Category: Hungary

When it comes to instances of compensation, this is not always the case. The European Court of Justice (ECJ) has recently reiterated that compensation for damages or contractual penalties may also qualify as consideration for a service for the purposes of VAT. This is important because consideration (i.e. the price of a service) is subject to VAT, whereas compensation is not. This could affect so-called loyalty periods or other fixed-term services in particular.

In terms of VAT, it makes a difference whether something is regarded as consideration or compensation for damages. The former is subject to VAT but the latter is not. Often, however, it is difficult to decide what constitutes compensation for VAT purposes – and this carries a serious risk on both the seller and the buyer side. If something is mistakenly treated as compensation, the tax authority (NAV) could claim the unpaid VAT from the seller. Whereas, if the item is mistakenly treated as being subject to VAT, it could refuse to accept a VAT deduction on the part of the buyer.

Whether something constitutes compensation or consideration depends only partly on the provisions of civil law. The ECJ has provided an interpretation for this that is independent of the Member States’ own regulations. In the reading of the ECJ, the question is always whether there is a direct relationship between the object of the transaction (the product or service) and the given financial benefit. If such a relationship exists, we are talking about consideration, not compensation. Yet in its recent decisions, the ECJ has interpreted the existence of a direct relationship in a rather broad way, to the extent that it regards as consideration amounts that you would normally think of as compensation. 

Lease fees falling due in the event of non-payment

In a recent case of Bulgarian origin (C-242/18), the parties signed a lease contract. Based on this, upon a default of payment, the lessor could terminate the contract before the end of the term and could claim compensation equal to the sum of the lease fees that would otherwise be due up to the end of the term. As the lessee failed to pay the fees, the lessor exercised this contractual right by terminating the contract and demanding compensation. In connection with this, the lessor also requested a refund of the VAT previously paid in a lump sum. However, the Bulgarian tax authority was not willing to make the repayment.

In the view of the ECJ, what is key is that the contractual clause on compensation allows the lessor to receive the same income as it would have received had it not been for the termination. In other words, the amounts claimed from the lessee by the lessor are still paid by the lessee ostensibly for the purpose of its using the service. According to the ECJ, it is irrelevant that the lessee is not, through its own fault, entitled to do so, nor whether or not it was able to use the object of the lease from the date of the termination. The lessor had, after all, made it possible for the lessee to avail itself of the services provided under the contract. Thus, there is a legal relationship whereby mutual services are transferred; in other words, there is a direct link between the “compensation” payable and the leasing service, so it cannot be classified as compensation for the purposes of VAT.

Monthly fees during loyalty periods

Perhaps it’s easier to understand the reasoning of the ECJ from its judgment (C-295/17) in which it classifies as consideration the monthly fees payable on termination under a contract terminated before the end of the loyalty period. In this case, a Portuguese telecoms provider stipulated a compensation claim for the event that it has to terminate the contract due to the fault of the customer. At that point, the monthly fees remaining from the loyalty period would immediately become due. Here too, according to the Court, a direct link can be established between the service and the amount received as compensation. The main reason for this is that it allows the service provider to receive the same revenue as it would have received if the customer had not terminated the contract before the end of the term; in other words, the economic substance of the transaction does not change simply because of the termination. The fact that the customer cannot use the service due its own fault does not, in itself, alter the true economic content of the legal relationship between the service provider and its customers. The ECJ believes that the purpose of the clause – being to discourage customers from terminating the contract before their loyalty period expires – is also irrelevant, as the amount, according to its true economic content, is intended to ensure that the service provider receives the income corresponding to the monthly fees due through the contractual loyalty period.

Counter-example: the deposit

It may also be illustrative to point out what the ECJ did not consider to be consideration. In an earlier case (C-277/05), the Court had to pass judgment on the deposit payable by a hotel guest. This was lost by the guest if he/she booked the room but failed to show up, that is – to use technical language – he/she rescinded the contract. The question that arises here is whether this is a fixed charge paid as compensation, which is not subject to VAT, or if it is a consideration, subject to VAT, for a special “booking” service which the hotel receives for reserving the room for the guest.

According to the ECJ, what is key here is that the hotel is obliged to reserve the room even if the guest does not pay a deposit, as this is always its basic contractual obligation. In addition, the guest is required to (definitively) pay the deposit even if he/she does not use the service and unilaterally terminates the contract. As a result, there is no individual service provided by the hotel for which the deposit is a consideration – so, for VAT purposes, it is considered to be a compensation.

Conclusion

The lesson to be learned from the practice of the ECJ is that, even in seemingly clear-cut cases, it is worth assessing separately, for VAT purposes as well, whether what we deem to be compensation in a civil law sense is also classed as such from a VAT perspective. This can help avoid possible VAT risk on either the seller or the buyer side. 

