Category: Hungary

Schoenherr has advised Chengdu Datang Communication Cable on the establishment of its Hungarian subsidiary, Zettanet Kft., and the acquisition of a 25,000-square-meter industrial site in Kisber from Sumitomo Electric Wiring Systems Limited. Sole practitioner Zsolt Fuesthy advised the sellers.

Chengdu Datang Communication Cable is a member of the Fiberhome Group. Fiberhome is listed on the Shanghai Stock Exchange and is a producer of optical cables.

Sumitomo Electric Wiring Systems Limited is a European-based company of the Japanese Sumitomo Group.

The Schoenherr team included Partners Kinga Hetenyi and Laszlo Krupl, Attorney at Law Adrian Menczelesz, and Associates Noemi Suller and Viktoria Magyar.

According to the decision of the Court of Justice of the European Union of 16 May 2024 (C-746/22), the Hungarian rule that does not allow foreign taxpayers in VAT refund cases to submit their documents even in the appeal procedure is contrary to EU law. We have summarised the key lessons learned from the case which was handled by our office.

VAT refunds for non-established taxpayers

Foreign businesses operating in the EU often find that they receive an invoice for services or goods purchased in a country different from their place of establishment. Unlike domestic businesses, they are unable to recover the amount of this VAT in their VAT returns because they are neither established in, nor registered in the relevant other Member State.

They must therefore reclaim VAT every year in a special procedure governed by Directive 2008/9. The application does not need to be accompanied by all the invoices and supporting documents. Therefore, for applications lodged with respect to Hungary, the tax authorities often ask foreign businesses to submit additional documents, setting a one-month deadline.

Additional documents may no longer be submitted on appeal

The tax authority will end the process due to insufficient information and will withhold the VAT refund if the foreign company fails to meet this one-month deadline (which often happens for harmless administrative reasons).

A common attempt to solve the problem is to submit the required documents through the appeal procedure. However, these are often dismissed by the second instance authority, because according to Hungarian procedural rules, documents that the taxpayer did not provide earlier despite the tax authority’s request cannot be submitted in the appeal procedure. This means that Hungary keeps the VAT for good.

The ECJ rejects the Hungarian practice

The EU’s highest judicial body, colloquially called the ECJ, has now made it very clear that the above Hungarian practice does not comply with EU requirements. This means that even if the one-month deadline is not met, the tax authority must still assess the merits of the case and provide a right of appeal against any rejection, allowing the taxpayer to supplement the documents not previously submitted. In other words, the one-month time limit for filing cannot be a limitation period.

May also be of help to taxpayers seeking refund from other Member States

This decision may now be relied on throughout the EU – in fact, some other Member States also create obstacles for foreigners who want to reclaim their VAT. Although the ECJ has had similar decisions before, most notably in the Sea Chefs Cruise Services case, this recent judgment still offers some novelties.

Firstly, the Court now clarified that the Sea Chefs decision is also applicable to this case – despite this being an administrative, rather than a judicial appeal.

Moreover, the Court, in line with our reasoning, not only referred to the specific rules of the Directive, but also to much more general principles. Most notably, the principle of VAT neutrality, the principle of effectiveness and the right to good administration were all relied upon. Therefore, the Court’s reasoning is likely to be helpful in various other cases that involve VAT and the diverse domestic procedures where these cases are decided.

By Tamas Feher, Partner, Jalsovszsky

EU legislation on crypto-assets is based on the EU Regulation on Markets in Crypto Assets (as known as MiCA), which is directly applicable in the Member States, including Hungary.

The Hungarian Crypto-Assets Act (Act) provides for important additional detailed rules necessary for the implementation of the MiCA. The Act aims to comply with EU legislation and its provisions cover the issuance, public offering and introduction into trading of crypto-assets in Hungary, the provision of crypto-asset services in Hungary and the supervision of these activities. Service providers must comply in principle with the provisions of the MiCA.

The Act also regulates complaint handling, under which crypto service providers must ensure that customers can make a complaint verbally or in writing about the conduct, activity or omission of the service provider. The crypto service provider cannot charge the consumer any extra fee for investigating the complaint.

Supervision of crypto-asset providers in Hungary will be carried out by the Hungarian National Bank (MNB), acting in its capacity as the financial intermediary system supervisor. MNB is responsible for detecting and sanctioning any violations of the regulations, in particular but not exclusively the provisions of the MiCA, in connection with the provision of crypto-assets and market abuse related to crypto-assets. The sanctions that MNB may impose in the event of non-compliance with the relevant legislation are also listed in the Act. Acting in its supervisory capacity, MNB may, among other measures, suspend or prohibit the activities of crypto-asset providers and may impose fines of up to HUF 5 billion on legal entities in certain cases.

