Category: Hungary

While a typical small or medium-sized family business consists of a single company, large enterprises tend to work in the form of a company group, made up of numerous companies. How do company groups form and what justifies their formation? When is it worth establishing a company group? These are the questions we seek to answer.

Company groups are often formed due to an external reason. For example, a company group is created when a company acquires another, but also when a company starts its cross-border activities through a separate foreign company. However, becoming a company group is often based on a conscious, internal decision of the owners, usually driven by the desire to protect the company’s assets, or by tax or business considerations.

When limited liability won’t protect you

Running any business involves risks. Deficient performance or a defective product may give rise to a warranty liability for your company. The tax authority may discover a tax shortfall due to an error in calculating the tax consequences of a transaction or other taxable event. In such cases, the entire net worth of the company – assets that the founders have often worked for decades to build up – can be wiped out in the blink of an eye.

The company can protect itself against this risk by spinning off the tangible and valuable assets from the operative entity (i.e. the company producing the goods or services). This way it is possible to establish, alongside the operative company, a firm that is engaged in real estate or some other asset management activity and that can keep the assets of the company away from the operational risks. The operative company can then lease back the spun-off assets so that it can continue to use them for its operations, this time as a lessee.

And tax is important, too

Setting up a company group is not just about protecting your assets – there are often important tax reasons for doing so, too. If, in order to secure his assets, an owner wants to withdraw excess cash from his business – in the form of dividends, for example – then this will have tax implications. However, if the owner establishes a holding company (i.e. a company that has no other function than to hold shares in other member companies of the group) between himself and his company, then he can take the dividends without incurring tax. In addition, the dividends thus withdrawn can be invested, likewise tax-free, in other members of the group. Holding companies can also play a very important role if the owner plans to sell one of his businesses, because through a holding company, the profits from the sale of the business can be rendered exempt from tax.

Often, tax considerations also persuade a company to spin off some of its assets (such as intellectual property) into a separate entity set up for this purpose as, both in Hungary and in certain foreign countries, the holding, the licence and the use of intellectual property is subject to favourable tax terms. Thus, for example, if a business develops, in a separate company, proprietary intellectual property utilised within the company group (such as software or a patentable invention) and grants a licence for the use of these to the operative group companies, then it only needs to pay 4.5% corporate tax on the invoiced royalties (while the operative company is able to account for the fees thus invoiced as a cost, at a 9% tax rate).

Concentration of organisational functions

Although not the first step in establishing a company group, organising certain suport functions – financial, legal or even a call centre – into a separate entity can often assist an existing company group to conduct its operations more effectively. It is also common to establish a financing company within the company group, that is then responsible for financing the other members of the group and for ensuring their liquidity. Many businesses employ a solution that involves establishing an intra-group service company in order to ‘concentrate’ HR-related risks and administrative tasks. In such cases, the other member companies use the services of this specialised company and pay a market rate in consideration.

Pros and cons…

As with any reorganisation, there are costs and drawbacks to becoming a group company. Thus, maintaining several businesses can result in more administration and additional costs. What’s more, the appropriate pricing of transactions between member companies needs to be ensured. However, the immediate benefits arising from the favourable tax treatment and the future advantages of asset and wealth protection far outweigh, in most cases, these costs. 

By Istvan Csovari, Partner, Jalsovszky

On 12 November 2019 Gergely Gulyás, Minister of the Prime Minister’s Office proposed an omnibus law in order to further streamline and expedite the operation of the metropolitan and county governmental offices. These offices serve, in many cases, as an authority of second instance where, at first instance, the city notary was the competent authority, so the Hungarian administrative system has shared competences in this respect.

One of the most important administrative matter handled by city notaries at first instance is construction matters, where the city notary has the right to issue a building permit. The proposed law would change the procedure of obtaining such permit in a way that the competent authority would be the metropolitan or county governmental office at first instance. The offices should enter into a contract about the details with the relevant mayors until 31 January 2020. 

