Category: Hungary

Aiming to create a modern, transparent, and unified regulatory framework by replacing the current fragmented regime, the new Hungarian Construction Act was adopted in December 2023.The new Act makes such substantial changes that most of its provisions will enter into force in phases between 2024 and 2027. In the following, we outline the basic features of the new Act.

Unified regulation of construction

The new Construction Act governs more matters than the current Act, as it includes provisions on professional chambers of design engineers and architects, provisions on the protection of the townscape, provisions on the protection of monuments and historic sites, which are currently covered by separate acts.

Principles

A significant change compared to the previous legislation is that the Act also lays down architectural principles that shall be taken into account during the preparation of plans, their approval and the entire construction process. The architectural principles highlight the direction of the new Act, which focuses on the enforcement of “civic sense” and architectural quality, the protection of the natural environment and green spaces, and the preservation and sustainability of the built environment.

The principles have a so-called gap-filling function, i.e., if there is no specific legal regulation on how to deal with a given issue, the building authority, the chief architect etc. can rely on the principles to make their decision.

Environment protection, brownfield areas

The Act introduces supportive and incentive measures to favour brownfield sites over greenfield investments to protect the natural environment and green spaces. These objectives are achieved by the brownfield register that will be established. Moreover, new land for development may only be designated by way of exception and for public interest reasons.

Construction permit procedures

There will be two types of procedure for approval of a construction activity, one is the building permit procedure, and the other is a simple notification for acknowledgement. During the simple notification procedure, the authority checks the plan’s compliance with the legal requirements within 15 days. If the planned construction activity does not comply with the legislation, the authority will prohibit it.

Architect as design supervisor

The architect who draws up the construction documents acts as a design supervisor for the construction works, checking the implementation of his/her design.

Commissioning

The new Act will change the rules of the commissioning procedure, so in the case of buildings with a specific purpose (office, warehouse) it will be possible to carry out the commissioning of a building with a certain degree of completion (e.g.: the interior can be designed later according to the tenant’s needs), and – in certain cases – the architect’s declaration will be mandatory for the commissioning.

Moreover, according to the new Act, after the building has been commissioned, a service record book must be kept for certain building types on information and documents related to future maintenance, renovation, conversion, and extension.

Securing of the construction materials and products

To ensure the security of domestic supply of construction materials and products, if the inflation rate increases significantly, or if there is a shortage of strategically important construction materials, or if a major manufacturer stops production of strategically important construction materials, and this makes it impossible to complete public construction projects or construction projects of public security on time, the Minister of Construction Economy may take measures to prohibit the export of materials for a maximum period of one year.

To secure and maintain the domestic production of building materials, the Act allows for the granting of a right of first refusal in the event of the transfer of a plant producing construction materials of strategic importance.

High-rise buildings in the outskirts

It seeks to restrict the construction of high-rise buildings in the outskirts. Therefore, it is stated that buildings taller than 65 metres may be built in the outskirts only if strict conditions are met, moreover, an upper maximum limit is also set, according to which buildings taller than 130 metres cannot be built in the outskirts.

Details

We would like to point out that many details are not yet known as they will be covered by separate government or ministerial decrees.

By Peter Korozs, Junior Associate, SmartLegal Schmidt & Partners

Schoenherr has advised Standard Motor Products on its acquisition of an industrial facility in Hungary from Mektec Manufacturing Corporation Europe HU. The sellers were represented by solo practitioner Peter Zsadon.

The industrial facility in question has a gross leasable area of approximately 4,000 square meters.

Standard Motor Products is a manufacturer and distributor of replacement parts for motor vehicles in the automotive industry, listed on the NYSE since 1977.

Mektec Manufacturing Corporation Europe HU is a German production company and a subsidiary of the Japanese Mektron corporation, founded in 1961.

Earlier this year, Schoenherr advised Standard Motor Products on another industrial facility acquisition (as reported by CEE Legal Matters on September 19, 2023)

The Schoenherr team included Partner Laszlo Krupl and Associate Viktoria Magyar.

David Hanis has been appointed as a new Partner with Oppenheim.

Hanis, an energy law specialist, joined the firm in 2009 as a Junior Associate. He became a Principal Associate in 2019 and a Counsel in 2021. As of January 2022, he has been the Co-Head of the Regulated Industries practice group at Oppenheim.