The Act will enter into force on 30 June 2024 and crypto-asset providers already in operation at the time of the entry into force and issuing crypto-assets other than asset-referenced tokens or electronic money tokens must comply with the requirements of MiCA by 1 January 2025 at the latest.

By Rita Parkanyi, Partner, KCG Partner

Local Partner Zoltan Kozma has been appointed the new Head of the Intellectual Property & Technology group at DLA Piper in Hungary.

Kozma has been with DLA Piper since 2002 and was promoted to Partner within the IPT group in 2021 (as reported by CEE Legal Matters on May 4, 2021). According to the firm, he has “successfully strengthened the technology and core intellectual property practice in the Budapest office.”

“I am excited to take on this role and lead our dedicated team in navigating our clients through the complex and rapidly changing legal and technology landscape,” Kozma said. “We expect to see further growth in technology, telecommunications, privacy, and media regulatory matters, given the unprecedented surge of EU and local legislation governing areas such as AI, data governance, online platforms, cybersecurity, and media.”

The bill to amend the laws on justice was adopted by the Hungarian Parliament on 30 April 2024. The omnibus act amends a number of laws, including the Act on Notaries Public, the Act on Judicial Enforcement, the Act on the Organization and Administration of the Courts and the Code of Civil Procedure.

This article presents the amendments to Act CXXX of 2016 on the Code of Civil Procedure. The amendments are intended to comply with Regulation (EU) 2023/2844 of the European Parliament and of the Council of 13 December 2023.

It is proposed that, if the technical conditions are met, the minutes may be drawn up at any stage of the procedure by single sequence recording of proceedings, containing both visual images and sound. Previously, this was only possible during the hearing as to merits. This could be done at the request of either party or even by order of the court on its own motion. If such a recording is made, the court will summarize the statements, requests and petitions of the parties relevant to the resolution of the case in order to prepare a written extract from the minutes.

The amendment also allows for the minutes to be drawn up by single sequence recording in appeal proceedings. However, in actions to modify the exercise of parental custody and in actions relating to visitation rights, a single sequence recording of the hearing of the minor may not be made in order to protect the minor.

The amendment allows for simplified telecommunication attendance via electronic communication networks (e.g., MS Teams, Skype, Zoom, etc.). For such a hearing, the room would not be made available by the court or other body. It would be sufficient that only the person to be heard is present at the hearing, in which case the person to be heard uses the available means. The directness of the connection between the set place of the procedural act (e.g., a courtroom) and the place of the hearing is ensured by the simultaneous transmission of moving images and sound (e.g., laptop, mobile phone). This is possible if the person to be heard also consents to simplified telecommunication attendance.

The hearing must take place in such a way that only the person to be heard or whose presence is otherwise permitted or required by law (e.g., legal counsel, guardian, etc.) is present in the room where the hearing is to take place.

The amendment also specifies when the procedural act cannot be continued in this way. Examples include when there is reasonable doubt as to the identity of the person to be heard, the voluntariness of their participation in the procedural act and the lack of undue influence on their part. Another example is when a person is not authorized or required by law to be in the room.

Prior to the hearing, the presiding judge or the court secretary will determine the activities to be performed by the person to be heard in order to verify their identity, voluntariness and lack of undue influence. They will also require that the person to be heard be visible, as well as all persons present at the same time and at all points of the hearing room. If verification is not possible or refused, the procedural act shall not be conducted by means of simplified telecommunication attendance.

The amendment also contains a new provision on the dismissal of the appointed expert, namely a new ground for dismissal. In addition to the previous grounds for dismissal, the court by its own motion will exempt the appointed expert from appointment if the appointed expert fails to provide an expert opinion within the time limit. Or, if an extension has been granted, he will be dismissed if he fails to provide his opinion within the extended time limit. and it cannot be expected to provide this expert opinion. In such cases, the court shall impose a fine in addition to the dismissal.

By Reka Vass, Senior Associate, Baker McKenzie

“Water resilience” is joining AI, competitiveness and sovereignty, as a new buzzword in Brussels’ policy-making conversations. But while the latter three concepts are rather intangible, water resilience is a more concrete concept, and is also a life-threatening problem.

