Category: Hungary

Hungarian hospitals are facing problems paying for drugs and medical devices. Many suppliers have claims worth millions of euros and are having difficulty enforcing them against either the hospitals or the Hungarian government.

To resolve this, the Hungarian government entered into negotiations with suppliers whose claims exceed HUF 100m (approx. EUR 300,000). The government offered to assume the hospitals’ debts and settle the claims directly from the central budget if the supplier agrees to a 20 % reduction on the principal and waives all default interest.

The hospitals accumulated debts over years and some suppliers have already taken steps to extricate themselves by selling their claims to factoring companies. Because of this, only the factoring companies can make a deal with the government; the suppliers that sold the claim cannot. The Hungarian government also suggested that further suppliers should consider selling their claims. While the government delegation does not yet have the competence to negotiate sold claims, it may be worthwhile for factoring companies to further explore this opportunity.

By Gergely Szaloki, Partner, Schoenherr

Investment funds are generally considered a complex, collective, highly specialised form of investment. However, an amendment that came into force from January this year, will allow a much wider range of participants to set up investment funds and fund management companies. And these funds can present very favourable opportunities, whether for acquisition purposes or for holding private assets.

For several years, an EU directive has allowed for simplified regulation with regard to ‘below-threshold’ venture capital fund management firms and the investment funds they manage. Taking this opportunity, since January, the Hungarian legislators have relaxed the operating rules applicable to fund management firms that manage funds with a net asset value not exceeding the EUR 100 million threshold. At the same time, so-called intra-group fund managers – i.e. those whose owners and the investors in the funds they manage belong to the same group – are now subject to more relaxed rules too. In this latter case, the reasoning is that there is no possibility of harming the interests of external investors and systemic risk is also low.

How will this make things easier and cheaper?

The main point of the more relaxed regulation is that both ‘below-threshold’ fund managers and intra-group fund managers will be removed from the supervision of the National Bank of Hungary. This significantly reduces the administrative burden on these fund managers and the funds they manage.

Last but not least, ‘below-threshold’ and intra-group fund managers are now also exempt from having to pay the related supervisory fee. And maintaining these funds has not been cheap so far, as the supervisory fee, which is based on the net asset value of the fund’s portfolio, sometimes resulted in a cost in the nine digits (in HUF) for these funds.

But what is it good for?

Apart from pursuing the main activity that they’re designed for, which is investing assets in a diversified form, setting up investment funds can serve many other purposes. On the one hand, funds are exempt from corporation tax and can therefore be used for many tax purposes. For example, since an investment fund can provide loans to portfolio companies within certain limits, investment funds can serve group-financing objectives in a tax-efficient manner.

It’s also worth noting that in terms of the application of several statutory regulations, holding investment fund units does not create an indirect ownership relationship between the holder of the units and the fund’s investments, which provides an opportunity when it comes to planning intra-group transactions. And not least, the ownership structure of an average company can be easily traced from the business register, while, for example, the identity of the owners of private equity funds is not revealed; in fact, investment unit holders do not feature in the beneficial owners’ registry under the latest money laundering rules, either.

It’s not all a bed of roses

However, the fact that some investment fund managers have been removed from the circle of entities subject to external supervision does not mean that the establishment of these fund management firms no longer has to comply with the strict material and personnel requirements stipulated by the law. Establishing a fund management firm continues to be subject to a regulatory procedure. In addition, many details are still unclear in the new regulation. Thus, although these funds are no longer subject to MNB supervision, it is unclear to what extent and how the supervisory authority will be able to intervene in the event of possible mismanagement by the fund manager.

By Akos Barati, Attorney, Jalsovszky

The most relevant provisions of the act on the amendment of certain justice laws entered into force on 1 January 2020, affecting among others the Public Notary Act, the Company Registry Act and the Forensic Expert Act.

As a result of the modifications of the Public Notary Act, the conditions of the assignment of public notaries have been restricted, since the person, who was punished with removal from position as disciplinary penalty by a final decision of the public notary disciplinary court or who was pronounced as undeserving person, cannot be appointed as public notary until 10 years after the final decision of the court. In addition, such person cannot be a member of a public notary office as a public notary, public notary assistant or public notary associate for the same period of time.

Furthermore, the amendment distinguishes two groups of the cases of suspension of the notary public: in certain cases the disciplinary court must suspend the public notary from his service without any discretion (for instance in case there is a criminal procedure, procedure for placement under guardianship, disqualification or inaptitude procedure against the notary public). In the other category, the disciplinary court may decide on the suspension on the basis of discretion of all circumstances of the case. The amendments to the Public Notary Act also clarify and complete the provisions relating to the public notary documents and public notary certificate.

From 1 October 2019, the regulations on the free company information in the Company Registry Act have been amended in order to hinder the abuses with free company information. However, this amendment resulted in significant conflicts and difficulties in the business practice, thus, from 1 January 2020, the original text of the law has been re-established, i.e. the availability of information of the company registry is free of charge and unlimited again.

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

Danubia Legal has brought Viktor Luszcz, the former President of the Hungarian Intellectual Property Office, on board as a partner.