If the Hungarian Parliament passes the omnibus law, local municipalities in construction matters will only have the right to issue the local building regulations, in which the city can describe the desired appearance and building style for the new buildings to be built. Experts argue that this modification would fit the long-term plans of the Hungarian Government relating to the construction issues by giving more competence to more relevant and centralized authorities.

By Gabriella Galik, Partner, KCG Partners Law Firm

A new amendment to the Hungarian Anti-Money Laundering Act seeks to extend its scope to custodian wallet providers and virtual currency exchange platforms, in order to reduce the risks associated to cryptocurrencies. The proposal is currently before the Hungarian Parliament, and aims at fulfilling Hungary’s obligations deriving from the 5th Anti-Money Laundering Directive (“Directive”).

The amendment defines virtual currencies as “a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.” A custodian wallet provider is defined as “an entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual currencies”. In line with the international practice on cross-border services, the proposal extends the scope of the Anti-Money Laundering Act to service providers established in Hungary or in another Member State of the EU or in a third country as long as these providers offer their services in Hungary.

These legislative changes are much needed, as they to bring legitimacy and clarity to the European cryptocurrency industry, and they counter the real risks presented by misuse of the technology. As a result of these modifications, it may be possible to address the potential money laundering and terrorist financing risks arising from the use of technological innovations (e.g. blockchain or distributed ledger technology).

Due to the modifications, virtual-currency exchange platforms and custodian wallet providers will be required to comply with the provisions of the Directive (e.g. to identify beneficial owner and to verify a client’s identity). Member States must adopt the necessary regulations to comply with the provisions of the Directive as of 10 January 2020.

By Rita Parkanyi, Partner, KCG Partners Law Firm

Csaba Vari has joined Baker McKenzie Hungary to head up the Privacy division of the office’s Intellectual Property and Technology group.

According to Baker McKenzie, “in his new position as Head of Privacy, he will provide comprehensive advice to clients on privacy and cybersecurity matters, from European data protection regulations and local privacy laws to e-commerce and cloud services regulation.” According to the firm, “he will provide effective legal support to clients regarding data protection impact assessments, data security incident reporting, and responding to queries from data subjects, as well as representation before regulatory authorities and courts.”

Prior to joining Baker McKenzie, Vari spent six and a half years as Managing Director of Solarstop, 18 years with Squire Patton Boggs, and two and a half years with DLA Piper.

“Csaba brings unparalleled data privacy expertise to our office from a legal career spanning two decades,” commented Managing Partner Zoltan Hegymegi-Barakonyi. “Thanks to his extensive knowledge we will continue to provide our clients with outstanding service in all data privacy and cybersecurity matters”.

On 23 October 2019 the European Commission published a report on the third annual review on the functioning of the EU-U.S. Privacy Shield. The report states that the U.S. continues to ensure an adequate level of protection for personal data transferred under the Privacy Shield from the EU to participating companies in the U.S. Today approx. 5,000 companies are participating in this EU-U.S. data protection framework.

The report assesses the recent improvements of the Privacy Shield, such as the process of the necessary oversight carried out by the U.S. Department of Commerce, the enforcement actions, the appointment of the permanent Ombudsperson or the redress mechanisms.

Beside the assessment of the recent improvements, the Commission also recommends certain steps to be taken to better ensure the effective functioning of the Privacy Shield in practice. The report highlights the importance of strengthening the (re)certification process for companies who want to participate in the EU-U.S. Privacy Shield by shortening the time of such (re)certification process. The report also recommends to expand compliance checks and to develop additional guidance for companies related to human resources data. 

The EU-U.S. Privacy Shield decision was adopted on 12 July 2016 and the Privacy Shield framework became operational on 1 August 2016. It protects the fundamental rights of anyone in the EU whose personal data is transferred to certified companies in the United States for commercial purposes. The Commission reviews the Privacy Shield on an annual basis in order to assess if it continues to ensure an adequate level of protection for personal data.

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

Former Baker McKenzie Budapest Head of IT/Communications Adam Liber and Attorney Tamas Bereczki have left that firm to become partners at the new Provaris Varga & Partners law firm in Budapest, led by former KNP Law Partner Istvan Varga.