But buzzwords tend to be empty shells and are often used for political purposes such as the upcoming EU and national elections in Europe. Debates related to water are almost exclusively focused on extreme weather events, water scarcity, sea level rise, wildfires, draught, and nature restoration. Hardly anybody addresses the acute issue of underfinanced and outdated water supply networks in Europe and the documented wasteful water usage across economic sectors and end-consumers in the region. Water utilities are increasingly unprofitable – in 2021/22, South West Water was the only water company in the UK to report profit after tax. In France, the credit rating of one of the country largest water service providers has recently been lowered to BBB minus. In Hungary, almost all water companies are in the red, largely due to outdated and underperforming networks and a price freeze which has existed since 2013. The 2023 year-end homogenization of water price for industrial consumers in Hungary has proved to be little in the way of a cure for the overarching illness. Economic difficulties persist. The water sector has failed to implement a change of tactics. The Zeitgeist of free water provision and questionable irrigation practices continue to dominate.

Yet, the good news is that things are starting to happen in the EU and in the member states. For example, Italy’s Tuscan region, together with the national regulatory authority (ARERA), the European University Institute and the European Water Regulators, has recently organized a panel discussion on water resilience and related investments. A discussion that, one can suppose, had a strong focus on Tuscany and Italian aspects of the issue. Danish water sector stakeholders have also been active and have organized the Grand Danish Water Day which will take place on the 15th of May in Copenhagen and will aim “to shine a spotlight on water in Europe”. The Friends of Europe is assembling an event to take place on the 24th of May in Brussels which will focus on the impact of climate change on health, water availability and water management. At this event, the European Environment Agency is expected to present its new report “Responding to climate change impacts on human health in Europe: focus on floods, droughts and water quality”. The Commission’s Green Week at the end of May, baptized “Toward a water resilient Europe”, will unmistakably act as a catalyst for additional partner events and policy discussions.

The question of investment in water resources and water distribution networks is not simply one part of the “big picture” of climate resilience. Rather it is in and of itself a time-sensitive matter. Water supply and drainage infrastructure is wholly outdated. Networks’ leakage is a constant 20-80% of total water passing through the pipes, on average in Europe. The prices paid for water usage are not able to cover the costs of production, transport, infrastructure and services. Artificially low prices are the subject of heated political debates at the national and European levels.

Real solutions are complex and far from imminent. Without placing a true high value and importance on water usage and disposal, without internalizing the environmental costs at both the upstream and downstream levels, and without coherent and long-term water policy planning, a mere patchwork of reactive rather than proactive steps will only lead to further and greater problems with the likely result of an unprecedented tragedy of the commons. While we do indeed need to update water related EU regulations and directives, national authorities must also enforce the existing laws based on the polluter-pays principle, they must urgently introduce behavioral incentives for users, and they must uncompromisingly enact laws enabling market-based dynamics to help generate income, e.g., by creating local, regional and national water trading markets. Avoiding the exploitation of the decreasing amount of water in Europe will not happen without the proper financing and renovation of existing pipelines and a significant overarching behavioral change of water consumers. We at Dentons have a holistic approach and see water as a precious natural resource that has an economic value. We advise our clients in this spirit.

By Pai Belenyesi, Of Counsel, Dentons 

Ban, S. Szabo, Rausch & Partners has advised Talentis Group Zrt on its acquisition of a 100% interest in Brendon Holding Kft. Deloitte Legal reportedly advised the seller.

According to Ban, S. Szabo, Rausch & Partners, the agreement was signed on April 18, 2024, and is pending clearance from the competition authority. Closing is expected for the second quarter of 2024.

Brendon Holding is a retailer specializing in children’s products within the Hungarian and Slovakian markets. The transaction will allow Brandon to “expand its footprint through the establishment of new retail outlets across the region.” according to Ban, S. Szabo, Rausch & Partners.

The Ban, S. Szabo, Rausch & Partners team was led by Managing Partner Janos Rausch and Partner Balazs Unger and included Partners Gergely Szabo and Kinga Bolcskei, Associate Viktoria Utassy, and Trainee Lawyer Andras Zatyko. 

Former Schoenherr Local Partner Gergely Szaloki has joined Wolf Theiss to co-lead the firm’s Banking & Finance in Budapest. 

Szaloki had been with Schoenherr since 2009, first joining the firm as an Attorney at Law. He made Partner in 2017 (reported by CEE Legal Matters on February 3, 2017). 

Before that, he worked as a Lawyer for the European Investment Bank in 2008, as an In-House Counsel for Hankook Tire Hungary between 2006 and 2008, and as an In-House Counsel for D.A.S. Legal Expense Insurance between 2005 and 2006.

