Category: Hungary

In export-import trade transactions across Europe, sellers commonly protect their assets by retaining the title of ownership until the buyer has paid the full purchase price. Retention of title allows sellers to reclaim the assets in case of non-payment or the buyer’s bankruptcy before full payment. However, in Hungary, such an arrangement can present unexpected challenges for sellers.

Retention of title in Hungary is subject to registration requirement. Without this registration, often omitted in export-import transactions, the asset intended for the seller may become encumbered with a pledge without the buyer’s intention or knowledge. This risk is significant for businesses with foreign commercial relationships, especially in Germany, where securing the purchase price with retention of title governed by German law is common.

Retention of title offers significant benefits for both, seller and buyer. It allows the seller to maintain ownership until the full purchase price is paid, reducing the risk of buyer default. Even if the buyer meets all other conditions for obtaining ownership the seller remains the owner if the purchase price is unpaid. This protection is crucial, particularly if the buyer resells the asset or establishes a pledge on it.

Under Hungarian law, the agreement must be in writing, even if the sales contract is concluded orally or by implied conduct. There is no requirement for the title retention to occur at the conclusion of the sales contract; it can be agreed upon at any time, such as when the buyer faces unexpected payment difficulties.

Key rules to consider:

If a sales contract contains foreign elements, the effects of the retention of title will be governed by the law of the country where the asset is located, unless the parties choose a different law, such as the law of the asset’s future destination.

For movable assets, retention of title is valid without registration but is enforceable only between the parties. Its effectiveness against third parties can be questionable. In most legal systems, registration of retention of title is not mandatory and foreign law-. governed retentions of title are usually not registered in the Hungarian Collateral Register (Hitelbiztosítéki nyilvántartás). This can lead to problems when an unregistered foreign retention of title collides with a registered Hungarian movables pledge.

This issue often arises unintentionally. A foreign seller considering retention of title as payment security may not realize that the buyer could have automatically created a pledge on the asset upon taking possession.. If the buyer previously granted a pledge to a Hungarian bank over future movable assets – a common practice in Hungarian banking – such pledge may cover the newly purchased asset without the seller, buyer or even the bank realizing it. As a result, if the retention of title is not registered with the Hungarian Collateral Register (as is usually the case) and the purchaser becomes insolvent before full payment, the seller may reclaim the sold assets. However, the asset will be encumbered by an enforceable bank pledge, complicating the situation, as Hungarian law permit this.

Possible solutions:

A more detailed definition of the pledged assets in the pledge agreements with Hungarian banks, excluding movable assets subject to unregistered retention of title, is highly desirable. This requires a high level of awareness from purchasers, which may be present in Hungary’s large corporate sector but is often lacking in the SME sector. Even with awareness, negotiating financing contracts individually in the SME sector is challenging, as the most common solution involves using general terms and conditions and standard form contracts.

By Gergely Szaloki, Senior Associate, Wolf Theiss

Wolf Theiss has advised Digi Tavkozlesi es Szolgaltato Kft. on acquiring Direct One from Canal+ Luxembourg S.ar.l. CMS advised the seller.

The transaction is expected to close in Q4 of 2024 pending approval from the Hungarian Competition Authority.

Digi Tavkozlesi es Szolgaltato Kft. is a telecommunications subsidiary of 4iG Group – a telecommunications and IT group in Hungary and the Western Balkans.

Direct One is the Hungarian satellite customer base of Canal+, which, according to Wolf Theiss, is Europe’s largest satellite and IP television provider.

“Through the closing of the transaction, 4iG Group will add 155,000 satellite subscribers to its customer base and will solidify its leading role in the Hungarian satellite broadcasting market,” according to Wolf Theiss.

Recently, Wolf Theiss advised 4iG Group and its telecommunications portfolio manager Antenna Hungaria Plc. on its acquisition of a 100% stake in PR-Telecom Tavkozlesi Zrt (as reported by CEE Legal Matters on August 9, 2024). In 2022, Wolf Theiss advised 4iG on the acquisition of an 80.27% stake in AlbTelecom from Turkey’s Calik Holding’s subsidiary (as reported by CEE Legal Matters on May 17, 2022).

The Wolf Theiss team was led by Counsel Norbert Balint and included Senior Associate Peter Ihasz.

