Category: Hungary

Former Gardos Mosonyi Tomori Partner Veronika Bakonyi has joined Lakatos Koves and Partners’ Banking Finance and Capital Markets team as an Attorney at Law.

According to LKT, “Veronika has significant experience in complex financing transactions and capital markets matters.” Before her move, Bakonyi spent five and a half years with Gardos Mosonyi Tomori. Prior to that, she spent over five years at Reti, Varszegi & Partners Law, first as a Trainee Lawyer from 2013 to 2017, and later as an Attorney-at-Law from 2017 to 2018.

“We are very pleased to welcome Veronika to our team,” said Lakatos, Koves and Partners Head of Banking and Finance and Capital Markets Szabolcs Mestyan. “Veronika’s arrival significantly enhances our offering and capabilities.”

“LKT is a market leader in the Hungarian banking and capital markets sector and I am delighted to join the team,” Bakonyi added.

Despite the original plan to transfer to Kinstellar, the Noerr Budapest office will continue as an independent firm from June 1, 2024.

According to Noerr, the Bratislava, Bucharest, and Prague offices will transfer to Kinstellar as originally reported on April 3, 2024, when Noerr announced it is taking “a new direction in its business in the markets of Central and Eastern Europe.” However, the Budapest team led by Zoltan Nadasdy will continue to work under a new, as-of-yet unannounced name.

The Noerr-Kinstellar transaction remains subject to regulatory approvals and other requirements.

In a previous article, we analyzed the phenomenon where courts typically reduce the attorney fees awarded to the winning party. This essentially forces the winner to incur unjustified losses, indirectly causing market distortion. Now, the Supreme Court has responded to this phenomenon with a precedent-setting, binding decision. Let’s first look at the key developments and then how this affects litigation strategy!

Over a year ago, we wrote that after the conclusion of a lawsuit, the winner might still face significant unreimbursed costs despite their victory. The reason for this is that courts have the discretion to reduce the attorney fees that can be passed on to the losing party in their judgments. What was intended as an exceptional option has become the norm. Courts generally base fee reductions on two main reasons: in some cases, they compare the value of the case to the calculated attorney fees, while in other cases, they deem some of the specifically billed work hours as “unnecessary.”

In a recent decision, the Supreme Court interpreted the rule that allows for fee reductions in a way that overturned the current status quo in favor of the winners (the decision is available under reference Pfv.II.20.887/2023/6). Due to a 2019 reform, the Supreme Court’s published decisions are directly binding on all lower courts, so in theory, lower courts will follow the Supreme Court’s guidance in the future. We also covered the reform introducing the precedent system in an earlier article.

What Did the Supreme Court Say?

The Supreme Court responded to almost all the common justifications for fee reduction, adopting a position favorable to the winning party. The Supreme Court clarified that attorney fees determined by an hourly rate can only be reduced if they are “obviously contrary to market conditions and common sense.” The Court pointed out that attorney fees cover all expenses related to the attorney’s own business, making the court’s opinion on the client-accepted fees irrelevant.

The Supreme Court also stated that the attorney’s work cannot be assessed based on the number of pages in submissions or the number of hours spent in court, as significant portions of the work include client interactions, preparation, document analysis, and other preparatory tasks.

Furthermore, the Court indicated that the quality of the winning party’s attorney’s work cannot justify a reduction. This would be contradictory: the attorney’s work led to a win, yet it is deemed inadequate.

One of the Supreme Court’s most crucial steps was stipulating that courts cannot reduce litigation costs without specific, well-founded reasons, as this violates the parties’ right to a fair trial. Courts must support even the cost-related parts of their decisions with detailed justifications based on the case files, providing a concrete basis for appeals.

What Does This Mean for the Future?

It is uncertain how quickly the Supreme Court’s decision will change deeply rooted practices, but courts must apply this guidance even in ongoing cases. This will likely increase the number of appeals regarding litigation costs, as the potential benefits of such appeals have grown.

