Category: Hungary

Since COVID, we have been living with a rule that makes the acquisition of ownership by foreigners in certain Hungarian companies operating in strategic sectors subject to government approval. Although we can no longer speak of a state of emergency, the rule is expected to stay with us for long – albeit with several modifications along the way, as happened in January this year.

According to the basic concept, if a foreign person (whether from the EU or a third country) intends to acquire a certain level of ownership in a Hungarian strategic company, they are required to notify (essentially to obtain approval) from the Ministry for National Economy, responsible for domestic economic matters. The threshold above which approval is needed depends on the origin of the investor. For a third-country investor, it can be as low as 3%, while for an EU/EEA party, majority control is generally required. The obligation for approval applies only to companies engaged in activities specified by law in certain strategic sectors. However, the list of these sectors in the relevant regulation is so broad that the approval requirement may arise even in seemingly straightforward transactions involving foreign buyers.

Furthermore, for several years, we have been living with an additional set of rules requiring approval from another authority, currently the Prime Minister’s Cabinet Office, for acquiring stakes in certain highly strategic sectors (e.g., telecommunications, energy supply, or the financial sector). This means that for the completion of a given transaction, approval from two state authorities may be necessary.

The M&A profession has not been overly enthusiastic about this regulatory framework from the beginning. A foreign investor often thinks twice before entering into an acquisition process that ultimately depends on state approval. This is especially true considering the risk that they may not be able to later sell the acquired company to another foreign buyer. Moreover, in recent times, there has been an increase in negative responses from ministries – sometimes in transactions that seemingly do not violate national security interests.

In this situation, a recent legal amendment has come, clarifying the interpretation of certain detailed rules.

Foreign transactions do not, but intra-group deals do need approval

For a long time, there has been a debate about whether a transaction is subject to approval in Hungary if it only indirectly involves a Hungarian company. For example, if there is a change in ownership affecting an international corporate group, and the group includes a Hungarian entity, does the transaction trigger the approval requirement in Hungary? While neither the legislator nor the authorities previously provided a clear answer to this question, it now seems to crystallize that the sale of a foreign company does not trigger the approval requirement – even if the foreign company has ownership in a Hungarian entity in a strategic sector.

At first glance, it seems that a new loophole has opened. If a Hungarian company is sold through a foreign parent company, the approval process could be bypassed. However, two things need to be considered with caution. First, it cannot be excluded that the ministry will interpret this rule not formally, but according to its purpose. If, for example, a Luxembourg parent company is sold, and the Hungarian subsidiary is the only asset of the Luxembourg company, that Hungarian authorities may attempt to bring such a sale under the approval requirement (applying the principle of legitimate exercise of rights), even if it may lead to serious legal disputes. Second, the amendment that came into effect in January explicitly states that the approval requirement still applies, regardless of whether the transaction occurs within the corporate group. This means that if someone directly owns a Hungarian company and wants to transfer it to a Luxembourg parent company within the corporate group, such a sale is now clearly subject to approval. The question is how permissive a Hungarian authority will be in the case of an intra-group restructuring, considering that the current Hungarian corporate assets will inevitably become part of a foreign company.

Relocation still works

The law still does not contain restrictions or approval requirements regarding a Hungarian company “moving” out of Hungary – even if it relocates its registered office outside Hungary. In such cases, by becoming foreign, the Hungarian company falls outside the scope of the law, and a subsequent sale of such company is no longer subject to Hungarian approval requirements. The practice also shows that the emigration of certain Hungarian companies has already begun.

However, such a transformation can be cumbersome in many respects, and the practicalities need to be considered before embarking on it. First, in itself, this is a lengthy process that can take up to 9-10 months. Second, if, despite being registered and headquartered abroad, the company wishes to continue its activities in Hungary, suitable legal forms and tax solutions must be found. Thus, it may even be the case that the company jumps from the frying pan into the fire. Approval requirements are not contained only in Hungarian laws. It is possible that the company may escape the Hungarian regime but fall under the approval requirements of another country with a similar nature.

