidable external circumstances, and what is to be done if they arise. If you do not follow the procedure set out in the contract, you may well lose the right to apply the force majeure cause.

Therefore, we recommend that you look at your key contracts from this perspective as soon as possible.

3. Communicate!

The general obligations regarding co-operation require that you immediately notify the other party if a circumstance that will (or is likely to) prevent you from fulfilling the contract arises. If you’re late in providing such notification, this can in itself result in liability for damages, even if you’re not actually responsible for causing the problem that prevented performance.

Therefore, even if there’s just a risk that you won’t be able to perform the contract, you must inform all parties concerned about the problem, in writing, and if possible, explain to them what the likely consequences will be.

4. Doing nothing is not an option!

The virus, and the circumstances caused by the preventive measures against it, may – certainly if we look at court decisions taken in comparable cases in the past – at the end, prove to mitigate your responsibility for a breach of contract. Nonetheless, even in this situation the law still requires the parties to take the necessary measures to minimise any damage that can be minimised.

In other words, you can’t just sit there doing nothing until all this blows over: whatever may be reasonably expected of you in the interests of fulfilling the contract and mitigating the consequences of the situation, you still need to do.

5. Adapt!

Information that’s available on the virus, including measures that the government is taking to combat its spread, are changing from day to day. Let’s not forget that with time, the situation will improve, and as it does, contractual obligations will gradually start to apply again, meaning that what was not fulfillable – or could not be expected to be fulfilled – one day may well again become fulfillable on another.

Ensuring compliance with your obligations under the law requires that you keep up-to-date, and that you constantly adapt to the latest situation by taking appropriate action.

By Levente Bihari, Senior Attorney, Jalsovszky

On 18 March the Hungarian prime minister announced extraordinary measures to be taken as a result of the national emergency caused by COVID-19. Most of these measures have a strong impact on the Hungarian economy; in particular, the banking sector.

Extraordinary measures

A moratorium has been introduced for all retail and corporate financings. Capital, interest and fee payment obligations for all loan, credit and financial leasing agreements have been suspended until 31 December 2020. Irrespective of the moratorium, debtors may of course continue performing their contractual obligations if they would like to.

Under the moratorium, the due date for fulfilling contractual obligations under financing agreements will be extended in line with the term of the moratorium. Due to the extension, security interest is also impacted (irrespective of whether ancillary or not and are incorporated into an agreement or a unilateral declaration). Contracts expiring during the national emergency will also be prolonged until 31 December 2020.

The annual percentage rate of consumer credit agreements not secured by mortgages/pledges concluded from 19 March onwards will be limited. The annual percentage rate of such credits will be the maximum base rate + 5% of the central bank.

The government introduced these measures after the Hungarian National Bank urged banks to apply for a moratorium during this national emergency, and if not, suggested the government should introduce a moratorium instead. The Hungarian National Bank also introduced a moratorium in its Funding for Growth Scheme (FGS) and changed certain terms of the FGS (e.g. banks may restructure their financings provided for SMEs in the FGS). Pursuant to the moratorium, SMEs which have applied to the FGS, and banks having refinanced loans due to the FGS, are exempted from their payment obligations until the end of the year.

Furthermore, certain sectors are facing serious issues, such as tourism, hospitality, the entertainment industry, sport, cultural services and passenger transport. Thus, until 30 June, the government has decided to release employers in these sectors from social contribution payment obligations. The government also reduced the social contribution payment obligations of the employees: they are not obliged to pay pension contributions and the amount of their social healthcare contribution is reduced to the minimum.

Are these measures necessary?

Due to COVID-19, companies providing services or manufacturing products which are not essential receive less income each day – even if these companies have a strong market position under normal market circumstances. Companies that require face-to-face contact due to their services are facing similar issues.

Certain employees struggling with these issues do not have enough liquidity to finance their day-to-day operations (in particular, salaries of employees) and have no chance for a loan in the current situation. As a result many companies will dismiss their employees during the next months, i.e. unemployment rate is expected to increase dramatically.

Under the moratorium, these companies are temporarily relieved from their repayment obligations – thereby relieving cash-flow – with a chance to avoid mass dismissals or even bankruptcy, thereby relieving concerns of employees about possible job loss.

Nevertheless, the moratorium in itself might not be sufficient. Many companies operate in a way that the debt servicing obligation is not the only – and might not even be the biggest – part of their expenditures. Also the extension of procedural and legal deadlines may be envisaged to have the moratorium work efficiently.

Right for opting out

During the moratorium, capital and interest payment obligations are suspended. However, unpaid interest will be continuously calculated to the capital, and at the end of the moratorium, debtors must repay their debts including this compound interest. This may lead to a significantly higher debt. Of course, debtors may opt-out from the moratorium thus they can avoid such increase of their debts.

Difficulties for banks

Banks face three kinds of challenges at the moment: they must protect their capital, maintain liquidity and secure their operations. The capital position of the Hungarian banking sector is generally robust and from an accounting perspective the interest income that remains uncollected does not constitute a loss. The moratorium will not result automatically in a loss of capital for banks, also due to the compound interest and the opt-out right of clients. In addition, the Hungarian National Bank announced that it is taking measures to support liquidity of banks. It is also envisaged that the lending activity of the banks will drop radically, which in turn means that the fee and commission income of the banks will drop as well, and their capacities will turn to servicing the existing increasingly problematic loan portfolios. Also, the Hungarian banking sector invested heavily in digitalisation and that may ease some difficulties encountered from an operational perspective.

All in all, although the banks may not expect a profit as high as last year (or might even suffer losses), the Hungarian banking sector is in good shape and thus the financial stability of the sector is not threatened by these measures.

By Gergely Szaloki, Partner, and Virag Palguta, Associate, Schoenherr

In the framework of the ‘Digital Court Project’, a new online system was launched by the courts as of 1 January 2020.

The new system (available at https://eakta.birosag.hu/) grants access for the clients to the e-files of court procedures initiated after 1 January 2020. Clients can get access to all documents submitted to the court during the procedure, from anywhere at any time.

To enter the online system, the client must have a customer account (‘ügyfélkapu’ in Hungarian) and an e-identification card, and must submit a request on the online platform to the court. Upon the client’s request, the court will grant the access to the documents. However, it is still possible to access the hard copies of the documents at the courts during opening hours of the customer service desk. It is also possible to calculate the estimated time frame of the procedure in this system (this function is also available for anyone at https://e-ugyintezes.birosag.hu/eljaras-idotartam-kalkulator).

By Levente Csengery, Partner, KCG Partners Law Firm