Varga leads the Disputes practice at Provaris, which opened its doors on October 1, 2019. Liber heads the new firm’s Information Technology and Intellectual Property practice and Bereczki leads the Privacy, Technology, and Security Management practice. Other practices are headed by partners Aron Bagdi (Culture, Sport and Tourism), Gaza Tenyi (Corporate and Commercial), Annamaria Klara (Life Sciences and Pharmaceutical), and Gabor Paksi (Public Procurement and Environment).

The organic development of the Hungarian insolvency laws was interrupted by the era of the socialist planned economy, which ended in 1990. The novel Insolvency Act of 1991 (IA) may have satisfactorily served the economy in the first years of the transition period, but due to the profound changes in the socio-economic environment in subsequent years, the statute has become obsolete. Successive governments over the past three decades have made multiple efforts to keep the IA up-to-date and to follow the numerous demands made by the various players of the market and interested legal professionals, but the more than one hundred (!) amendments have rendered the system opaque and relatively difficult to use.

The European Commission reported that Hungary ranks 25th among EU Member States when it comes to the effectiveness of insolvency proceedings. The recovery rate for secured creditors is 43% – lower than the EU average – with, more often than not, no assets (proceeds) to be distributed to unsecured creditors. There are only two types of insolvency proceedings available in Hungary – bankruptcy proceedings (reorganization) and liquidation (involuntary winding-up) proceedings – and no formal pre-insolvency proceedings are available. A striking deficiency of the Hungarian insolvency regime is the lack of functioning reorganization proceedings: only 24 successful composition agreements (out of 109 reorganization proceedings) were approved in 2017, although the number of new liquidation cases exceeded 15,000. In addition, the IA fails to provide efficient protection to post-commencement financing (i.e. super-priority creditor status) diminishing the chances of a successful reorganization, as well as missing the practical possibility of the sale of the assets as a going concern in liquidation proceedings. Furthermore, the IA provides insufficient protection to creditors and ineffective judicial control in insolvency proceedings and contains uncertainties regarding the qualification and selection of insolvency practitioners as well as deficiencies regarding their remuneration. 

The IA’s regimes are still considered “secured-creditor friendly,” and a number of recent changes to the law strengthen secured creditors’ position even more. The equal treatment of certain fiduciary security with traditional security interest (pledges) and the clarification of long-debated matters like the treatment of future receivables used as collateral show a clear intention towards modernization. However, due to the history of the IA, the realistic level of consistency and coherence of the statute has more or less reached its full potential. There are also a number of areas of the IA where we could expect further progress and the taking of a close look by the codification teams from a secured creditors’ point of view, including the settlement of cash and other financial collaterals, the enforcement of option rights, and the enhanced control of the dominant creditors over sale processes. The question of allowing group insolvencies or the combination of insolvency proceedings for creating larger asset pools may also be considered. 

Insolvency legislation has recently been a shifting landscape in Europe. After having addressed the cross-border aspects of insolvency in the recast Insolvency Regulation, the European legislator has launched the partial harmonization of the substantive insolvency laws of the Member States by adopting the Directive on Restructuring and Insolvency. In the same vein, in 2018 the Ministry of Justice of Hungary set up a working group to reform the Insolvency law consisting of stakeholders from the business, regulatory, judicial, and insolvency community. The objective is to adopt a modern insolvency law promoting efficient reorganization (including pre-insolvency proceedings) or, alternatively, an expedited insolvent liquidation process providing higher distribution rates to creditors. The concept paper of the new insolvency law is expected to be published in the fourth quarter of 2019.

This is a long-awaited and unique opportunity to elevate the Hungarian insolvency laws to the level of the modern, efficient, and well-functioning systems in Europe. We are proud that our colleague Zoltan Fabok, Counsel at DLA Piper, has been invited to participate in the working group, which enables us to contribute to the improvement of Hungary’s insolvency framework.   

