Category: Hungary

From 2019 the turnover threshold of tax exemption may continue to rise which would allow more micro and small business to issue VAT-exempt invoices in the framework of the low tax-bracket scheme. Tax-payer companies under the low tax-bracket will benefit most of the change, even though the regulation does not directly affect the legislation applicable on them.

The benefit of tax exemption is that a taxpayer can issue a VAT exempt invoice. The threshold of tax exemption was first increased in 2017 from HUF 6 million (2017) to HUF 8 million (2018). If the Hungarian Government’s deregulation proposal is upheld by the European Union, businesses could benefit a tax exemption up to HUF 12 million from 1 January 2019. 

Although the threshold was increased to HUF 12 million by the Hungarian legislation in 2017, for companies with private individual clients, the HUF 8 million threshold is applicable. In case of exceeding this limit, the companies’ service fee is still subject to 27% VAT. However, with the proposed change, the thresholds of tax exemption under the low tax-bracket scheme will coincide from 2019. 

It seems that those micro and small companies will benefit from this modification who are subject to the low tax-bracket scheme and who have private individual customers.

By Gabriella Galik, Partner, KCG Partners Law Firm

As of 1 July 2018, the provisions regulating the obligations of travel agencies in the Hungarian Commerce Act will be amended in order to comply with the EU directive on package travel and linked travel arrangements.

The definition of the travel organiser and travel agent activity will be amended, and the Hungarian Commerce Act will be completed with the definition of the traveller and the commercial activity facilitating linked travel arrangements. The Hungarian Commerce Act will state that it is forbidden to sell the travel package in separate parts to the consumers and the consumer protection authority will be competent to check this prohibition. 

The trader facilitating linked travel arrangements will need to have financial security, the amount of which will also be amended depending on the type of the travel package. Under the new provisions, where the travel services also include carriage of passengers, the travel organiser must conclude an insurance agreement with an insurer for the benefit of the traveller as beneficiary. In case the travel entrepreneur does not undertake to ensure the repatriation of the beneficiaries and the costs of the forced stay abroad, the insurer must take the necessary measures and the travel entrepreneur has to provide the insurer with the relevant data.

By Rita Parkanyi, Partner, KCG Partners Law Firm

Update on Hungary’s solar boom – significant benefit to photovoltaic projects licensed under mandatory offtake system upon applications submitted before 2017.

1. Introduction

While no more application for Micro PVPP licenses in the mandatory offtake system can be submitted anymore as of 26 April 2018, it seems that the Government acknowledged that the projects licensed under the mandatory offtake system that are applied before 2017 may not be implemented within the strict deadlines prior set in the regulation. The Government therefore allowed the developers (i) to ask for the extension of the implementation period (additional 3 years instead of the former 1 year) regarding such projects provided that such projects reached a reasonable phase and (ii) cancelled the former 10% cutback on the payback period as well. Projects considered as having “special importance for the Hungarian National Economy” enjoy such extension benefit even if they have not yet reached a certain reasonable phase of the project implementation.

The purpose of this update is to provide an overview on the regulatory changes affecting photovoltaic power plants (“PVPPs”) licensed under the old regime, to highlight the novelties and potential risks of the “new” system and also to summarize the most recent governmental action bringing an end to the mandatory off-take system.

The supporting system of PVPP projects in Hungary can be divided into three categories:

a) the “old” mandatory off-take system, relating to the applications submitted until 31 December 2016;

b) the “new” mandatory off-take and green premium system, relating to the applications submitted after 1 January 2017; and

c) the “new” tendering system.

2. The “old” Mandatory off-take System

Although new conditions have been put in place for the support of PVPP projects, every PVPP project licensed upon applications submitted until 31 December 2016 is still covered by the “old” rules.

It is important to recall that the licenses under the old regime terminate in case the PVPP does not start to generate electricity within 3 years (1 year in case of applications submitted after 1 January 2016) counted from the date of commercial operation as set in the license. With regard to applications submitted after 1 January 2016, based on the most recent modification of the relevant decree, the above mentioned deadline (date of commercial operation plus 1 year) may be extended with an additional 3 years upon request by the license holder, provided that it fulfils certain conditions (verification of (i) the title over the project land, (ii) the existence of the grid connection agreement, (iii) sufficient funds for the implementation, (iv) construction permit and start of construction by opening the e-construction log). (Small and Major PPs are not subject to these rules of termination if their construction has started before 1 July 2016).

