Category: Hungary

Factoring is an increasingly popular product of banks that appeals to corporate clients of whatever size as it provides liquidity to the clients and stable cash flow.  The factoring is usually structures in a way that the vendors of the client do not receive information on the factoring, the bank stays in the background; the relationship between the client and its vendor remains intact.  In practice, this means that the client continues to collect the amounts the vendor owes, although such amounts do not belong to the client anymore.  Also, it is not uncommon that even the soft workout stage stays with the client in case the vendor is in delay with its payment obligation; i.e. the client will be obliged to chase its vendor for the money.

The Hungarian National Bank had issued several guidelines in the past on the factoring which among others, also analyse this role of the client from banking regulatory perspective, but they either had a different focus or did not provide clear cut answer on the issue.  The issue is the uncertainty whether the client in the above set-up should be deemed as the agent of the factoring bank and if yes, under what conditions may it operate as such. 

The Hungarian National Bank has recently issued a guideline analysing specifically the role of the clients and made entirely clear that should the client have any role in the collection of the amounts factored to the bank, it will become an agent of the bank (i.e. this means that factoring cannot be done “silently” without the client falling under the scope of the banking regulation).  From the client’s perspective, this means that it must comply with all the regulatory requirements that an agent would normally do; e.g. requirements on the skill and education of the executive officers – needless to say a client that is not engaged in such agency activity can rarely comply with this requirement.  From the bank’s perspective, this means that it must either register the client as its agent with the Hungarian National Bank, or it must obtain a license from the Hungarian National Bank for employing its client as its agent.  The latter is required if the client is entitled under the factoring agreement to amend the payment terms with its vendors, since after the factoring, the client does this to the risk of the factoring bank.

Although this strict guideline pertains to factorings under foreign law (so long the client is situated in Hungary), it does not render factoring practically impossible in Hungary.  With careful structuring the pitfalls of the regulatory requirements may be evaded; nevertheless, it requires some flexibility from the banks and its clients too. 

By Gergely Szaloki, Partner Schoenherr

The Hungarian Competition Authority (HCA) recently published a strategy paper presenting its views on consumer protection in the digital age. The paper subtly indicates that the HCA will continue to follow the European Commission’s guidance in this regard. The paper highlights the measures which the HCA deems necessary to protect consumers and keep up with the developments and companies central to this process.

As a premise, the HCA stresses that consumers are highly vulnerable to certain tech giants and other online service providers. This is because the overwhelming data flow which is inherent to the emerging digital age has rendered the traditional consumer protection approach meaningless.

According to the HCA, to cope with the new dynamics of the market, authorities and consumers need a new approach to: 

• consumer protection issues; and
• transactional decisions.

The HCA also noted that algorithms and artificial intelligence are likely to become highly relevant in the foreseeable future and urged competition authorities to prepare to respond accordingly. The HCA believes that it is paramount that consumers with a limited understanding or interest in technology both remain protected and benefit from new inventions.

In light of the above, the HCA has defined its approach as follows.

Strategy

Fostering compliance

According to the HCA, the problems posed by the digital markets may be best solved by proceedings which aim to foster compliance rather than impose penalties. These proceedings mainly aim to provide a solution for prevalent topics. In addition to traditional goals, their purpose is to function as an exemplary case or guidance. While these cases may also involve penalties, these are not of utmost importance. The HCA has already initiated proceedings using this approach. These cases involved Instagram celebrities with paid content and online accommodation booking sites, among others.

Proceedings against global players

According to the HCA, these cases may require an assessment of the overarching effects of the specific conduct, including those which occur outside Hungary. Therefore, the HCA deems it necessary to consider the approach of other authorities, especially those from the European Union. However, the HCA remains confident to take action on an international scale and expects international players to align their practices with its guidance, where relevant. 

Prioritising novel cases

The HCA has prioritised the issues pertaining to consumer protection in the digital markets. In particular, the HCA intends to address cases which raise novel questions and pose problems which did not exist or were not addressed prior to the digital age. The HCA has even gone so far as to indicate that it intends to initiate at least one such novel proceeding every year. It also intends to orchestrate international actions if necessary and has indicated that it will not shy away from leading the way in this regard. 