“David has an in-depth knowledge of the sector of regulated industries, putting a special emphasis on the precise understanding of the aims of the clients to elaborate appropriate and tailor-made legal solutions,” Partner Gergely Legradi commented.

“David’s appointment as Partner is part of Oppenheim’s strategy of elevating the next generation of lawyers who are the future of the firm,” Oppenheim Managing Partner Istvan Szatmary added. “He is also a perfect example of the career path at Oppenheim, with his commitment of the last 14 years.”

Allen & Overy has advised CMC Europe on the sale of a 100-megawatt combined capacity solar plant in Kaposvar, Hungary to MVM Green Generation. Reportedly, Kinstellar advised MVM Green Generation.

CMC Europe is a member of the Genertec International Group.

MVM Green Generation is a subsidiary of MVM Group, a state-owned Hungarian energy company. 

The Allen & Overy team included Counsel Balazs Sahin-Toth, Senior Associate Daniel Racz, and Associate Judit Ban. 

The current rules on foreign direct investments (FDI), which are already quite restrictive, will be tightened further from January next year: the current exemptions will be narrowed, and the Hungarian State will have a right of first refusal for solar power plant investments. The government is trying to address a long-standing and sensitive issue for domestic energy policy, while also affecting other non-renewable investments by tightening the exemptions.

Last week, on 14 December 2023, Government Decree No. 566/2023 (XII. 14.) of Hungary amending certain provisions of the so-called “transitional” FDI regime based on Government Decree No. 561/2022 (XII. 23.) of Hungary was published in the Hungarian Gazette (see no. 180/2023). The provisions of the government decree shall apply from the 30th day after its publication, i.e., from 13 January 2024. Moreover, yesterday, 19 December, Government Resolution No. 1576/2023 (XII. 19.) was published in the Hungarian Gazette (see no. 183/2023), clarifying certain issues of the right of first refusal contained in the government decree.

1. Narrowing exceptions – fewer possibilities for exemption from submitting a request

The new government decree amending the transitional FDI regime will narrow the scope of transactions that are not subject to submitting a request for FDI clearance (i.e., exempt from prior ministerial approval). Under the current rules, no prior ministerial approval is required for indirect foreign acquisitions of control and intra-group restructurings at the ownership levels above the strategic target company, provided that they do not result in a change in the direct ownership structure of the strategic target company.

According to the newly adopted rules, from next year only foreign intra-group transactions would remain as an exception, provided that they are purely foreign-to-foreign transactions and do not result in a change in the direct ownership structure of the Hungarian target company (subordinated affiliate).

The Government Decree provides that the alternative FDI regime do not apply if a transaction implemented in respect of a foreign registered legal entity indirectly results in the change of ownership over a Hungarian registered subordinated affiliate of such foreign entity.

2. Right of first refusal for solar investments

Another novelty of the rules amending the transitional regime is that it grants the Hungarian State a right of first refusal in respect of domestic strategic target companies that are planning to be acquired by foreign investors for the implementation of photovoltaic (solar) projects, excluding companies interested in small household power plants (i.e., below 50 kVA).

According to the new rules, if the sale and purchase transaction subject to prior approval is concluded in respect of a strategic target company whose main or additional activity (in Hungarian: “TEÁOR”) is electricity generation and which is engaged in solar power plant activities, the Hungarian State will have a statutory right of first refusal before any other party.

The right of first refusal will be exercised according to the following procedure:

• Firstly, the competent minister will examine the submission received to determine whether the transaction is covered by the right of first refusal and inform the applicant accordingly. The Hungarian State may exercise the right within 60 working days, which shall be calculated from the date of sending the foregoing information to the applicant. If the deadline expires without result, the right is lost.
• In a second step, at the same time as the information is sent to the applicant, the competent minister will send the documentation received as part of the submission to the minister responsible for energy policy, who will decide within 15 working days whether or not the exercise of the right of first refusal is justified in the underlying case. The minister responsible for energy policy has to forward his reply and the relevant documentation to the Hungarian National Asset Management Zrt. within the time limit and at the same time inform the competent minister conducting the FDI clearance.
• Finally, if the competent minister receives a proposal to exercise the right of first refusal, the minister will terminate the FDI clearance procedure, expressly stating that the minister responsible for energy policy is of the opinion that the exercise of the right of first refusal is justified. If, on the other hand, the minister responsible for energy policy makes a proposal not to exercise the right of first refusal in respect of the underlying transaction within the time limit, or does not take a position on the exercise of the right of first refusal on time, the competent minister conducting the FDI clearance will assess the merits of the submission and, where appropriate, prohibit the transaction or, failing that, authorize it.