The CMS team was led by Partner Eszter Torok and included Partner Dora Petranyi, Senior Counsel Peter Homoki, and Associates Szabina Marsi and Orsolya Pass.

After heightened political tensions preceding June’s elections, Hungary is now implementing a new electronic land registry requiring attorneys to pass an exam, amid ongoing digitalization efforts, according to Nagy es Trocsanyi Partner Orsolya Kovacs.

“Here in Hungary, the recent European Parliament and local elections, held in June, were major events,” Kovacs says, stressing that it “created a lot of tension, and everyone was curious about the potential outcomes.” This, according to her, affected legislative developments, as they were also on a break. “No significant acts have been introduced in the last weeks. It’s natural for activity to slow down afterward, with everyone wanting to relax a bit following this period.”

Still, Kovacs highlights that there are developments lawyers look out to. “In January 2025, authorization for lawyers will be required, and passing an exam is necessary for that authorization,” she says. This authorization, according to her, is crucial for accessing the electronic land registry, therefore, “attorneys handling real estate transactions will need higher training and specific authorization by January. This is a significant issue because real estate transactions, from apartments to large factories, are among the most common cases handled.” As a result, Kovacs notes, “the exam window opened on July 15, and nearly 500 attorneys have already passed. Originally, the exam was intended to assess both theoretical knowledge and practical skills – demonstrating the ability to use the software – but due to time constraints, only the theoretical portion was implemented.”

“During the summer break, there has been significant progress on digitalization,” Kovacs continues. “The government is promoting a Digital Citizenship program, encouraging people to obtain digital IDs and digital signatures.” However, she says that “some lawyers focused on human rights issues are concerned about the potential for increased tracking of individuals through these digital IDs.” Additionally, “there are plans to digitalize the registry of legal entities, though this may be postponed until 2026,” she notes, as well as “a new software iForm introduced for submitting court documents and other forms.” According to her, “This is a significant change for lawyers, many of whom are not well-versed in IT. For most lawyers, adjusting to this new system and bypassing traditional forms is a major challenge.”

Finally, Kovacs highlights that in Hungary, the number of litigation cases is decreasing overall, though high-profile cases remain unaffected. “I believe this trend is due to a rise in cases related to construction courts, the Curia, and the ECJ,” she points out. “The decline in litigation may be attributed to a decrease in the ratio of income-related cases, 80% of which are resolved at the lower court level without clients filing appeals. This is likely driven by the high costs and lengthy duration of trials, as clients often lose interest in their cases after waiting 2-3 years for a lower court decision or finding amicable resolutions instead.”

“Another factor is the relatively small costs awarded by courts,” she adds. “Courts typically do not accept the fee agreements between clients and attorneys, instead deciding independently on what constitutes a ‘justified’ fee. A recent Curia judgment addressed this issue, highlighting that lower costs are generally awarded to lawyers.” Kovacs believes that “This could change attitudes toward pursuing litigation, as it impacts the perceived value and respect of the legal profession.”

Wolf Theiss has advised the 4iG Group and its telecommunications portfolio manager Antenna Hungaria Plc. on their acquisition of a 100% stake in PR-Telecom Tavkozlesi Zrt.

The transaction is expected to close in Q4 of 2024, pending approval from the Hungarian Competition Authority.

4iG is a telecommunications and IT group in Hungary and the Western Balkans.

PR-Telecom is a wholly Hungarian-owned telecommunications company with a 25-year history and employs 160 people. It provides TV, internet, and telephone services over its own fixed fiber and mixed fiber-coax infrastructure, reaching approximately 250,000 households and 55,000 customers. The former owners of PR-Telecom will continue to participate in managing the company after the closing of the transaction.

In 2022, Wolf Theiss advised 4iG on the acquisition of an 80.27% stake in AlbTelecom from Turkey’s Calik Holding’s subsidiary (as reported by CEE Legal Matters on May 17, 2022).

The Wolf Theiss team was led by Counsel Norbert Balint and included Senior Associate Peter Ihasz.

Kapolyi Law Firm has advised Amixa and Foodnet Ltd. shareholders on the former’s acquisition of the latter and Amixa’s listing of new shares on the Budapest Stock Exchange.