Gabor Borbely, Partner, and Zoltan Fabok, Counsel, DLA Piper Hungary

This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Hungary’s Danubia Patent and Law Office traces its roots back almost three quarters of a century. Danubia Partners Eszter Szakacs and Zsofia Klauber explain how the firm has managed to stay on top of the market for so long, through significant periods of technological, political, legal, and historical transformation in the country and culture around it.

CEELM:  Danubia has a long history. Can you tell us when the firm was set up and how it has evolved through the years?

Eszter: Danubia was founded in 1949 as a state-owned company primarily by patent agents with the main purpose in the beginning of helping mostly the innovative domestic Hungarian companies who wished to enter foreign markets with their products. After the change in the political regime in Hungary in 1989, it was privatized by some of the patent and trademark attorneys who worked here (many who whom still do). From then on, a different era began. The classic patent and trademark filing services expanded into something that was better focused on looking at ventures and companies coming to the Hungarian market, and offering a more holistic approach – not just to offer prosecution services but really understand what IP the given company had, what its aims were, and the potential of the market and to help the entities optimize their IP portfolio accordingly. This change in approach led to the expansion of the firm’s portfolio and the creation of Danubia IP, which mostly deals with intellectual property management, and to Danubia Legal, which offers legal services provided by specialized IP lawyers. So this is how it evolved from Danubia Patent and Trademark Office into the three-pillar structure it has today and which is unique in the Hungarian market in terms of providing these umbrella-type services.

CEELM:  Tell us about the firm now. How big is it? What drives that growth? 

Zsofia: The big change of course was the privatization, and in the last 30 years we have grown continuously. Since then, of course, competition has grown much greater. One can say it was a smart move to preserve the institutional know-how and expertise in the field when they turned the firm into a private company. It has always been important for the firm to maintain its reputation as a leading intellectual property firm in Hungary.

We now have 20-25 patent and trademark attorneys, four partner attorneys at law at Danubia Legal, and five associate lawyers. All in all, together with the paralegals and finance department, there are about 80 of us.

CEELM:  Why do IP firms have such relatively large headcounts compared to traditional law firms – even those with IP departments?

Eszter: The patent field requires patent attorneys with different technical backgrounds (and in fact Danubia has more than one person for every technical field due to the workload). In addition, in this field professionals – patent agents and lawyers equally – have to take in a lot of technical information and legal history. Patent litigation files can be massive. There is a demand in terms of human resources to deal with all that. And especially in the area of IP, the field is getting more and more complex.

Zsofia: The other thing is that once a firm like Danubia establishes a leading market position, obviously more and more cases come. And that requires growth as well.

If we look at it from a client perspective, our clients come from all sectors of industry: Pharma, IT, Fashion, Entertainment, Food & Beverages, and so on. We assist our clients from the very beginning, when they first step into the market. We work with them not only to find both the company’s name and the brand, and we assist them in obtaining, maintaining, and enforcing IP rights, and this requires a lot of people. 

CEELM:  What’s the main profile of your clients?

Eszter: It depends on which field you’re looking at. One key portfolio aspect is the litigation work we do for foreign clients in Hungary in the field of IP. There, what we are very impressive in is handling very complex patent litigation matters for clients, specifically litigation that takes place in several jurisdictions in Europe. Very often we act as part of an international team, coordinating the same matter. I think if you look at the rankings, where Danubia is mentioned, it is often mentioned as being known for working on high-profile patent litigation matters – infringement and revocation – for large foreign companies, either on the side of the patentee or its opponents.

Zsofia: Another type of service is where we work for domestic clients – it can be litigation, the same way – but also helping them establish a contractual background for their innovative product or service which they launch, either in the Hungarian market or outside its borders. As a side note, I need to mention that the patent attorneys of Danubia are European patent attorneys as well, which means that they can proceed before the European Patent Office as well. So there is also a strong basis in domestic clients as well.

CEELM:  Do you find that clients are now sufficiently aware of what protections they need, or do you still find the need to educate the market?

Zsofia: It depends on the size. Usually, bigger clients are more aware of the importance of IP, but there is often a need to convey the importance and pitfalls of IP to start-ups and IT companies, as they often do not have enough knowledge and awareness of potential IP conflicts on the market. 