A new obligation for the applicant is that the submission must now include, in addition to the previous mandatory content, a reference to the existence of a right of first refusal in relation to the transaction. In other words, the applicant must draw the attention of the competent minister to the possibility of a right of first refusal.

In addition to the foregoing, in Government Resolution No. 1576/2023 (XII. 19.), the government mandates that the minister responsible for energy policy has to become the beneficiary of the ownership rights and obligations of the State over the strategic target companies acquired as a result of the right of first refusal. Furthermore, the target companies have to be transferred to the state-owned MVM Zrt. as a contribution in kind in excess of the share capital within 6 months of their acquisition by the State. Moreover, the government resolution indicated the chapter in the national budget under which the financial coverage for the purchase of the target companies would be provided next year.

By Janos Toth, Laszlo Kenyeres, Partners, and Adam Lukonits, Associate, Wolf Theiss

In its recent judgment, the Supreme Court of Hungary examined the right of the employer to unilaterally determine the employee’s place of work, within the geographical area stipulated in the labour contract. In our article we examine what aspects shall the employer take into account and what are the employee’s rights in such cases, based on Hungarian case law.

Facts

The claimant worked as a travelling insurance salesperson at the defendant. She carried out her tasks outside the employer’s premises.

According to her labour contract, the place of work varied, within the “Central Hungary” business area of the employer, with the stipulation that the claimant shall occasionally appear in person at the time and place agreed upon, to settle accounts and to undergo training, which actually meant a 10 km drive to the employer’s office once per week.

The claimant’s husband suffered a road accident and became severely restricted in his mobility, the claimant had to take care of him on a daily basis.

In the midst of these circumstances, the employer informed the claimant that due to the claimant’s conflict with her immediate superior, she was transferred to another office of the company. It meant that the clientele remained the same, but the claimant got a new superior and had to appear in another office to settle accounts.

The claimant refused to work at a different office. The employer, after repeated warnings, terminated her employment with immediate effect since she intentionally refused the employer’s instructions to perform the work duties.

The claimant requested the restoration of the employment relationship. She stated in her claim that her employment was terminated wrongfully, since

1. i) the employer has failed to take into account her interests under the principle of equitable assessment when unilaterally determining the place of work (i.e. the place of the meetings to settle accounts), and therefore she lawfully refused the employer’s illegal instruction;
2. ii) the employer violated the principle of equal treatment when dismissing her, since she was unable to perform the employer’s instruction because of her husband’s disabled status.

The defendant stated that the claimant did not have any protected characteristics and the dismissal was lawful.

First and second instance judgement

The first instance court granted the claim and restored the claimant’s employment relationship.

The court found that employer, when unilaterally determining the place of work, has failed to consider that it caused unreasonable disadvantage to the claimant, as she had to take care of her husband, who needed help on a permanent basis.

The court found a violation of the principle of equal treatment based on the fact that the employee suffered discrimination because of the disability of her close relative (known as “discrimination by association”).

Following the defendant’s appeal, the second-instance court changed the judgment and rejected the claim.

It stated that the employer’s instruction to transfer the claimant to a different office did not affect her daily work, as she had to visit the same clients, and the personal meeting at the office (which was 20-30 minutes from her home) took about 1 hour per week, which did not prevent her from taking care of her husband and did not cause her a disproportionate disadvantage. Therefore, the claimant could not legally refuse the employer’s instruction.

The second instance court found that the employer did not violate the principle of equal treatment. The claimant did not prove that she was disadvantaged because of her husband’s disability, but at the same time, the defendant could successfully prove with witnesses that the claimant was transferred to a different office in order to eliminate the conflict between her and her immediate superior at that time.

The decision of the Supreme Court of Hungary

The Supreme Court found the claimant’s request for review unfounded.