Market analysis

The HCA may use invasive tools to map a market before deciding whether an investigation into a certain conduct is necessary. One such tool is market analysis, which the HCA intends to employ to better understand the functioning of comparison tools. 

Super complaints

In its strategy paper, the HCA introduced the notion of ‘super complaints’ (ie, complaints which are addressed directly to the HCA by or through, for example, authorities or consumer associations). Although the HCA does not differentiate between complaints, such pre-selected and comprehensive presentations by professional organisations may allow for more intensive and swifter intervention by the HCA.

Fostering international cooperation

The HCA concluded its strategy paper by highlighting its intention to foster international cooperation around consumer protection, especially within the framework of the Consumer Protection Cooperation Network and under the aegis of the European Commission’s New Deal for Consumers.

Comment

In recent years, the HCA has become a dynamic authority which aims to effectively enforce competition, particularly in novel cases. It has also visibly shifted its focus on to consumer protection and – most recently – the digital markets. As such, it has devoted significant resources to protecting consumer interests, which has somewhat slowed down enforcement in other areas. However, the HCA’s new-found focus has also led it to issue groundbreaking decisions.

The HCA’s strategy paper gives market players insight into how it perceives its activities. The ambitious undertaking to solve at least one novel issue every year may represent, to some, an overly eager approach to enforce competition on the digital markets and among major international companies. The question remains as to whether such a vigorous approach from the HCA is necessary.

As mentioned above, the HCA is planning to initiate an analysis of the online comparison services market. Therefore, undertakings which perform such activities may expect data requests in the near future. This inquiry is not constrained to price comparison websites, but extends to any online service which allows for product comparisons. Further, players which also market their own products through such services may expect a high level of scrutiny. In its analysis, the HCA is expected to thoroughly review whether consumers are provided with all information regarding the basis of a comparison and the proof regarding the lack of bias in the algorithms.

All other undertakings which are active on the digital markets may be subject to the HCA’s scrutiny. If the authority truly intends to provide continuous guidance regarding novel issues and compliance, the number of tech companies approached by the HCA may increase significantly in future.

By Andras Nagy, Associate Schoenherr

From January 2019 the VAT exemption threshold for individuals will be increased to HUF 12 million from the current limit of HUF 8 million. During the summer 2018 the Hungarian Parliament had already adopted the tax rules applicable in 2019, however, some adjustments had to be made in autumn to fully comply with the EU law.

As part of the above tax package, the increase of the threshold of the VAT exemption for individuals is also included. The European Committee supported the request to increase the limit for VAT exemption for individuals from HUF 8 million. The Council Decision had already been adopted earlier and now was ratified by Hungarian Parliament. 

This legislative amendment affects hundreds of enterprises by extending their possibilities to earn more revenue, since some of them were trying to avoid the additional administrative burden by not letting their revenue above HUF 8 million.

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

There can be even 1 million wells or borehole in Hungary with an unclarified status that had been built without a permit in the last decades. As water becomes an even more valuable resource, countries should represent a responsible approach in their water management. This is why the Hungarian Government amended the law on water management by establishing a moratorium until the end of 2018, during which period well and borehole owners can obtain a permit from the competent authority without being fined. This exemption applies only to water sources that were set up before 1 January 2018.

The owners should start the proceeding by submitting a request to the competent notary of the municipality. In order to obtain the permit, technical documentation should be made which contains the technical specifications of the well, the drilling method, materials used for the well, etc. A water sample from the well must be analysed by the competent medical authority if the well is used for drinking purposes. 

If there is no ongoing procedure for obtaining the permission initiated by the end of 2018, the owner can be fined up to HUF 300,000. The costs of obtaining the permit is usually approx. HUF 50-100,000.

By Gabriella Galik, Partner, KCG Partners Law Firm

One of the most important elements of the tax package adopted by the Hungarian Government on 13 November is to create the possibility of tax groupings for CIT purposes from 1 January 2019.

One of the main advantages of the group taxation is that the members of the group are exempted from the obligation for supporting the prices applying between the associated enterprises (i.e. the transfer pricing documentation) regarding the transactions between the group members. The other main advantage is the determination of the common tax base. In order to determine the common tax base of the group, the tax bases of the members having positive tax base must be added up first, then the amount (or a part of the amount) of the tax bases of the members having negative tax base can be deducted (except for the deferred losses generated prior to becoming a member). The deduction is the half of the amount of the added positive tax bases. The members of the tax groupings for CIT purposes may be corporate taxpayers that are related companies based on at least 75% voting right. Not only direct, but indirect voting rights may also give the possibility for the concerned taxpayers to become members of the same group taxation, but only if the direct voting rights underlying the indirect voting rights reach or exceed the rate of 75%.