Previously, we noted that from an economic standpoint, initiating relatively low-value lawsuits often didn’t make sense because the unrecovered litigation costs could end up being more expensive than the amount won. This also posed a rule of law issue, as it limited access to the courts on one hand, and encouraged contract breaches or other legal violations on the other. This trend may now reverse, providing effective legal protection to companies or individuals whose financial grievances are relatively minor. Consequently, the market distortion highlighted in our earlier article is likely to decrease, narrowing the situations where it is financially worthwhile to act unlawfully.

For the party expected to lose, prolonging the case with additional witnesses and motions will no longer be advantageous. Previously, one could try even low-chance arguments without financial consequences, but this is expected to change: the losing party will bear the extra costs of pointless delays at the end of the proceedings.

If a complex case appears uncertain, another factor will push the parties toward settlement. The financial risk associated with the case increases, as the loser will now be liable for the full attorney fees of the opposing party.

A client who selects their legal representative through a tender or from multiple offers can demonstrate that the attorney fees charged are not contrary to market conditions if there is no significant difference among the submitted offers, leaving no room for fee reduction.

Detailed and accurate time records will become more important. In economic matters, time-based hourly billing, which is more prevalent, may become easier to enforce than lump-sum agreements (e.g., fixed fees per document or hearing).

Overall, the Supreme Court’s decision marks a significant shift in litigation cost recovery, favoring those who win their cases and ensuring that losers fully bear the financial consequences of their loss.

By Zoltan Dobos, Attorney, Jalsovszky

In the audit practice of the Hungarian Tax and Customs Administration (HTA), the audit of transfer pricing is gaining importance. Moreover, the relevant regulations are becoming more complex with each passing year. As the deadlines for transfer pricing documentation approach, it is worth reviewing what hidden pitfalls should be avoided when preparing documentation and providing data.

Amidst the rush to finalize annual reports, it is often overlooked that the deadline of May 31st is significant for another reason: businesses are also required to prepare their transfer pricing documentation by this date. Furthermore, based on a legislative amendment that came into effect last year, the taxpayers simultaneously have to comply with a separate transfer pricing data reporting obligation. Under this, data must be provided for any transaction with a transaction value exceeding HUF 100 million – regardless of whether the transaction was concluded with a domestic related party or a foreign one.

As reporting obligations expand, the tax authority is increasingly engaging in transfer pricing audits. During the audits, the HTA request the taxpayers to fill a questionnaire – that is almost exclusively fillable by professionals – and any error or inaccuracy immediately triggers a red flag at the HTA.

In this environment, caution is advised when preparing transfer pricing documentation and meeting reporting obligations. The unaware taxpayer may encounter several easily overlooked pitfalls.

Pricing of Minor Transactions

One of the biggest pitfalls are related to transactions exempt from reporting and documentation obligations. Although businesses do not provide data on these transactions and do not keep records of how transfer prices were determined, the HTA often requests a detailed presentation, including the pricing methodology, the price range compared to the arm’s length price, etc. Ultimately, this means that even for these transactions, it’s prudent to have some background documentation, as the market conformity of applied prices must be demonstrable.

Similar Transactions

There are transactions that fall under the obligation of consolidation based on the similarity or identity of contractual terms, services, or products, or similarity in payment structures. While many of these transactions may not individually reach the HUF 100 million threshold individually that triggers reporting and documentation obligations, they do so when consolidated. Many tend to underestimate this obligation, although the tax authority has recently been paying attention to these transactions and easily imposes multi-million HUF penalties for non-compliance with documentation obligations.

One Transaction – Multiple Documentations

A transaction subject to transfer pricing involves two parties. However, often the documentation covering such transaction is only prepared by one of the related parties, not the other. In such cases – however absurd it may seem – the HTA may impose a HUF 5 million penalty on the party failing to prepare the transfer pricing documentation, as it has already been seen in the practice of the tax authority. Unfortunately, it must be accepted that transactions must be fully documented from both sides.