In the second half of 2016, nearly 3,000 applications have been submitted to the Hungarian Energy and Public Utility Regulatory Authority (“HEA”) for the support of Micro PVPP projects. We understand that these have been awarded by the HEA, leading to the “solar boom” at the end of the year. However, it is questionable whether the projects with an aggregate capacity of approximately 1.500 MW will actually be implemented. Although the support is attractive and offers compelling business opportunities, the 20-25 years reference period has potential risks as well. In addition, developers have to face unexpected legal uncertainties and problems, such as many of the projects are based on project lands classified as agricultural land in the land registry, therefore the reclassification as “lands out of cultivation” is indispensable, or such as the projects have to take into consideration the environmental protection rules (e.g. Natura 2000 limitations).

In order to support the realization of the projects, the Hungarian legislator adopted certain laws and decrees:

• as mentioned above, the implementation period of the projects licensed under the mandatory offtake system upon applications submitted before 2017, provided that such projects fulfil certain conditions, may be extended by 3 additional years (instead of 1 additional year) upon the request of the developers without any cutback on the payback period;
• the DSO, upon the request of the Micro PVPP, is obliged to establish and develop a medium-voltage grid connection point within 3 years at the frontier of the project land, and the costs of securing the grid connection point shall be borne by the DSO;
• the cost of building and development of cables up to 3,000 meters per network user, as well as other facilities necessary in order to secure the connection of Micro PVPPs to the producer distribution system or the public utility system shall be borne by the DSO;
• the reclassification of agricultural lands became easier for Micro PVPPs, as the land authorities of local municipalities are obliged to make the decision on the reclassification based on the documents submitted to them, without performing site visits, within a maximum of 8 days; as well as the reclassification of agricultural lands with quality above the average quality may also be permitted if the Micro PP is within 1,000 meters from the network with capacity to on-load electricity, provided that the project has been declared as “having special importance for the Hungarian economy” and that the project cannot be realized on another land (or trace);

However, it is worth to mention that the Hungarian Parliament is planning to adopt a new act on the unified rules of national and regional spatial planning setting further limitations regarding the construction of PVPPs in Hungary, it is expected that such conditions will be applicable as of 1 September 2018.

3. The “new” mandatory off-take and green Premium System

The new system covers new projects only, i.e. whose implementation has not started until the submission of the application. However, already existing PVPPs may also apply for support under the new regime if they are going through significant reconstruction or development (exceeding 50% of the original project costs). 

PVPP Projects shall meet the technical requirements as set out in 55/2016. (XII. 21.) NFM Decree of Hungary and Commission Regulation (EU) 2016/631 on the requirements of grid connection, which has been implemented by the HEA in February 2018. These new technical requirements shall apply to new facilities (i.e. which have already been connected to the network, or in case of which the facility owner has concluded a final and binding contract for the purchase of the main generating assets not later than 17  May 2018). 

The new regime differentiates between three categories:

a) PVPPs with a peak capacity below 0.5 MW (“Micro PPs”),

b) PVPPs with a peak capacity between 0.5 MW and 1 MW (“Small PPs”), and

c) PVPPs with a peak capacity above 1 MW (“Major PPs”).

3.1. Financial Incentive Scheme for Micro PVPPs

Newly built Micro PVPPs are eligible for participation in the mandatory off-take system (similar to the old regime), however, developers applying for entitlements under the new regime are facing less generous conditions than before.

Firstly, the benchmark used to calculate the reference return of investment period for Micro PPs was reduced: 

a) in case of applications submitted before 9 November 2017, the benchmark is 13 years;

b) in case of applications submitted between 9 November 2017 and 31 December 2017, the benchmark is 20 years; and

c) in case of applications submitted after 1 January 2018, the benchmark is 17 years.