The establishment of a group taxation for CIT purpose requires the authorization of the Hungarian tax authority. For the first time, the application must be submitted between 1 and 15 January 2019, which is a mandatory time-limit.

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

The Hungarian Competition Authority has launched the public consultation process about the draft of its updated and amended communication concerning commitment decisions in Hungarian competition cases.

In general, a “commitment decision” is available from the competition watchdog to infringers of competition laws (both antitrust rules and laws prohibiting unfair business-to-consumer practices), who are prepared to offer legally binding commitments in order to remedy the competition concerns the regulatory investigation has identified. Unlike a normal prohibition decision, the acceptance by the Competition Authority (GVH) of a voluntary commitment makes the resulting decision binding on the infringing company without establishing any infringement or pursuing the investigation any further. Another difference is that in a prohibition decision the GVH imposes sanctions on the infringer, whereas a commitment decision essentially rests only on the voluntary commitments offered. 

The GVH sees this procedural alternative, which has been available under Hungarian law since 2014, as an effective tool to address competition law concerns via a procedure that allows for a quicker restoration of undistorted conditions of competition on the relevant market than stretching out a full-blown investigation to its end (or even further if the infringer appeals the prohibition decision).  

Nonetheless, there has admittedly not been a clear legal path in Hungary for wrongdoers hoping to secure a commitment decision from the GVH against their compromise offer. Therefore, the GVH now proposes to update and substantially amend its former communication in order to fill that procedural gap. 

The new communication proposes to define milestones and introduce deadlines for the process and to set explicit requirements in terms of preparing the offered commitments by the infringer and then having them evaluated by the regulator. These are intended to confer increased transparency and predictability on the process. The new communication makes it clear that it remains binding on the GVH only where the infringer follows the preferred procedures. 

Wrongdoers are encouraged to proactively indicate their interest in discussing any possible commitment at the earliest possible stage. Unless they do so, the GVH’s preliminary assessment of the case and the resulting draft statement of objections will also mention the GVH’s preparedness to consider commitments from the wrongdoers to the extent the underlying case allows the competition concerns to be effectively addressed by those commitments. A review of Hungarian competition cases shows that one fourth of infringers in antitrust cases and half of all infringers in unfair business-to-consumer practices cases had a genuine willingness to propose commitments even at the outset of their cases.

One of the most important new features of the draft new communication is that it introduces a well-defined set of six criteria the proposed commitment package needs to comply with in order to open the door for further alignment with the GVH. In particular, the GVH expects that the commitments infringers offer be relevant, credible (i.e., raise no concerns regarding their implementation), timely (i.e., can take effect soon after the GVH’s decision and extend for a period sufficient to remedy the problem), unambiguous, accountable (i.e., a subsequent inspection of compliance will be reasonably possible for the GVH), and fit for putting out for market testing (i.e., not so dominated by business secrets and other confidential details that the GVH would be unable to make them available to third parties). 

Although it remains in the GVH’s discretion to assess whether the commitments offered are appropriate and sufficient to address its competition concerns, the explicit listing of these criteria in the new communication significantly increases the transparency and predictability of the GVH’s decisions.

Otherwise the new communication leaves infringers completely free to offer commitments that are “behavioral” (i.e., a commitment by the infringer to actively do something on the market, such as provide certain services or goods under specified conditions, or refrain from certain former practices) and/or “structural” (e.g., a commitment to divest certain assets to other market players).

The new communication makes it apparent, however, that commitment decisions are not appropriate for severe infringements of competition law (e.g., secret cartels), which the GVH prefers to investigate in full and where sanctions are considered necessary. 

Once the new communication has been finally adopted by the GVH the expectation is that it will further increase the recognition of commitment decisions in Hungary and hence contribute to more efficient investigations by the GVH.

By Janos Toth, Partner, Wolf Theiss Budapest

This Article was originally published in Issue 5.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.