The “Other Category”

During transfer pricing data reporting, businesses may fall into the pitfall of not attempting to classify their transactions into the available groups, instead labelling them as “other transactions.” It is important to be aware that labelling transactions as the “other category” is a red flag to the tax authority. If someone categorizes their transaction in this manner, significantly increases the risk of an audit. Therefore, it is advised to use the “other category” only when there is no other, more specific type of transaction to indicate.

By Péter Barta, Senior Attorney, Jalsovszky

The decision of the U.S. Securities and Exchange Commission (SEC) on January 10 has stirred significant attention, as it granted approval for the listing of certain products based on Bitcoin on the stock exchange. The impact of this decision on the European and American securities markets, and whether similar steps will be taken, depends largely on the details – including the names assigned to cryptocurrency-based products.

What exactly did the SEC approve?

The SEC’s decision on January 10 allowed the introduction and trading of 11 Bitcoin-based Exchange Traded Funds (ETFs). ETFs are characterized by tracking the value of an underlying commodity or stock market index. Investors do not need to directly purchase the underlying asset to bear the risk of the product. This comes with several advantages, such as avoiding high transaction costs and potential tax obligations associated with individual trading. The approval of Bitcoin-based ETFs by the SEC is particularly significant, as it allows investors to invest in Bitcoin through a regulated product without the risks of buying on unregulated exchanges.

These new products were approved as “spot commodity” ETFs, meaning they relate to a commodity. With this decision, the SEC uniquely and revolutionarily declared that Bitcoin is a commodity – a recognized digital commodity.

However, the SEC decision applies specifically and exclusively to Bitcoin ETFs. The SEC emphasized that other unspecified crypto assets may not necessarily qualify as commodities. Naturally, this could complicate the potential listing of products based on other cryptocurrencies.

Where does Europe stand now?

In European markets, which lag behind their American counterparts both in potential and interest in crypto assets, Exchange Traded Notes (ETNs) based on bitcoins are prevalent. While ETNs, like ETFs, are linked to the price of Bitcoin, a significant difference exists between European and recently approved American formats. While ETFs are regarded as investment funds investing in Bitcoin, ETNs were specifically issued as securities embodying a credit relationship. Although the value of these securities largely depends on the price of bitcoins, as securities representing credit relationships, they also carry the risk of the issuers.

What can be expected in Europe?

The EU adopted a regulatory framework for cryptocurrencies last year, known as the Markets in Crypto Assets Regulation (MICA), aimed at facilitating the issuance of crypto assets in a regulated environment, categorizing various crypto assets precisely, and subjecting crypto asset services to authorization. The SEC’s recent decision and the regulatory thinking behind it are expected to have a significant impact on the application of this regulatory package.

MICA (applicable in some parts from June 29, 2023, and from June 30, 2024, and December 30, 2024(, introduces different issuance requirements for various crypto assets, some more permissive than others. The crucial question is what will qualify as a purely crypto asset under the regulation, and to what extent the SEC’s recent decision will influence this. While the two sets of regulations do not directly affect each other, it is not excluded (if other conditions are met) that crypto assets classified as commodities by the SEC could fall under the scope of MICA in Europe. However, MICA does not apply to crypto assets classified as financial instruments, and in this regard, the SEC’s expected classification of non-Bitcoin crypto assets as securities or investment instruments may influence European regulators. Currently, under the leadership of the European Securities and Markets Authority (ESMA), professional work is underway to determine the conditions under which certain crypto assets and products based on crypto assets could be considered financial instruments. It will be interesting to see how the relevant ESMA recommendations align with the SEC’s assessment of non-Bitcoin crypto assets.

Summary

With its January decision, the U.S. securities market took a significant step forward, allowing institutional investors to invest in products tied to crypto assets, an opportunity that was not previously available in this form and content in Europe. This naturally gives the American crypto market an advantage. In the coming period, further decisions regarding the regulation of other crypto assets are expected in the United States. Given the explosive development and complexity of crypto assets, it is unpredictable which assets will receive approval from the SEC.