CEELM:  How do you reach potential start-up clients to educate them?

Eszter: They often come to us, because of the reputation Danubia has on the market. We need to talk through what technology they have and what they want to do with it in order to learn about their IP needs and processes. The technical knowledge of Danubia’s patent attorneys is very important here. You need a technical background to determine if that specific technology is capable of being protected by a patent, and then you need both legal knowledge and a very business-minded approach to decide strategically how to proceed. Of course, clients also need to realize that obtaining IP protection and taking care of their intellectual property requires a financial commitment as well – it’s something they have to invest in. 

CEELM:  What kind of financial commitment?

Zsofia: Obtaining IP costs money. When you factor in the need to obtain the necessary intellectual property protection not only in Hungary but also in multiple other markets, the costs can get quite high – and you have to maintain those protections as well, so it’s not just a one-time spend. And the more complex technology you have and the more versatile the protection you seek, the more it costs. It really makes it worth your time to consult with a professional, because there are situations where it might not serve the client’s best interests to have an overreaching protection, when there is in fact a more sophisticated approach. Ultimately, we are required to understand what the client wishes to do on the market in order to help provide them with a tailor-made IP portfolio.

CEELM:  You said the work is becoming more complex. How so?

Eszter: Let me limit myself to what I actually do, as that’s what I know best. As an attorney-at-law, I’m involved mostly with multi-jurisdictional patent litigation. Legal disputes are becoming more and more multi-jurisdictional, and the amount of information we’re dealing with is growing and becoming more complex – and the market goals of clients (because they are involved in multiple jurisdictions) are becoming more sophisticated, so we have to be very sensitive to those. We have to be able to react quickly and provide our services to work out a Hungarian litigation strategy, for instance, and implement it at a high level of quality, often under time-pressure. 

CEELM:  Is Danubia a member of professional associations or networks with firms in other countries?

Zsofia: This is of course an important part of our every-day business so we are of course present at most IP conferences and associations, such as the INTA, ECTA, MARQUES, AIPPI, LESI, and EPLAW, and everyone in the management of Danubia as well as Danubia Legal partners holds positions in several professional associations. Besides the networking aspects these involvements and commitments help us stay up to date with relevant trends and developments in the field and ensure that our service keeps up with the standards of major European patent attorney and law firms. 

Because the UK is an important place in terms of patent litigation we have many contacts with UK lawyers and law firms. The same goes with German locations, which are equally important, such as Munich and Dusseldorf. But otherwise I wouldn’t emphasize specific geographical areas. Ultimately, we get referrals from all over the world, including of course other countries from CEE, and I am very often contacted to reach out to lawyers in Romania or Poland, and of course we have contacts there too.

CEELM:  What are some projects in the last five years that you are most proud of?

Eszter: We managed to obtain a significant victory for Pfizer in Hungary regarding its patent for Viagra. This was an excellent example of how effectively to protect a patent by effective judicial measures. That required a lot of preparation and very hands-on handling of that matter. It was an example where we really thought through the strategy with the client from the very beginning, and that strategy played out very well. Ultimately, the process was really long and with unimaginable complexities – it went up to the Supreme Court twice, and in the end it was a success. It even involved legal questions that influenced cases afterwards. It really moved Hungarian judicial practice in patent litigation forward, set precedents, changing legal and judicial practice. It was long – it started in 2012 with a preliminary injunction – and the end of the revocation was last year.

We are also very proud of our work on two cases that went to the CJEU and ended with a favorable ruling, both in the field of pharmaceuticals, one being C-492/16 (Incyte) and the other C-688/16 (Bayer). Obviously, these cases affect patent litigation well beyond Hungary and it is a great honor for us to be involved in them.

Zsofia: We are also proud of our work for a German company, Green Dot. The importance is that it was going on in multiple jurisdictions, and the victory was that we were able to maintain the client’s rights, when a third party tried to cancel the client’s very famous and widely-used trademark. Because of our work, Hungary was one of the few jurisdictions in which the trademark was preserved, in fact, so we were very proud of our work here. 