Luszcz served as President of HIPO from January 2017 to March 2019. He was a Legal Secretary at the General Court of the EU in Luxembourg from June 2004 to October 2015.

“It is a great honor to join Hungary’s first established patent and law office,” commented Luszcz. “During my time at the Hungarian Intellectual Property Office, I met many colleagues from Danubia and I knew that I’d become a member of a team with outstanding knowledge and expertise.”

Danubia Legal, part of the Danubia Group, is a former part of Sar and Partners, and split off from Sar and Partners in 2018 (as reported by CEE Legal Matters on December 17, 2018). Danubia recently celebrated its 70th anniversary.

The Central Bank of Hungary (MNB) has announced a new program, for the purpose of providing capital requirement benefits to those credit institutions based in Hungary that offer so called green loans for energy efficient housing goals (purchase, building or refurbishment) between 1 January 2020 and 31 December 2023. During this time period, these credit institutions will receive capital requirement benefits (5 to 7% depending on the energy efficiency of the related property) after the provided green loans, and the customers taking out these loans are eligible for lower, discounted rates.

The main purpose of this program is promoting climate-friendly financial products and improving the energy efficiency of properties. This can prove to be a beneficial practice, especially since credit institutions typically do not take the energy efficiency of the buildings into account during the loaning process, despite the fact that energy efficient (green) properties have lower monthly expenses. Due to the lower monthly overhead to be paid after the given property, customers are able to pay higher monthly instalments, while energy efficiency investments can increase the value of the property. As a result of the above, these green loans will have lower risk than their similar, but not green counterparts, which can be taken into account when pricing these green loans.

It is an interesting fact that currently about one third of personal loans are used for home renovation purposes, but a significant part of these renovations will not result in improved energy efficiency since these are mostly aesthetic corrections or bathroom refurbishments. According to statistics, domestic houses are responsible for 40% of the national energy consumption in Hungary. This high ratio is due to the obsolete building materials with low thermal insulation values and deteriorating conditions built into existing houses together with the outdated heating appliances. Upgrading and exchanging these machines and materials can be ideal for realizing savings, while the reduction of energy consumption can be a big step toward sustainability and environment consciousness.

The volume of green financial products in Hungary, despite their favourable characteristics, is still low. Public awareness of the climate change and the environmental issues is currently inadequate and many government and education tasks remain to be done. It is the task of the Central Bank to strengthen the financial culture by placing these environmental considerations and the development financial awareness to the forefront. To increase consumer appreciation and demand, education programs will be organized. At the end of the initial 4 year period, the Central Bank will evaluate the experiences and will decide whether to continue the program or not. If the program proves to be successful, the Central Bank will promote the development of the domestic green financial market in additional areas beyond housing loans, such as small-medium size enterprises and corporate loans.

By Eszter Kamocsay-Berta, Managing partner, KCG Partners Law Firm

In December 2019 the Hungarian Parliament adopted a law resulting in that all Supreme Court rulings become precedents.

Case law is established by following decisions made by judges in earlier cases (i.e. precedents) and it is commonly used in the Anglo-Saxon countries. On the contrary, civil law, which is originating in Europe, proceeds from abstractions, formulates general principles, and distinguishes substantive rules from procedural rules. In this system a Hungarian judge, for example, is not bound by any previous supreme-court decision in a similar case.

However, under the new rule, the published decisions of the Supreme Court will have a more pronounced role in the Hungarian jurisprudence: the court may derogate from them only in exceptional cases, it must provide specific reasons for the derogation, and the derogation itself provides an opportunity to challenge the judgment before the Supreme Court. Moreover, if a judge decides to derogate from a previously published decision, there will be a separate remedy against that decision.

The above amendment to the law may bring Hungarian jurisprudence closer to case law, however, also raises some questions and concerns. For instance, it seems crucial to set up an up-to-date system that allows searching effectively among the published rulings. Other notable concern is that some of the published Supreme Court rulings are likely to contradict each other.

By Adrienn Megyesi, Attorney at law, KCG Partners Law Firm

In Hungary the overall tax burden on employment income represents 44% of the total wage cost. Here are the most efficient ways to cut this tax bill.

Employee shares

Employee share can be granted to employees free from taxes and any dividend distributed on such shares enjoys a low taxation of 15% in the employees’ hands. This means a tax saving associated by a higher motivation of the employees arising from their owners’ status in the employing company. There exists various legal techniques to avoid, at the same time, the interference of the employees in the strategic decisions of the company.

ESOP

ESOP can be best described as a “holding foundation”, owning shares in the employer in favour of the participating employees. Similar to employee shares, share grants through an ESOP enjoy tax exemption and employees may realise income at an overall 15% taxation. One of the advantages of ESOP, compared to employee shares, is that it may also be used to distribute proceeds of an exit in a tax efficient manner.

KIVA

KIVA (which stands for “small company tax”) is a popular alternative taxation for small and medium-size companies. KIVA payers are liable to a flat 12% tax based on the wage costs and on the amount of dividends distributed to shareholders. KIVA replaces various taxes (such as corporate tax, social security tax and training fund contribution). KIVA can result in significant tax saving for companies with high wage costs relative to their distributed profits.