According to the Supreme Court of Hungary, the courts correctly stated that the claimant’s place of work was the “Central Hungary” business area of the defendant. Within this area, the employer could unilaterally change the place of settlement without amending the employment contract. For the claimant, the transfer resulted in 1-2 hours extra travel per month, which did not cause disproportionate disadvantage to her.

The Supreme Court found that the claimant did not prove the violation of equal treatment. The Court emphasized that the employer tried to negotiate with the claimant several times, but in each case it was unsuccessful. The defendant therefore tried to resolve the situation, which failed due to the claimant’s uncooperative behaviour.

Comment

The terms of the employment contract, which is a bilateral agreement, can generally be amended by mutual agreement of the parties. However, in case the place of work is stipulated as variable within a wider geographical area (a city, a region or even the whole country), the employer can unilaterally determine the specific location within the area concerned. The recent judgment made it clear that this right is not unlimited: the employer has to consider the employee’s interests under the principle of equitable assessment and the decision may not cause disproportionate disadvantage to the employee, and most importantly, the employer must also be able to prove it in an eventual labor lawsuit.

(In the article, we analysed Supreme Court Decision published under No. “BH 2023.11.277”)

By Peter Gritta, Attorney-at-law, SmartLegal Schmidt & Partners

As of 1 January 2024, the Hungarian Parliament is expected to introduce a new framework for the conditions of residence and employment of third-country nationals in Hungary, significantly rewriting the existing rules.

Based on the currently effective Act II of 2007, employees – on general basis – can secure their longer-term employment with a residence permit for employment purpose on general basis. This system of rules will fundamentally change through the newly adopted law, which is yet to be promulgated. The following are the most prominent changes: 

1. The law divides workers into two groups according to their education, Guest Workers and Highly Qualified Workers. Third-country nationals with higher education are considered to be Highly Qualified Workers, those without such a degree are classified as Guest Workers.
2. Highly Qualified Employees will be entitled to a Hungarian Card, which (i) is valid for 3 years, (ii) can be extended as many times as needed, (iii) enables family reunification, and (iv) must be taken into account during settlement on the legal ground of National Card. The Hungarian Card will therefore be available to persons holding a BA/MA degree and working in a position with a FEOR 2 classification if their professional qualifications are listed in the announcement of the relevant minister.
3. Compared to the residence permit for the purpose of employment available until 31 December 2023, the rights of Guest Workers have been significantly narrowed by the new law, (i) they will not be eligible for family reunification; (ii) also, to switch from this legal ground to another, these workers are required to leave Hungary and apply through a Hungarian consulate from abroad. Accordingly, even if these citizens obtain a higher education degree in the meantime, they cannot initiate the administration from within Hungary.
4. If an employed third-country national has a secondary education, they can submit their application as a Guest Worker in the future. SSCs has previously hired employees with secondary education in entry-level positions (typically analyst, associate), so these companies should count on a group of employees who can only extend their stay as guest workers with a residence permit for employment purposes. As this title excludes the change of legal ground, there definitely will be cases when they cannot continue the career path offered by SSCs without interruption.
5. There is a common misconception that Guest Workers must leave Hungary after 3 years and will not eligible for permanent residency.  However, they remain entitled to (i) initiate the process from within Hungary on Guest Worker title after 3 years; and (ii) EU permanent residency after 5 years. Accordingly, the new legislation excludes them only from the eligible group for a National Card which is normally available to others after 3 years.  
6. Since neither official resolutions nor the applicable ministerial announcements are available in relation to the new law, those who based on the current rules in force can submit their application still this year, should do so. 
7. Business should continue as usual, however, the new law suspends the evaluation of ongoing procedures between 1 January 2024 and 29 February 2024, and no new applications can be submitted during this time. This carries the risk that if the authorization procedure of a newly joining employee is not completed by the end of this year, they may join to their employer with a delay of at least 2 months.

It is also worth mentioning that the new law only provides for the automatic extension of residence permits expiring between 1 January 2024 and 29 February 2024. This means that while measures to extend a residence permit expiring in March, for the purpose of employment, would normally begin in January, based on the new rules, the application can only be submitted on 1 March 2024 at the earliest. This is particularly risky for employees who are changing jobs, as they cannot be employed after the expiry of their residence permit until their new application is assessed. Based on the mandatory official shutdown, this can be up to 60 days, which can greatly affect business operations.