Secondly, the budget for support in the mandatory off-take system is now capped:

a) in case of applications submitted before 9 November 2017, between 1 January 2017 and 31 December 2021 only a maximum of HUF 20 billion of support can be provided to new entries on a first-come, first-served basis;

b) in case of applications submitted after 9 November 2017, between 1 January 2017 and 31 December 2016 only a maximum of HUF 1 billion of support per year can be provided to new entries on a first-come, first-served basis.

Further to the above, the new regulation introduced new conditions regarding the determination of the capacity of the PVPP (the capacities of PVPPs considered as neighbouring establishments and which are at the same time operated by linked enterprises or partner enterprises have to be added together). In addition, it is also necessary to include certain information into the applications (i.e. verification of right of disposal over the project land, or written consent by the respective landowner to the establishment of the Micro PVPP on the project land).

Note that Micro PPs are entitled to choose green premium (see below) instead of the mandatory off-take system; however, if so deciding there is no possibility to return to the mandatory off-take system.

On 20 April 2018, the Hungarian Government with Government Decree 81/2018. (IV. 20.) of Hungary declared that no more applications for Micro PP licenses in the mandatory off-take system can be submitted after 26 April 2018. The decision was adopted strikingly fast and without any foresight. The underlying reasons are unknown; however, the conventional interpretation appears to be that the high number of applications submitted set a risk on the budget. Such fundamental change may revaluate the existing Micro PP licenses on the market. 

Financial Incentive Scheme for Small PVPPs

Small and Major PVPPs are no longer eligible to participate in the mandatory off-take system as of 1 January 2017. For them, the new green premium supporting scheme and/or tendering rules apply.

The Small and Major PVPPs sell the electricity generated in the market. The financial support in case of the green premium scheme is the so-called “green premium” which is the margin between the “support price” (defined by the Government which currently equals the supported mandatory offtake prices) and the “reference market price” (based on the prices of the Hungarian Power Exchange, HUPX).

For Small PVPPs, the main difference compared to the old (mandatory offtake) regime is that the operators have to sell the electricity on the market, MAVIR has no obligation to take over such electricity. Additionally, the benchmarks applicable for calculating the reference return of investment period was decreased for 12 years, then raised to 20 years, and later decreased to 17 years, with the timeframes as set out above at the Micro PPs. The budget had also shrunk: at first, only a maximum of HUF 10 billion of support could be provided to new entries on a first-come, first-served basis, then it was changed to a maximum of HUF 0,5 billion of support per year, also on a first-come, first-served basis.

The rules regarding the determination of capacity also apply to Small PVPPs.

4. The “new” Tendering System

For Major PVPPs, the support price is the subject to competitive tendering. Consequently, Major PVPPs are only eligible to participate in the new financial support scheme if they are awarded upon tender proceedings that aim to select the most competitive and most effective projects. Note that under specific circumstances PVPPs outside the territory of Hungary may also apply for green premium. The premium can be awarded for the period of time as defined in the tender (but in no case longer than 20 years). The budget for entitlements is also capped: at first, only a maximum of HUF 15 billion of support could be provided to new entries, then it was changed to a maximum of HUF 1 billion of support per year.

The limitation on bundling also applies to Major PVPPs, which has significant relevance in case of Major PPs, as the PVPPs with an aggregated capacity above 50 MW is subject to a complex licensing regime.

Although the general rules regarding the tender procedures became effective in the beginning of 2017 already, no tender has been issued since then but there is no indication either that such regulation would be cancelled. The tenders shall be issued by the Hungarian Energy and Public Utility Regulatory Authority upon the request of the Minister. Based on tendering rules such PVPPs would be eligible for support which require the least financial support for the realization of PVPPs. The relevant decree regulates the potential maximum financial support on annual basis which yearly amount shall increase by the amount not granted to tenderers in the previous year. 

Although there is no publicly available information regarding when an under what conditions the first tender would be issued, the termination of the mandatory offtake regime may accelerate the process taking also into consideration that the Government’s communication concerning the promotion of solar projects has not changed. 

However, it cannot be excluded that investors who have already taken certain project development steps (such as securing the lands, evaluating the grid connection possibilities, elaborating their business plans etc.) may be in a better position to provide offers in a most probably very short tendering period.