By Kitti Vizler, Trainee Lawyer, Jalsovszky

DLA Piper has advised Vanessa Research and its Hungarian subsidiary on a change of ownership and company structure. The sell-side of the transaction was reportedly advised by Zsolt Szita and Lanchidi & Partners.

According to DLA Piper, the parties have agreed not to disclose the new ownership and company structure nor the financial details of the transaction.

Vanessa Research is a US-based biomedical company that, it reports, “seeks to make an impact on often overlooked healthcare markets.”

DLA Piper’s Hungary-based team included Partner Gabor Molnar and Senior Associate Gabor Spitz.

Former EY Law Attorney Laszlo Krupl has joined Schoenherr Budapest as Head of Real Estate.

According to Schoenherr, Krupl specializes in real estate transactions and “regularly supports clients in greenfield investments into Hungary, from the location selection, through the due diligence process, land acquisition, and construction phase.”

Krupl graduated from ELTE Law School in Budapest and undertook LL.M studies at the Georg-August University in Gottingen. He spent three years at EY Law, after spending three at Cerha Hempel, both in Budapest. He was also a trainee with Cerha Hempel for nine months in 2010 and for three years, from 2010-2013, with CMS.

“Expanding our real estate team with a designated head with international expertise is the next step in the process of further strengthening our Hungarian practice,” said Michael Lagler, Managing Partner of Schoenherr. “We are excited to have Laszlo on board.”

Gabor Horvath, former Senior Legal Counsel & Ethics Officer at GDF Suez, has joined the Kapolyi Law Firm as Head of Corporate/M&A.

According to Kapolyi, Horvath specializes in Energy and Corporate/M&A. Horvath’s “professional background and experience is another guarantee of the high level of professional background and legal work” at the firm. He will focus on Energy, Corporate, and M&A areas of practice.

Horvath has both private practice and in-house experience, having spent two years as an associate at Freshfields Bruckhaus Deringer, over a year at Altheimer & Grey, two years with White & Case, four and a half years as Senior Legal Counsel at E.ON Hungaria, and over six years as Senior Legal Counsel & Ethics Officer at GDF Suez. 

According to Kapolyi, “during his years at the E.ON Hungary Group (2005-2009), [Horvath] became a specialist in energy law. He also assisted natural gas and electricity distribution and trading companies with advice and management support, provided legal advice to corporate bodies, participated in the preparation of decisions and the monitoring of their implementation. At ENGIE (GDF SUEZ) Hungary (2012-2019), he was responsible for the legal background of natural gas and electricity contracts, business codes, and general terms and conditions and his work also extended to the area of M&A, corporate governance, corporate law and labor law.”

Horvath graduated from the University of Pecs with a degree in law and economics in 1997 and obtained a doctorate from the same university in 2004.  

One does not simply walk into the courtroom and hope for the best. To win a civil case you will need to navigate through the strict formalities that were introduced by the new Hungarian civil procedure code. It closed many well-known paths of litigation tactics and antics but also opened up new possibilities.

So what are our top 5 pieces of advice that lead to success in the courtroom?

1. Decide where you want to litigate

There may be different courts available to decide your case. These could be the courts of Hungary or those of another country. Even within Hungary, you have the choice between arbitration and the ordinary courts. The designation of the court could have a decisive impact on the outcome of your case, its timing and the costs. For instance, you may prefer arbitration where the complexity of your industry demands that you have some influence on who your judges are.

2. Do your pre-trial preparation properly 

The new rules of litigation before the ordinary courts require that all cards are revealed already in the first phase of the litigation. If you do not present a certain invoice to the court, or forget to involve certain witnesses that may be useful to your statement, you may not be allowed to do this later in the process. It is essential to collect at an early stage all documents and evidence that might be relevant to the case. 

3. Obtain an expert’s report in advance 

Asking for an authorized expert’s report before you present your claim in court can give you a head start. This allows you to get to know the strong (or weak) points of your arguments before the trial. If the expert’s report is unfavourable, you can choose not to attach this report to your submissions and to develop a strategy to manage the risks. 

4. Be picky with your opponent’s submissions

Do not forget: the strict procedural rules of the ordinary courts do not only limit you, but also your opponent. Pay attention to their actions and omissions and use them to your advantage. For example, do not hesitate to let the judge know if the opponent does not provide adequate evidence, or if he or she makes contradictory statements.