The SEC’s decisions are likely to have a considerable impact on how European regulators categorize crypto assets intended for introduction to EU markets and which assets will receive facilitated approval under the MICA regulation. With the approval of ETFs, American crypto markets have gained a competitive edge over Europeans (especially in terms of volume) – the question is whether European crypto markets can catch up with this advantage.

By Adam Boross, Senior Attorney, Jalsovsky

The Court of Justice of the European Union has decided in two cases concerning Hungary in its judgments in joined cases C-420/22 and C-528/22, published on 25 April 2024.

The underlying facts of the decision are as follows: two third-country nationals, one Turkish and one Nigerian, have been legally resident in Hungary for several years. One of them is the spouse of a woman of Hungarian nationality, with whom she is raising a child whose citizenship is Hungarian. The other person lives with his Hungarian partner and their two children, who are also Hungarian citizens. In 2020 and 2021, the Hungarian Constitution Protection Office issued two unsubstantiated statements stating that the presence of these third-country nationals in Hungary poses a threat to national security, however, the authority encrypted the data on which it relied on when adopting these resolutions. Consequently, the National Directorate-General for Aliens Policing was obliged to withdraw the permanent residence card of the first person and to order him to leave Hungary. It was also obliged to reject the application for a national permanent residence permit submitted by the second national referred to above. Neither the authority nor the persons concerned could have gained access to the confidential data on which the initial decisions were based.

The Szeged Regional Court, to which both persons had submitted an action against the decision of the National Directorate-General for Aliens Policing, referred questions to the Court of Justice of the European Union (CJEU) on the compatibility of the Hungarian legislation with EU law.

The CJEU ruled that the Hungarian law is contrary to EU law if it requires national authorities to withdraw the residence permit of a family member of an EU citizen on grounds of national security, based on an unjustified opinion of a competent authority, or to refuse to issue a residence permit to the latter, without the latter having been able to carry out a thorough examination of the relevant individual circumstances and the proportionality of their decision.

Lastly, EU law precludes national legislation that prevents a family member of an EU citizen from whom a residence permit has been withdrawn or refused based on confidential data from being informed of the substance of the reasons on which those decisions are based and from using such data in administrative or judicial proceedings.

By Lilla Majoros, Attorney at law, KCG Partners Law Firm

From a significant downturn in project financing to promising developments in green energy, particularly wind, CMS Partner Eszter Torok shares valuable insights into the complexities of the Hungarian market against the backdrop of shifting economic and regulatory landscapes.

“Over the last three years, since the onset of COVID-19, Hungary has experienced a downturn in project financing activities, accompanied by high interest rates and inflation,” Torok begins. “However, recent months have shown promising signs. For instance, the national bank’s official interest rate, which stood at 13% in 2023, has begun to decrease, currently sitting below 10% since last December. This decline in interest rates has revitalized mortgage lending in the first quarter of 2024, although project financing remains cautious, with investors adopting a wait-and-see approach,” she explains.

Focusing on specific sectors, Torok turns the discussion to green energy. “Renewable energy, particularly wind and solar financing, is garnering significant attention. While solar energy projects, supported by subsidies, have been a focal point in the past, wind energy was relatively neglected until the end of 2023,” she shares. However, changes in regulations have now made wind projects more feasible. “Previously, wind farms could not be constructed within 12 kilometers of populated areas, a challenging requirement given Hungary’s dense population and relatively small area. Since the end of last year, the restriction has been reduced to just 700 meters, opening new possibilities for wind energy development, particularly in the northwest of Hungary,” she explains, adding that there are still relatively detailed and complicated regulations to keep in mind.