Jalsovszky’s Dispute Resolution practice in Hungary is going from strength to strength according to Partner Tamas Feher, who points to long cases, significant wins, fiscal changes, budgetary pressures, and the economy’s slowdown as the ultimate reasons behind their litigators staying busy.

CEELM: What kind of work has been keeping you busy in the last 12 months?

Feher: As with many legal practices, our cases often extend beyond a year, and a significant portion of our current workload consists of ongoing matters. One recent case that showcases the breadth of our services is our representation of Wizzair in a landmark dispute against the 18th District Municipality of Budapest. This case challenged the municipality’s attempt to impose a local passenger tax, which they believed to be an innovative way to raise revenue. The challenge arose because the Hungarian International Airport partially falls within the jurisdiction of the 18th District, and the municipality felt they could tax passengers using the airport. We successfully argued before the highest court in Hungary that the municipality lacked the authority to impose such taxes, setting a precedent that impacts all airlines operating in Hungary. This is just one example, and Wizzair has entrusted us with other cases as well.

Beyond this, we’ve recently concluded other successful cases, including a major tax dispute for a leading telecom company (lasting over seven years) and a construction dispute for another key client. We’re also currently representing a client before the European Court of Justice in a VAT case concerning a Slovakian company’s denied VAT reimbursement in Hungary. This case is on a promising track following a favorable opinion from the Advocate General. The past year has also witnessed an increase in arbitration cases, reflecting a broader trend towards alternative dispute resolution.

Another notable trend is the rise in tax-related cases, often accompanied by criminal charges against companies, likely driven by the state of the Hungarian budget, particularly regarding VAT collection challenges. This aggressive approach from the authorities necessitates a multidisciplinary approach, leveraging our expertise in both criminal and tax law. These cases can be particularly complex as companies may face both tax liabilities and criminal charges. The potential consequences can be severe, including significant financial penalties, investigations against individuals with the risk of jail time, and even preliminary measures that can severely impact a company’s operations before the case is even concluded.

CEELM: What are the key factors driving that pipeline of work?

Feher: Our workload has been heavily influenced by the Hungarian government’s recent fiscal policies, particularly its response to the VAT revenue shortfall. This has led to a more aggressive approach to tax collection, resulting in a significant increase in tax disputes, many of which also involve criminal charges for tax evasion. This dual threat has made these cases particularly complex, highlighting the need for a comprehensive legal strategy encompassing both the fiscal and criminal aspects.

Furthermore, the current economic climate has contributed to a record number of forced liquidations, indicating underlying financial instability. There seems to be something “boiling underneath” for the Hungarian economy that’s not reflected in growth or GDP figures. However, the rising number of companies going out of business suggests significant economic strain. This situation leads to a surge in disputes related to payment defaults – early risk assessments and strategic planning are crucial to protect our clients’ interests in such situations.

And the labor market has also been impacted, with an increase in disputes arising from layoffs and employment terminations, reflecting the broader economic pressures on businesses. Even the IT sector, despite its growth, has not been immune to disputes, particularly regarding contract performance issues. Some experts suggest this rise might be linked to the sector’s rapid growth, making it harder to distinguish between reliable and unreliable players. This, in turn, can lead to disputes when expectations and deliverables don’t align in such a fast-paced environment. 

CEELM: And what is your outlook for the next 12 months?

Feher: We anticipate a continued rise in our workload, driven by both internal and external factors. The expansion of our Dispute Resolution practice, exemplified by the recruitment of senior litigator Peter Szilas, demonstrates our continuing focus on building our expertise and capabilities.

Finally, looking at all of the current trends, it seems like there will be ample work to be done: rising numbers of liquidations, labor disputes, and litigation proceedings in the IT sector are likely going to keep us quite busy as the year progresses.

Lakatos, Koves and Partners has announced Richard Lock is stepping up to become Senior Partner while former Senior Partner Peter Koves becomes Partner Emeritus and Honorary Senior Partner.

“Peter has contributed significantly to the growth and development of our firm as a leading independent internationally focused firm in Hungary,” commented Lakatos, Koves and Partners Managing Partner Peter Lakatos. “Richard, having been in Hungary for over 30 years, with Clifford Chance and then as one of the founding partners of Lakatos, Koves and Partners, has played a central role in the development of our firm and in particular in developing and nurturing our firm’s relationships with law firms around the world.”

“I am honored to take on this role, to continue my work as an ambassador for the firm, and to contribute to the continuing evolution of our firm and its culture,” Lock added.