Benefits granted by shareholders

If either cash or in-kind benefit is granted to the employee by the employer’s shareholder, instead of the employer itself, such income will be free from the 18.5% social security tax. Examples can be a cash bonus system introduced by the shareholder or a global parent company stock option program – if not introduced through an employee share or an ESOP scheme.

Cafeteria

In the cafeteria system, certain fringe benefits related to recreation can be offered up to specific value limits to employees at their own selection and at a reduced tax burden of 24.5% for the employer, with no liabilities for the employee at all.

By István Csővári, Partner, Jalsovszky

While dozens of programmers, engineers and hairdressers continue to opt for KATA [the fixed-rate tax for enterprises categorised as “small taxpayers”] in Hungary, the tax is increasingly coming under fire from all sides. Apparently, the Hungarian Tax Authority (NAV) is stepping up its investigations into businesses who employ KATA payers, and at the same time rumours are also flying about a planned KATA tightening.

Is there reason to worry? 

It’s no coincidence that KATA is seen as an attractive form of tax: those who opt for it can meet almost all their tax obligations by paying just HUF 50,000 in tax a month (or HUF 75,000 if the increased KATA is selected), and with virtually no administration to bother with. It’s not surprising, therefore, that the number of persons choosing this form of taxation has skyrocketed: when it was introduced, about 85,000 small taxpayers were registered, while today there are approximately 350,000.

At the same time, however, KATA has spawned a number of anomalies, with more and more employers replacing classic employment relationships en masse with work contracts signed with KATA-paying entrepreneurs. It is thus no wonder that the tax authority has started playing hardball in the last six months: the NAV has begun to conduct methodical compliance audits of KATA payers, the first findings of which are about to being published.

The critical link

There is an important condition for choosing KATA. If a small taxpayer derives income in excess of HUF 1,000,000 per year from the same client, he must prove, with regard to his working relationship, that at least two of the conditions for classing it as self-employment listed in the law are met. If he does not do this, his working relationship may be classified as a classic employment relationship. The problem is that most of these circumstances are hard to grasp and hard to prove. For instance, how can it be clearly decided whether the client may have instructed the small taxpayer or whether the small taxpayer was able to determine his own work schedule? There are also practical problems in proving that the taxpayer himself provided the equipment and materials needed for his activities or whether he could have used a substitute in the course of his work. 

And then, even if you can show with relative certainty that at least two of the above circumstances exist, you’re not necessarily in the clear. The tax authority has a right, under the general anti-avoidance rules, to classify a legal relationship based on its actual content, taking all circumstances into account. Naturally, it remains to be seen whether it will be able to exercise this right under the very special rules of KATA.

What’s at stake?

It’s important to note that reclassifying a working relationship as a classic employment relationship has a serious impact not only on the small taxpayer but also on his employer. In the event of reclassification, the tax authority may assess a shortfall in social contribution tax and vocational training contributions, and levy a tax penalty, a late payment penalty and a default penalty on the amounts unpaid. Furthermore, the employer may also be slapped with a tax penalty charged on unpaid personal income tax and employee contributions. Not to mention that if the KATA-paying entrepreneur charged VAT on the invoices issued to the client, the client could lose the right to deduct VAT. 

Is there life after KATA?

So if you feel that KATA is risky, what should you choose instead? It may seem a somewhat outdated solution, but there are an increasing number of incentives that facilitate working in a classic employment relationship. In addition to the continuous cuts in social security contributions, the various tax and social security breaks granted to retirees, young mothers and first-time employees plus the family tax and contribution allowances often reduce significantly the financial burdens of an employment relationship. 

A business should also make a calculation to see if it would be better off with the corporation tax and social contribution tax tandem or with KIVA [the small business tax]. For businesses with higher employment costs, KIVA may be a much more favourable alternative, not to mention that opting for KIVA also means tax savings in local business tax. Depending on the industry and the activity of the persons employed, there is also the possibility of switching to EKHO [the simplified contribution to public revenues] as long as it can be clearly separated from the employment relationship. 

Finally, it may be worth considering giving an ownership interest in the company to employees – or some of them – and remunerating them (in part) through dividends. This can be achieved with an employee stock ownership plan or through the provision of employee shares. There is no need to be afraid that the employees, as stockholders, will also have a say in business decisions: both forms of granting an ownership interest allow you to rule out this possibility. 

By Peter Barta, Attorney and Tax Advisor, Jalsovszky

DLA Piper has advised Optima Investment Co Ltd on the sale of the Reno Udvar real estate project in Hungary to the Chi Fu Group. Dentons advised the buyer on the deal, which is valued at EUR 60 million.

DLA Piper’s team included Counsels Szilard Kui, Akos Becher, and Attila Sari and Senior Associate Gabor Spitz.

Dentons’ team included Managing Partner Istvan Reczicza, Partner Annamaria Csenterics, Associate Nora Jakab, and Junior Associate Nandor Beck.