Putting this shift in the energy sector into perspective, Torok assesses the broader economic conditions in Hungary: “Hungary’s economic growth has been sluggish and heavily reliant on foreign investments, particularly from Germany, in the automotive sector with major players like BMW, Mercedes, and Audi operating plants here,” she says. “More recently, we’ve seen a surge in investments from Chinese and Korean firms into electric vehicle battery manufacturing, indicating a shift towards alternative technologies.” Despite these developments, “the local economy struggles under a high public debt load and, with upcoming EU parliamentary and municipal elections, economic measures to address this debt are anticipated later in the year,” she reports.

And, focusing on these elections – with both cycles due in June of this year – it is interesting to observe what economic policies could come to pass, according to Torok. “The first half of 2024 has, somewhat expectedly, seen few economic restrictions due to the electoral period. However, post-election, we might witness tax increases or other fiscal measures aimed at reducing the national debt,” she explains. “These changes could influence investment trends, particularly in sectors like renewable energy and technology, which have seen significant interest.” It is not unreasonable to assume that “investors will be keenly watching these developments, hoping for stability and clear policies that would support continued investment,” she posits.

Looking at the road ahead, Torok feels that the remainder of 2024 could be impactful. “If the government implements favorable policies post-elections, there might be an acceleration both in green energy projects and more traditional sectors of foreign interest.” However, she notes, “any restrictive fiscal policies could dampen this momentum.” Still, an important mark has been made with relaxing wind energy investment regulations, and Torok concludes by reiterating that it is a “positive development to which investors had been looking forward.”

A new decree entered into force on 9 April 2024 on the ban of employment of guest workers in the public sector in Hungary.

The following entities may not establish an employment relationship with a guest worker to work on the basis of a work permit, a residence permit for employment purposes or a residence permit for guest workers issued to carry out an investment project in Hungary:

1. a budgetary organisation under the direction or supervision of the Government,
2. a budgetary organisation under the direction, control or maintenance of another budgetary organisation and forming part of the central sub-system of public finances,
3. a company in which the Hungarian State has direct or indirect majority ownership, and it is owned by a budgetary body, or by an economic corporation owned by a budgetary organisation, or by a subsidiary of an economic corporation belonging to the latter category.

However, the new regulation makes one exception: the person designated by the Government may grant an exemption from the prohibition in respect of a company for compelling reasons, on the initiative of the competent Minister.

The new decree will not affect the employment relationships established before the date of the entry into force of the new decree. In other words, guest workers currently working in the public sector, in state-owned companies, will be able to keep their jobs.

By Eszter Ila-Horvath, Attorney at Law, KCG Partners Law Firm

One of the measurable success stories of the fintech revolution is how donation and subscription-based community financing has become an alternative to traditional fundraising methods such as classical bank financing or venture capital investments. From this rapid development, it follows that there is a less uniform picture in the public consciousness about the phenomenon of “crowdfunding.” How many forms are there? Which ones are regulated? Who are the actors in the process? What regulations apply to it? How are they taxed? Among many clarifications to be made, the main question, however, is whether specialized crowdfunding service providers for this purpose will emerge in Hungary as well.

If somebody has heard the term crowdfunding before, the first thing that comes to mind is almost certainly not the EU Regulation 2020/1503, which is the basis for European regulation. Much more likely, they think of the Kickstarter platform, which provided the initial start for crowdfunding in 2009, where promising project ideas can still be supported today. The company successfully brought together project owners and users interested in the realization of their goals (e.g., software development) through its website. Users pre-finance and in return they receive rewards. This reward is usually a product designed, developed, and brought to market by the project owner.

Reward-based financing – taxation matters, regulation less so

However, reward-based crowdfunding and donation-based crowdfunding, which can be paired with it, do not require serious regulation. In both cases donations are made, in return for which, in the former case, users expect specific goods or services, while in the latter case, they do not receive monetary or other material compensation, as they contribute on a charitable basis to charitable projects. With these solutions, the question may be who and how they are taxed. This must be carefully considered mainly from the perspective of VAT, fees, and income tax. From a VAT perspective, it is generally assumed that the product, service, or other reward given in exchange for the contribution is subject to VAT liability. However, purely donation-based community fundraisers may not incur VAT liability, but they may incur stamp duty and possibly income tax liabilities. All of this depends on who collects and who gives the donation and, in general, whether this happens in Hungary.