According to the firm, Foodnet Ltd. is an important player in the Hungarian wholesale market of consumer foods. Amixa is a public shell company traded on the Budapest Stock Exchange.

The transaction implied using a reverse acquisition strategy whereby Amixa raised its registered capital and the Foodnet shareholders contributed their purchase price claim to Amixa to become the controlling owners of Amixa. Ultimately, Amixa listed the newly issued shares on the Budapest Stock Exchange.

The Kapolyi team included Senior Attorney at Law Viktor Krezinger and Attorneys at Law Adam Menyhart and Vivien Szekeres-Benczik.

To support the prevention of money laundering and terrorist financing, on 26 June 2024, the Hungarian National Bank issued two new regulations, incorporating changes in domestic legislation, guidelines of the European Banking Authority and lessons learned from supervisory experience.

The legislation includes new provisions on the identification of the beneficial owner, requirements of the external audit function, establishment of the nature of business relationship, and electronic customer due diligence. The new legislation, depending on the subjects covered, enters into force from July 2024, January 2025 and/or March 2025 and covers service providers within the meaning of the Hungarian AML Act.

The regulation on the identification of the beneficial owner introduces a new provision that, in order to establish the ownership and control structure of legal persons or entities without legal personality, a declaration by the customer is sufficient for low-risk customers. In all other cases, the ownership and control structure must be verified by other risk-based measures. Additionally, to avoid the ‘strawman risk’, financial service providers must verify the identity of the beneficial owner. Where appropriate, they must conduct a due diligence interview with the customer and beneficial owner, and complete a questionnaire to determine the risk level. Providers must then assess the customer’s risk. Additionally, electronic customer due diligence can be outsourced, but the provider cannot delegate the decision to establish a business relationship.

A new requirement for the internal control and information system is that the service filtering system must ensure real-time monitoring of transactions. The intensity and conditions of the filtering – based on the characteristics and risks of the customer and the indications of the Hungarian National Bank – will be set by the service provider, with a maximum time limit for the analysis and evaluation of the filters.

The other regulation of the Hungarian National Bank contains detailed rules on the minimum requirements for audited electronic communication devices and their operation, internal regulations, the method of auditing, and the implementation of online customer due diligence through such devices. As a new feature, service providers must consider and assess in a demonstrable manner the justification for introducing a new type of electronic communication tool for customer due diligence and its feasibility in light of the risks involved. Service providers must establish an electronic customer due diligence policy and continuously monitor, on a regular and ad hoc basis, and modify the functioning of their digital communication equipment as necessary in accordance with the law and their internal rules. The regulation also introduces the possibility to use biometric data in online customer due diligence. Finally, it should be highlighted that the regulation also contains a number of other provisions relating to the timeliness, secure storage and data protection of data obtained through audited electronic communications.

By Gabriella Galik, Founding Partner, KCG Partners Law Firm

Since 1 July 2023, interest income has been subject to a 13% social contribution tax (‘szocho’) in addition to the 15% personal income tax (‘szja’). Originally this was only for the duration of the emergency caused by the armed conflict in Ukraine. However, a new act published in the Hungarian Official Gazette on 18 June 2024, changed the situation.

Under the new rules, we will have to pay social contribution tax on interest income from 1 August 2024. In the month of July, we will still have to pay it under the transitional rules for the period of the emergency.

It should be emphasised that the tax on interest income will not increase from 1 August. In the same way, 15% personal income tax and 13% social contribution tax will be charged on the return on investments both today and from 1 August. The range of products concerned will also remain unchanged: fixed-term and demand deposits, investment funds, insurance, debt securities, etc. will be subject to the social contribution tax. This means that in the future, this tax should be expected on the investments in question, at least in the long term.

By Rozsa Rusvai-Darazs, Attorney at law, KCG Partners Law Firm

The EU’s Al Act (Regulation 2024/1689) enters into force today, August 1, 2024. The groundbreaking Act is designed to ensure that AI systems are safe, transparent, and governed by rules that protect fundamental rights. The Act categorizes AI applications into risk-based tiers, with each tier subject to different levels of regulatory scrutiny and compliance requirements.

The Act will become fully applicable in two years. However, some requirements of the Act, mainly related to prohibited Al practices, will become applicable as of February 2, 2025.