5. Have a specialist handle your case

The new rules aim to accelerate court procedures and to make them more efficient; but this comes at the cost of higher expectations against the skills of the attorneys. So, last but not least, avoid generalists: make sure to have your case be handled by lawyers who are specialized in litigation and who are up-to-date with current legislation and judicial practice. 

By Tamás Fehér, Partner, Jalsovszky

Budapest’s HP Legal has announced that Reka Versics will be promoted to the firm’s partnership on January 1, 2020.

Versics joined HP Legal in December 2015. According to HP Legal, “she specializes in banking and finance transactions as well as M&A and corporate transactions, [and] she also has significant experience in competition law and real estate matters.”

“We are delighted to welcome Reka into our partnership,” commented HP Legal Managing Partner Laszlo Hajdu. “Since joining HP Legal in 2015, Reka has proved to be a real asset to the firm. She is an excellent lawyer with in-depth knowledge of the legal aspects of various types of business transactions. Her commitment, enthusiasm and hard-working approach has been instrumental to the continued success of HP Legal. I am convinced that Reka’s promotion will allow us to maintain the excellent reputation of HP Legal built up over the past 11 years in Hungary”.  

Under a non-compete agreement, the employer may restrict the ex-employee’s business activity for a period of maximum 2 years following the termination of employment and in exchange, the employer shall pay adequate compensation to the employee – the amount of which may not be less than 1/3 of the base wage due for the same period. The Hungarian Supreme Court (Curia) published in September 2019 a report on the judicial practice relating to non-compete agreements, which highlights the following findings:

It is usually stipulated in the non-compete agreements that the employee may not enter into employment relationship with a company which can be deemed as the employer’s competitor. According to the summary report, from the fact that according to the company register the two companies carry out the same activities, it might be implied that they are competitors; however, there is still a room for the employee to prove that at the new employer he actually performs completely different tasks in a different field; therefore, he did not breach the non-compete agreement.

According to the judicial practice, the amount of compensation payable to the employee in exchange for the non-compete obligation must reflect the severity of the restrictions imposed on the employee’s activity. When assessing this criterion, the age and qualifications of the employee, as well as the labour market in the given location must be taken into account. Furthermore, the compensation might not be included in the employee’s salary and it might not be a remuneration in kind.

If the right of withdrawal is included in the non-compete agreement, the parties are entitled to withdraw from it before the termination of employment. This practically means that the other party should receive the declaration of withdrawal on the date of termination of employment at the latest. According to the report, the courts also made it clear in several decisions that if the parties terminate the employment relationship with mutual agreement and declare that they have no claims against each other, it does not mean that they withdraw from the application of the non-compete agreement set out earlier in the employment contract.

By Levente Csengery, Founding Partner, KCG Partners Law Firm

On 24 September 2019 the commencement of the electronical land registry (E-Land registry) project was announced aiming at the development of real estate and land issues. As a result of the E-Land registry, a safer, more transparent and faster system will be established, which would also enable automatic decision-making processes. This step follows the electronization of the administrative processes resulting in the decrease of the lead time and costs of the land registry procedures and the increase of the legal certainty.

Land administration procedures, workflows as well as an information system supporting electronically the data provisions will be created in the framework of the project. As a further result of the development, the consortium managed by Lechner Knowledge Centre (in Hungarian: Lechner Tudásközpont) integrates the handling of the official public land registry and the central land register. The new land registry system must be connected with other data bases, e.g. with the address and population registers.

The development started in 2019 and will finish expectedly by the end of 2021. The new system can be launched following the test period, in autumn 2022.

By Lídia Süveges, Attorney at Law, KCG Partners Law Firm

White & Case has reportedly advised Hungarian energy firm MOL on its USD 1.57 billion acquisition of Chevron’s stake in an oilfield in Azerbaijan. Herbert Smith Freehills reportedly advised Chevron on the deal.

MOL reported that the deal includes a 9.57% stake in the BP-operated Azeri-Chirag-Gunashli field in the Caspian Sea and a 8.9% stake in the Baku-Tbilisi-Ceyhan pipeline that transports the crude to the Mediterranean. The Azeri purchase is expected to add about 20,000 barrels per day to MOL’s production, which will rise to 120,000-130,000 barrels per day.

MOL’s in-house team was led by Head of Group M&A Legal Biborka Jojart, who described the deal as “the largest inorganic one of MOL Group’s history, being also the largest one in Hungary as well as the CEE region.” Jojart worked alongside MOL M&A Legal Advisor David Spiegel.

Editor’s Note: After this article was published Herbert Smith Freehills confirmed that it had advised Chevron on the deal. The firm’s team was led by London-based Partners Steve Dalton and Laura Hulett and included Singapore-based Associate Irina Akentjeva and Lond-based Associate Becky Wee.