Why has crowdfunding still become subject to regulation?

In addition to the opportunities already mentioned, crowdfunding can also be investment-based (“equity-based”) or credit-based (“credit-based”). In the case of investment-based crowdfunding, the investor acquires ownership rights in the form of securities in exchange for their financial contribution, while in the case of credit-based crowdfunding, investors provide loans to the project owner to be repaid with interest. With these methods, significant amounts of capital can be raised, thus serving as alternatives and supplements to classical fundraising forms such as bank financing or venture capital investment. However, both forms of crowdfunding constitute financial services and investment services. While long-term opinions and incomplete national regulations have only provided guidance to market participants in this regard, the regulation issued by the EU in 2020 and applicable from November 2023 clearly states: prospective crowdfunding service providers must have permission to provide credit or investment-based services.

It works abroad… and at home?

Since the end of last year, uniform European regulation has made the requirements for crowdfunding transparent. As with other licensed activities, obtaining a crowdfunding license is not easy here either. So much that there is still no domestic service provider who has obtained such a permit.

However, this should not deter anyone. In other countries of the Central and Eastern European region (which fall under the same EU regulation), numerous companies have already established and licensed crowdfunding platforms. Thus, there are licensed crowdfunding service providers in Austria, the Czech Republic, Slovakia, Poland and Romania. There is serious competition among crowdfunding providers in some Western European countries: in France alone, since the entry into force of the regulation, approximately 60 providers have been registered and licensed in almost half a year.

Hopefully, thanks to transparent regulation and successful regional examples, crowdfunding will soon become an addition to traditional fundraising in Hungary as well. But until then, if someone does not want to navigate through the maze of Hungarian financial regulations, they can still start their operation in Hungary as a cross-border financing service established in another EU country.

By Zsombor Gere, Trainee Lawyer, Jalsovszky

At the end of 2023, the Hungarian Parliament adopted the Act on the Digital State and Certain Rules for the Provision of Digital Services (“Digital State Act”), the majority provisions of which will enter into force on 1 July 2024. This act opens a new era in the digitalization of public services, serving the 21st-century administrative needs of the Hungarian people and economic operators.

In the third decade of the 21st century, the most important tool for digitalization is the mobile phone, the smartphone. Therefore, from 2024, ID cards, paperwork and signatures will gradually move to mobile in Hungary. Under the Digital State Act, the state will create a mobile application that will be accessible to all Hungarian citizens, making it easier to manage more and more matters without queuing or sending postal mail.

In addition to the drafting and scheduled entry into force of the new Digital State Act introducing digital citizenship and the repeal of the previous E-Administration Act, the expected results need to be achieved that the Parliament also adapts all laws to the new rules, where digitalization facilitated by the state is of key importance. As a result, on 7 May 2024, the Act on the Amendment of Certain Laws for the Implementation of the Digital State was published in the Hungarian Gazette which is a package of amendments to a number of laws ensuring legal and technical compliance with the new Digital State Act.

The act amends several laws, including the Act on Notaries, the Act on the Registration of Personal Data and Addresses of Citizens, the Act on Personal Income Tax and the Act on the Activities of Attorneys. For instance, the amendment of the Act on the Registration of Personal Data and Addresses of Citizens lays down the provisions necessary to establish the necessary data links between the digital citizenship register and the register of personal data and addresses. The amendment creates the conditions for pre-registration for digital citizenship: citizens will be able to pre-register for digital citizenship at government offices, in addition to proving their identity. By amending the Police Act, citizens will be able to provide credible proof of their identity by presenting a visual code on their phone – equivalent to presenting a physical document – during police stops. The provisions of the act will enter into force gradually from 17 May 2024 until 1 January 2026.

By Lidia Suveges, Attorney at law, KCG Partners Law Firm