By Agnes Bejo, Partner, Jalsovszky Law Firm

On 26 February 2024, the 34/2024 (II.26) decree on the different application of Act C of 2000 on Accounting during an emergency was published in the Hungarian Gazette, which repeals a decree issued a few days before, on 8 February.

According to the previous decree published on 8 February, all cash and in-kind benefits exceeding HUF 1 million without compensation during the financial year to civil society organisations carrying out activities of public interest in the fields of the environment, sport, health, social, cultural and educational activities should have been reported by the companies, also to whom (name, address, tax number) and what amount was given (recorded at book value). This would also have applied to company accounts submitted for the year 2023. The National Tax Authority (NAV) also warned entrepreneurs on the above, on the basis of the decree published on 8 February.

The decree published on 26 February overrides this, stating that the new reporting obligation shall apply to the financial year starting in 2024 instead as of the financial year 2023.

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

As of 1 March 2024, it possible to submit applications for residence permit at the Immigration Authority in accordance with the new regulation, i.e. the Act XC of 2023 on the General Rules for the Entry and Residence of Third-Country Nationals.

If the residence permit expired between 1 January 2024 and 29 February 2024, its validity is extended automatically until 30 April 2024, so it is considered as if it had been issued with a validity period of 30 April 2024.

The holders of a residence permit valid on 1 January 2024 may apply for a new residence permit under one of the new titles provided for in the new act. For instance, the holders of the residence permit for gainful activity can apply for residence permit for guest self-employment. In the case of a residence permit for the purpose of employment, the third country national can choose from several types of work permit, e.g. permit for employment purposes, guest worker residence permit, Hungarian Card etc.

The application can be submitted maximum 45 days before the expiry date of the residence permit. If the residence permit expires between 1 March and 1 April 2024, the application for a residence permit must be submitted no later than the last day of the period of validity of the residence permit. According to the general rule, the validity period of the new residence permit will be calculated from the date of submission of the application, which means that the previous stay in Hungary shall not be calculated to the validity period of the new residence permit.

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

Wolf Theiss has advised Budapest Municipality-owned BKM Budapest Public Utilities Nonprofit on its acquisition of E.On Hungaria’s 50% stake in BDK Budapest Decorative and Public Lighting.

According to Wolf Theiss, “BDK was previously jointly owned 50-50% by the Municipality of Budapest and E.On. Through the acquisition of E.On’s stake in the company, the city’s public and decorative lighting will have a single owner, thus ensuring higher quality, along with more modern and cheaper lighting in Hungary’s capital.”

The Wolf Theiss team included Counsel Norbert Balint, Senior Associate Zoltan Bodog, and Associate Reka Deak.

In order to promote the health of employees and prevent workplace accidents, the Hungarian Government had significantly increased the fines for the breach of occupational health and safety rules as of 1 March 2024. The rule on its amount was removed from the applicable act and its details were laid down in a government decree.

The lower limit of the fines is doubled, (HUF 100,000 per employee) and the upper limit is increased to 10 times the current level, HUF 100 million. The imposed amount depends on various factors such as number of norm violations, the duration of exposure, or the occurrence of occupational accidents or health damage. For example, in the case of an occupational accident or health damage, the fine increases threefold, in the case of a serious occupational accident, tenfold, and twentyfold in the case of a fatal occupational accident.

If the authority has imposed a fine against the employer once within the 3 year period (previously it was two years) prior to the official inspection due to a serious risk, the new fine shall be increased by 1.5 times. As a new rule, in the case of any further fines imposed within three years, the multiplier used for the most recent violation is doubled for each fine.

There are also circumstances that reduce the amount of the fine, thus if the violation is committed by a micro-and small enterprise or a natural person employer, it shall be reduced by 0.8 times and can reach a maximum of HUF 25 million, and in case the violation is committed by a medium-sized employer, it shall be reduced by 0.9 times, and may not exceed HUF 50 million. These rules do not apply if a fatal work accident occurred due to the employer’s negligence.