Fines under EU Regulation 2016/679 setting forth the General Data Protection Regulation (GDPR) can be up to €35 million or 7% of total worldwide annual turnover. By comparison, the maximum fine under the EU Regulation 2016/679 on the General Data Protection Regulation (GDPR) is €20 million or 4% of total worldwide annual turnover, thus the risk of non-compliance with the EU AI Act will be almost double that of the GDPR.

The EU AI Act is a complex and comprehensive piece of legislation that will have far-reaching effects on the development and use of AI systems within the EU. It is essential for entities to be well informed about the Act’s requirements and to begin preparing for compliance.

By Tímea Bana, Partner, and Theodore S. Boone, Of Counsel, Dentons

In July 2024, the Hungarian Central Statistical Office began sending formal notifications via email regarding changes to the statistical codes of various activities. Although the required procedure takes only a few minutes, non-compliant companies may face penalties.

The ‘statistical classification of economic activities’ in the European Community, abbreviated as NACE, is a system used by the European Union (EU) to classify economic activities. The term NACE is derived from the French title: Nomenclature statistique des activités économiques dans la Communauté européenne. This classification is integral to a wide range of European statistics across economic, social, environmental, and agricultural domains.

Since the last version, NACE Rev. 2 was published in 2006, the EU economy has undergone significant changes, necessitating an update to this classification system. Over the past few years, Eurostat has collaborated with its partners in the European Statistical System to develop NACE Rev. 2.1, which is now in effect. Starting in 2025, European statistics will be based on NACE Rev. 2.1.

The Standard Industrial Classification of Economic Activities, commonly known by its Hungarian acronym TEÁOR, is based on NACE. Due to the changes in NACE, TEÁOR will also have to be updated. Effective from 1 January 2025, the familiar TEÁOR’08 will be replaced by TEÁOR’25. This update will result in changes to the declared main activity codes for many enterprises. TEÁOR’25 introduces significant changes compared to TEÁOR’08, with activities being split into multiple subcategories or merged in some cases.

Companies required to comply with this update must complete the “1764 form” and submit it electronically via the KSH-Elektra website. The form, which is supported by automation, offers the new activity codes, which now correspond to TEÁOR’25, but in case of uncertainty, there is a guide available online helping to choose the correct new activity code by entering the old one. The form has to be completed by indicating the revenue from the offered activities in 2023. If there is revenue from an activity not listed on the form, the company may insert its TEÁOR’25 code. It is essential that the data provided totals 100% of the revenue. The form will also automatically determine the revenue for the two highest-volume activities according to the new codes. The Hungarian Central Statistical Office requests the exact starting year for these two activities to be indicated.

Non-compliance is taken seriously, as the Statistics Act allows for fines. The government office can impose penalties of up to HUF 200,000 for natural persons (e.g., sole proprietors) and between HUF 100,000 and HUF 2 million for legal entities or organizations with legal personality.

By Denes Glavatity, Associate, KCG Partners Law Firm

Kapolyi has advised VGD Hungary on its sale to WTS Klient.

The transaction remains contingent on regulatory approval.

VGD Hungary is an audit, tax, and accountancy firm.

WTS Klient is an accounting and tax advisory firm. It was established in 1998 and set up its consulting division in 2004. In 2013, it joined WTS Global – a tax and financial advisory network. 

“We are delighted that the merger of WTS Klient and VGD Hungary will further strengthen our market position in Hungary,” said Managing Partner of WTS Klient Zoltan Lambert. “As a key market player, we will be capable of playing a leading role in the explosive technological development underway in our sector, and be instrumental in the consolidation of the accounting and tax advisory market.”

“VGD Hungary’s dynamic and committed team of experts always placed great emphasis on finding efficient solutions under long-term, supportive partnership frameworks to help its clients in the international accounting, advisory, and audit market,” added Founding Partner of VGD Hungary Gyongyi Ferencz. “This merger – which taking into account our organic growth in 2024 will create a firm with 350 staff generating sales revenue of HUF 6 billion – will enable us to fulfil this mission on even more secure foundations.”

The Kapolyi team included Senior Attorney at Law Mate Hajas.

Kapolyi could not disclose additional information on the deal.