CEELM:  Since a lot of your work is obviously involving litigation, how do your fees work, exactly? What’s the spread of work between bread-and-butter registration work and the more high-profile litigations?

Eszter: Of course, a lot of our services don’t depend on the blockbuster cases. Most clients, at least in litigation, still work on hourly rates. We are often asked to provide budget estimates in advance, which is very reasonable, but especially in litigation it’s very difficult to predict, which comes with the nature of the service. However, for certain prosecution services, Danubia has fixed tariffs.

CEELM:  After 70 successful years, what’s in Danubia’s future?

Eszter: New technology is always getting stronger, and what we do is about technology. I think one thing that is important for us is to be very open and adaptable – so that we remain able to handle these new technologies and new business models with the IP knowledge that we have. I think what is really required is to increase the thoroughness of the understanding of the ever-growing amounts of data and information that need to be covered in each case as well as the fast-changing technology and business models. Perhaps with that we can maintain the leading position that we have achieved over the years

This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

If you decide to apply for bank financing, you will need to consider not only the financial terms of the loan but also whether you are ready to allow the bank to access your assets as collateral. It will probably ask for the following guarantees.

1. Pledge and/or call option on shares

Once you apply for financing, it is highly likely that the ownership interests of the shareholders will be a targeted security. If you have a viable business, the bank will want to ensure that, in the case of default, it can intervene to save the operation. It can do so by acquiring direct ownership through a security call option granted in its favour or by selling the ownership interests via a pledge on the shares to a prospective investor.  

2. Pledge/mortgage on property

If you are in the property business, your properties will almost certainly serve as security for the bank to ensure that you meet all your payment obligations. Moreover, the bank will probably register a mortgage (also known as a pledge, lien or charge) over one or more properties you hold even if you are not in the property business. Since the mortgage is, in most cases, coupled with a restriction on the alienation and encumbrance of the property, you will not be able to sell or further encumber your property without the permission of the lending bank.

3. Pledge on receivables 

Do you have a successful business with robust cash-flow? If so, you should expect that at least some of your receivables from your trade contracts, lease agreements and supply contracts, as well as from any insurance or guarantee contracts where you are the beneficiary, will need to be pledged in favour of the bank. In most cases you will also have to notify your trade creditors about the pledge and obtain agreement from them that in the event of default, they will pay their dues to the bank instead of you. 

4. Pledge/charge on bank accounts  

Your bank accounts can also serve as collateral. There are several ways banks can secure access to the balance of your accounts. The most common way is for you to pledge to the lender the balance on all your accounts held at a credit institution. If you have accounts with banks other than your financing bank, you can be fairly sure that you’ll be asked to grant a prompt collection authorisation over such accounts for the benefit of your financing bank. In certain cases, you will be required to block some of the funds in your current account in a security (or collateral) deposit, and you will not be able to access these funds without the bank’s approval during the term of the loan agreement. 

5. Third-party guarantee

If your financing bank decides that your business plan needs some backing in order to make it bankable, there are additional forms of security that can reduce the bank’s risk and help you qualify for the financing. A corporate guarantee or the undertaking of surety by a reputable company from your company’s group, or even from outside it, is always welcome by banks when establishing the security structure for a financing arrangement. 

By Boglarka Zsibrita, Attorney, Jalsovszky

Lakatos, Koves & Partners has advised the Indotek Group on its acquisition of Hungary’s Miskolc Plaza, Duna Plaza, Gyor Plaza, and Corvin Plaza shopping centers from Klepierre. Kinstellar advised the sellers.

Klepierre is a French real estate investor and shopping mall management company operating in Europe.

The LKT team included Partners Ivan Solyom and Szabolcs Mestyan, Senior Lawyer Agnes Hegyi, Lawyers Tomas Balogh, Agnes Abraham, Noemi Varga. and Horvath Botond, and Trainee Lawyer Adrienn Mandoki.

The Kinstellar team was led by Partner Anthony O’Connor.