By Borbala Maglai, Attorney at Law, KCG Partners Law Firm

As we move into yet another year with the special surtaxes in effect, the question justifiably arises: for how much longer will the extra-profit taxes, those labelled initially as temporary, encumber the Hungarian taxpayers’ declarations. Also, businesses now have to face additional burdens, such as the EPR fees, the carbon quota tax or the global minimum of the corporate income tax.

 

In any case, the application of the special taxes is being extended again and again, and in addition, some of these special taxes have even made it to the level of laws (from being regulated in a mere government decree). It seems, therefore, that the decline in the number of tax types that we witnessed a few years ago has been reversed in the long run: this year, compared to last year’s 59, we counted 61 types of taxes. This is yet the highest number since we started our yearly counting of Hungarian taxes.

Taxes we bade farewell to, and the new contenders

During the previous year they removed the investment firms’ and credit institutions’ transaction tax from the government decree regulating the surtaxes. (This transaction tax should not be confused with the financial transaction tax under a separate law. This latter still exists.)

Furthermore, from the beginning of this year, the registration fee for domestic work was finally abolished – but not the obligation to register! As we have written before, year after year this otherwise forward-thinking tax has failed to bring in the expected revenues.

But we have four new taxes to take the place of these former payment obligations.

Firstly, as a result of many years of OECD and EU legislation, top-up taxes have been introduced in Hungary to ensure the (global) minimum level of corporate income tax. Groups of companies with a consolidated turnover of more than EUR 750 million will be taxed on their global income at a single minimum tax rate (15%), thus preventing or at least reducing harmful tax competition between Member States.

Secondly, we considered the surtax of pharmaceutical product manufacturers as a new contender as well.

This tax is also intended to ‘regulate’ the special tax burdens of pharmaceutical product manufacturers with a slightly different tax base compared to that of the pharmaceutical product manufacturers’ special tax, which continues to exist under a slightly different name.

Finally, in the middle of last year the government introduced two new taxes on operators of an installation receiving a significant free allocation of CO2 emission rights: the ‘carbon quota tax’ taxes the amount of carbon dioxide emitted by the holder of the quota holder; on the other hand, the ‘carbon dioxide quota transaction fee’ taxes the trading of the quota.

Changing taxes

Some taxes were slimmed, while others’ tax bases got enriched with new items. An example of the former is the tax on utility lines which, from the beginning of the year, no longer covers communication lines. The opposite has happened with the tourism development contribution, where hop-on hop-off bus services have been brought within the scope of the tax.

In contrast to the above, the scope of NETA (tax on unhealthy aliments) has been both narrowed and widened: on the one hand, alcoholic beverages have been removed from the taxable items and two new categories of products have been added to the taxable scope. These latter are the categories of “delicacies” and “pre-packaged sweet and savoury pasta” as defined in the law.

Finally, it is also noteworthy that the rate of the soil protection contribution on the permanent repurposing of agricultural lands, calculated on the basis of the – so-called – golden crown value of the land, has tripled for all quality classes since the beginning of this year.

This time the fee is just a fee: the Extended Producer Responsibility (or EPR) policy

The EPR policy is the EU’s response to rising waste emissions. Under the liability system, producers of various single-use (so-called circular) products must pay a fee for their emissions to a concession company, MOHU MOL Hulladékgazdálkodási Zrt., which organises the complete management of waste: from collection and transport to recycling or disposal. MOHU will invoice the fee on the basis of the information provided by the producers to the waste management authority.

While it is not unknown for some taxes to be referred to as a “fee” in the legislation, especially when they are specifically intended to finance a public task by way of indirect taxation (e.g. the food chain supervision fee or the gambling supervision fee), the EPR fee is not, conceptually speaking, a tax. This is because, in return, the persons liable receive a directly tangible service. And, in principle, this is so even if some dispute the equivalence between the fee paid and the service received (see below what we consider to be a tax for more details).