Wolf Theiss and its highly experienced Energy Regulatory and M&A teams are pleased to assist our clients with any questions in relation to RES investments in Hungary.

By Laszlo Kenyeres, Partner, Zoltan Bodnar, Senior Associate, Wolf Theiss

On 12 March 2018 the Hungarian National Bank (“MNB”) published its recommendation on the criteria on how to stipulate the minimum monetary amount of the professional indemnity insurance or other comparable guarantee. The addressees of recommendation are fintech companies, i.e. payment initiation service providers (PISPs) and account information service providers (AISPs).

MNB requires that the minimum monetary amount of the insurance or comparable guarantee covers the costs and expenses incurred by payment service users and account servicing payment service providers (ASPSPs) who request the fintech companies to refund losses resulting from one or more of the liabilities established by the Hungarian Payment Services Act. The minimum monetary amount of insurance or comparable guarantee should not have any excess, deductible or any threshold that could prejudice repayments resulting from the requests for refunds. 

The recommendation is largely based on the 2017/08 EBA Guideline with same title, which was published on 7 July 2017 and serves the purpose of the national compliance with such guideline.

By Tamas Virag, Attorney at law KCG Partners Law Firm

This mostly occurs in the case of high volume projects where more than one general contractor performs construction work in parallel on the construction site (“multiple contractors”). It is possible to divide the tasks in a way that the contractors perform the same works but in different locations (e.g. different contractors for different buildings), while it may also happen that the client requires different contractors for different branches or distinct tasks (e.g. deep foundation phase, low voltage, BMS).

Advantages

Apparently, the advantage of engaging multiple contractors is that the different tasks between the contractors can be divided. Accordingly, even if one general contractor drops out of the construction for any reason (e.g. due to a liquidation proceeding), such outage can be remedied more efficiently compared to the case when the client loses the only contractor for the entire project. Multiple general contractors are often used, since it allows the client to have more influence on the construction timetable, the selection of the appropriate subcontractors, the quality and also the pricing of the work done.

Disadvantages

However, simultaneously engaging multiple general contractors may be difficult. The work of general contractors performed at the same time or in the same location in parallel or successively must be duly planned and harmonised, which is the responsibility of the client. The coordination of the work requires huge resources from the client. If the work of the contractors can be clearly separated in terms of location, since they work in different sites, the coordination does not have so much relevance. On the other hand, if the contractors have to perform at the same location and at the same time and/or successively, coordination is crucial.

Preparation

If multiple general contractors are working on the construction site, it is advisable for the investor or for the project manager to harmonise their contracts in order to ensure the proper allocation and documentation as to the liabilities. In addition to the generally used consequences (e.g. penalty for a delay caused by one contractor to another contractor), it may be useful to work out mechanisms that facilitate the cooperation between the contractors (e.g. exchanging information, reporting obligations, regulated cooperation). Instead of punishing, this system could work more on an incentive basis.

Proper documentation

During the project, the client, due to unexpected events, often may find himself in situations where immediate decisions are needed, that most often override the construction timetable. In case of such unexpected events, it often turns out for the client that it is not clear which contractor was in the possession of the given working area at that time and how to find the responsible contractor. In case of several general contractors, the risk of unexpected events multiplies as well: the client typically experiences that the contractors generally hold the other contractors liable for the occurred defects and unexpected events. It seems to be clear, however, that many times the proper documentation as to the significant circumstances (such as the handover of the working areas) during the construction work is missing. Furthermore, it is also crucial both for the contractor and the client to immediately communicate the defects and the relevant comments to the other party, otherwise there is a risk that the information will be lost permanently and neither party will be able to use it. As a result, it is not possible to make immediate action that could decrease the occurred additional costs and damages, and the client’s bargaining power during the settlement significantly decreases.

Accurate and continuous documentation of the process is important not only during the construction work but also after the completion of the work, when the fixable and non-fixable defects are summarized and might be needed to reduce the contractor’s fee. In case of improper documentation of defects and events, it is quite difficult to explore the responsible contractors, to establish their liability afterwards or to make deductions from the contractors’ fees. In this case, the maximum that can be done is to divide and deduct the occurred additional costs among the relevant contractors proportionately or based on an estimate.