Naturally, the number of taxes in Hungary depends on what should be considered as one.  Both everyday experience and the tax theory make it clear that not all payment obligations to the state can be considered as tax.

On one hand, there are payment obligations that directly entitle the holder to specific services or benefits – these are not taxes. Thus, for example, a procedural fee cannot be a tax, nor can, for example, a toll.

Similarly, classic social security contributions are not taxes either, because they are typically capped, i.e. their level is in principle proportional to the service received for them. It is another matter that today in Hungary social security contributions no longer work like this, so they are considered taxes.

Lastly, fines, surcharges and other penalties cannot be considered taxes either, no matter how much its one-time recipient may feel that way.

On the other hand, however, we have considered as taxes certain payments which, although not directly payable to the state, are nevertheless state-imposed payments which do not give rise to a right to compensation. A typical example of this at present is the compulsory chamber’s contribution for the Hungarian Chamber of Commerce and Industry. 

They will not contribute: the industrial safety contribution

Late last year, news emerged that the government would introduce a new turnover-based tax on factories working with hazardous materials, the industrial safety contribution. Many speculated whether the measure was introduced in view of the battery factories, now shooting up like mushrooms, but the explanatory notes to the bill did not specifically mention this scenario. In any case, the new tax was not introduced in the end, so it does not enrich the number of Hungarian taxes.

Challenging years

Clearly, the economic and political context still does not allow the government to give up the revenues generated by the surtaxes. In the meantime, other developments, such as the excessive demands on the environment or the fight against harmful tax competition, are triggering additional tax legislation. It therefore does not seem realistic at present to expect a significant reduction in the number of taxes. The situation may be helped by the increasing number of ways in which the tax authorities are providing assistance to comply with tax obligations, including the possibility to ask the tax authorities to fill in VAT returns from February.

By Dániel Veres, Advisor, Jalsovszsky

Certain amendments to the Land Transaction Act entered into force on 1 January 2024. The amendment introduces the definition of a rice farm, which includes the land and, as an accessory thereto, the land parcel registered as an area excluded from cultivation serving the rice production (e.g. ditch and drainage systems, embankments and farm roads). The amended Act contains specific provisions, such as two new legal bases for the pre-emption right in respect of rice farms.

The amended Act also contains a new provision under which a non-resident natural person and a national of a Member State who is not a farmer may acquire the right to use a land if the area of the land in his possession, including the area of the land to be acquired, does not exceed 1 hectare and the person making the transfer is a close relative of the land user. By the amendment of the Land Transaction Act, the acquisition of the right to use land was simplified, as the contracting party must declare only once in the contract for the right to use land that he has no legally established and outstanding fee debt, without having to make a separate declaration in a private or public document with full evidential effect.

The amendment also extends the cases of refusal to approve a leasehold (in Hungarian: “haszonbérlet”). Furthermore, the amended Act extends the scope of cases not subject to the approval by the agricultural administration body, thus, the approval of the agricultural administration body is not required for a land-use contract between a family agricultural association as a land user and its member as a user.

In view of the fact that the full transition to electronic administration will be implemented gradually within the framework of the “E-Land Register” project and that this project also concerns land transaction procedures, it was necessary to include this gradualness in the provisions of the Land Transaction Act. Therefore, certain provisions of the Land Transaction Act are applicable between 1 October 2024 and 3 December 2024 if the procedure is initiated through the IT system supporting land transaction procedures.

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

Former Counsel Viktoria Szilagyi has been promoted to a Partner position with Lakatos Koves & Partners in Budapest.

According to the firm, Szilagyi has 20 years of practice in both local and international transactions on the full range of corporate law issues. She joined the LKT team in 2020 (as reported by CEE Legal Matters on January 19, 2021). Before that, she spent more than 16 years with Nagy es Trocsanyi, departing that firm as a Partner.