Defects subject to guarantee

In case of multiple general contractors, the client must consider the risk that after the completion of the construction work, the contractors will hold the other contractors liable for the defects subject to guarantee and warranty and will deny their own liability. In order to decrease such risk, it is advisable to properly specify the guarantee obligations and procedures in the contract. In addition, in case of multiple general contractors, determining whether the defect existed during the construction or occurred afterwards and which contractor is liable for such defect and which contractor is liable for such defect is possible only through the proper documents.

It may occur that the client discovers further defects during the examination of the defect subject to guarantee. In this case, there is a question who is liable for the newly discovered defects and whether they can be repaired together with the original defect. The question of hidden defects in case of multiple general contractors may be extremely complicated. In this case it must be checked whether the client, during the repair work, found further defects and deficiencies in the area that had been wrapped during the construction and also whether the construction of the discovered area and the wrapping had been carried out by the same contractor. Furthermore, in connection with the discovered defect in the hidden working area it must be checked whether the contractor, before wrapping it, had ensured for the client to examine the part to be covered.

According to the above, the importance of proper documentation cannot be emphasized enough, in the possession of which the given party can be in a more favourable bargaining position during all phases of the project.

By Gabriella Galik, Partner, KCG Partners Law Firm

On the first anniversary of the introduction of Hungary’s long-awaited renewable energy support scheme (known as “METAR”), we look back at its first year and ahead to the future of renewable energy in Hungary from a legal perspective.

The last quarter of 2016 and the first half of 2017 saw a significant rise in renewable electric power projects in Hungary, as developers and project brokers rushed to obtain permits under the pre-METAR renewable support plan, which guaranteed that eligible projects would be able to sell electricity at regulated prices. The vast majority of these permits were obtained for solar or photovoltaic projects, which were, at the beginning of 2018, either in operation, under construction, or scrapped due to the expiry of their permits.

The energy regulatory authority, having processed the thousands of applications that poured in, can now focus on the new support scheme. 

Among other things, the METAR regime introduced the green premium system, which grants subsidies through technology-neutral tender procedures for power generation units of at least 1 MW. This system, which is expected to bring more transparency to the sector, relies on bilateral agreements to expand the scope of eligible projects beyond Hungary’s borders. The amount of green premiums to be granted through public tenders is capped at HUF 1 billion annually until the end of 2026, with leftover subsidies from one calendar year transferable to the next.

Regarding already operating biomass and biogas generation units, METAR introduced the brown premiums system, which grants subsidies to eligible projects for five years. These premiums are also capped on an annual basis at HUF 20 billion, but unlike the green premium system, leftover subsidies are not transferable to the next year, and the five-year subsidies granted will be deducted from the annual HUF 20 billion limit for their entire extent. 

The implementation of the new support scheme, however, will most likely pose certain challenges to the regulatory authority and the industry as well, particularly for green premiums granted through public tenders. On one hand, stricter regulation regarding the permitting and realization of projects eligible for premiums introduced by METAR will require an adjustment of project structures. From the financing perspective, a different approach will also be necessary taking into consideration that the amount of the premiums will no longer be fixed. 

On the other hand, opening tenders to renewable projects located outside of Hungary could prove to be an effective tool to increase competition in a sector that has operated under regulated pricing over the past decade, and to strengthen regional cooperation in the energy sector. 

With the first green-premium tenders expected to be announced later this year, the feasibility of the annual HUF 1 billion cap on green premiums in public tenders and the annual HUF 20 billion cap on brown premiums will be put to the test.

In light of the EU’s recent legislative approach, which encourages solar, wind, and hydro projects over biomass and biogas, and the fact that there is a lot of room for growth in the Hungarian renewables sector (the share of renewables within electricity consumption was 7.19% in 2016), it will be of particular importance to have a well-operating and feasible renewables support scheme that is successful in increasing generation capacities ahead of the completion of the EU’s Europe 2020 strategy.  

By Peter Simon, Partner, and Nora Kondorosi, Senior Associate, CMS Budapest 

This Article was originally published in Issue 5.2 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.