“Viktoria is an exciting addition to our partnership,” Managing Partner Peter Lakatos commented. “Since joining LKT four years ago, Viktoria has shown in her work, in particular in relation to renewable energy projects, in her engagement with LKT’s international network, in particular through her work with the IBA, and through her contribution to training and internal firm culture initiatives that she is committed to the firm and its future. I am pleased to welcome her to the partnership.”

“Being promoted to Partner at LKT is an honor for me and an important milestone in my professional career,” Szilagyi added. “I’m grateful for the promotion and look forward to further developing our practice in the coming years. Thank you for your trust in me!”

According to the Hungarian Government’s spring 2024 legislative program, the Hungarian Parliament may decide on the introduction of a “European minimum wage” as early as this spring session. The EU minimum wage directive highlights the importance of European social dialogue frameworks in reaching agreements on minimum wages among Member States.

Firstly, every Member State is urged to develop criteria for determining the appropriate level of the minimum wage, ensuring that the lowest-paid workers are not exposed to the risk of poverty. Secondly, each country is called upon to devise a timetable for promoting collective contractual protection for workers, aiming for at least 80 percent coverage of employees under collective agreements within a few years. Finally, Member States are encouraged to intensify inspections and strengthen labor authorities to ensure that every worker has actual access to the minimum wage and all necessary information.

The directive requires minimum wages to be set at 60% of the median gross wage or 50% of the average wage. However, many European countries fall short of these targets. OECD data from 2022 shows that ten EU nations, including Hungary, have minimum wages below 50% of the median wage, with only Portugal, Slovenia, and France exceeding 60%. Consequently, Hungary is expected to encounter increased pressure to reassess its minimum wages in accordance with the EU directive’s standards. This could potentially create challenges in the labor market, as implementing such adjustments may necessitate a double-digit percentage increase, posing difficulties in aligning wage increases for workers in higher income brackets.

The European minimum wage directive was announced by the EU in October 2022, and the Member States have two years from the official publication date to align the directive with national legislation. This means that by October 2024 at the latest, the legislative amendments necessary to bring the “European minimum wage” to Hungary will come into effect.

By Levente Csengery, Partner, KCG Partners

Wolf Theiss, working with Gleiss Lutz, has advised Bausparkasse Schwaebisch Hall, Wuestenrot & Wuerttembergische, and Bausparkasse Wuestenrot on their sale of a 76.35% participation in Fundamenta-Lakaskassza to MBH Bank. DLA Piper advised MBH Bank.

The transaction closed on March 27, 2024.

The MBH Bank is Hungary’s second-largest lender, according to WT.

Fundamenta-Lakaskassza is a Hungarian home savings bank.

“Following the transaction, Fundamenta will operate as a consolidated subsidiary of the buyer bank, but as an independent entity,” Wolf Theiss reported.

Bausparkasse Schwaebisch Hall is a building society in Germany, active abroad with subsidiaries in Eastern Europe and China.

Wuestenrot & Wuerttembergische is a German financial services company.

Bausparkasse Wuestenrot provides banking services.

The Wolf Theiss team included Partner Janos Toth, Counsel Melinda Pelikan, and Associates Kinga Kajcsos, Laszlo Lovas, and Viktoria Horvath.

The DLA Piper team included Partners Gabor Molnar, Zoltan Kozma, and Zoltan Marosi, Senior Associates Levente Molnar, Jeno Kimmel, Tamas Szkiba, and Balazs Szalbot, Associate Mark Almasy Kozma, and Junior Associates Krisztina Varkonyi and Balazs Torok.

Editor’s Note: After this article was published, Oppenheim announced it had advised Fundamenta Lakaskassza and its board of directors. The firm’s team included Partners Mihaly Barcza, Zsolt Cseledi, and Istvan Szatmary, and Counsel Barna Fazekas.