By Barnabas Buzasi, Counsel, Nora Bogdany and Helga Szkok, Associates, Wolf Theiss

According to the opinion released yesterday by the advocate general of the European Court of Justice, the Hungarian regulation that prohibits foreign taxpayers from submitting their documents in the second instance (appeal) procedures in VAT refund cases violates European law. If the final judgment will align with this opinion, it would not only simplify the process for foreign businesses to claim VAT refunds in Hungary but would also open the possibility to reclaim previous VAT payments.

Hurdle race: VAT refund for foreigners in Hungary

It is not uncommon for a foreign business that has purchased goods or services in Hungary to receive invoices with Hungarian VAT. Unlike the vast majority of domestic businesses, foreign businesses cannot deduct or reclaim the VAT on these invoices in their own VAT returns because they do not have an establishment in Hungary, nor a Hungarian tax number.

Foreign entities can only reclaim Hungarian VAT through a special procedure, filed annually. Not every invoice and supporting document needs to be attached to the application, however, the serial numbers of the relevant invoices must be indicated on the form.

Since the submission of invoices and other documents (e.g. contracts, performance certificates, etc.) is not mandatory, the Hungarian tax authority often requests additional documents within a one-month deadline during the assessment process.

Those who stayed out missed out – until now

The problem lies in the fact that the Hungarian tax authority communicates with foreign businesses and their designated contacts exclusively through the electronic channel specified in the application (typically the provided email address). However, it often happens that the foreign business provides an incorrect contact address, or the designated contact person no longer works for the company or maybe they are on a vacation, and therefore the foreign business fails to submit the requested documents within the deadline. Failure to meet the deadline leads to the termination of the procedure by the tax authority, and VAT is not refunded to the foreign businesses.

Many attempt to salvage the situation by submitting the documents requested by the tax authority in the appeal procedure against the first-instance decision. However, the second-instance authority automatically rejects these submissions, on the basis that, under Hungarian procedural rules, documents cannot be submitted anymore in the appeal procedure if the taxpayer did not submit them despite the tax authority’s request. This leaves the VAT permanently in the Hungarian budget, inaccessible to foreign businesses.

Is there still a way out?

In an ongoing tax procedure, the opinion of the advocate general published yesterday stated that Hungarian tax laws are inconsistent with EU laws because they do not allow foreign businesses to submit documents in the second-instance (appeal) procedures which were previously requested by first-instance authorities. The Hungarian regulation violates several fundamental principles, such as the principles of tax neutrality, effectiveness and proportionality.

What can be expected from this and what are the further questions?

In its subsequent judgment, the Court of Justice of the European Union will give special consideration to the advocate general’s opinion and the replies proposed therein. While the Court rarely deviates from such opinions in tax matters, it is not bound by them in its final decision-making process. If the formalities are followed, the European Court of Justice is likely to declare that the Hungarian regulation violates EU law.

Such a decision would probably result in the amendment of the current Hungarian regulations and raise the question that, pursuant to this decision, whether foreign businesses in similar situations could retroactively access their VAT stuck in the Hungarian budget. It may also raise further questions about whether the reasoning in the advocate general’s opinion can be utilized in the appeal stage of other types of cases, such as other VAT refund requests or tax inspections.

By Péter Barta, Senior Attorney, Jalsovszky

In Hungary, adherence to regulatory requirements is pivotal for the operations of domestic legal entities or businesses. Recently, there have been discussions regarding the significance of possessing a domestic bank account as mandated by Hungarian law, and the implications for companies failing to meet these criteria.

According to the prevailing legal framework, a company registered in Hungary must maintain a domestic bank account in line with the specifications outlined by the law. Failure to comply with this regulation may result in a judicial supervisory proceeding carried out by the competent court of registration.

It is crucial to note that simply having a foreign bank account does not meet the above requirement (i.e., having a foreign bank account does not exempt a company from failing to meet the prescribed obligation of maintaining a domestic (Hungarian) bank account).

Moreover, instances where domestic financial institutions deny opening a bank account for a company can pose significant challenges. Despite such refusals, the competent court of registration cannot intervene or alter the practices of these financial institutions. This underscores the importance of proactive measures by businesses to ensure compliance and address issues related to domestic financial accounts.

In essence, while the regulations surrounding domestic bank accounts for companies registered in Hungary might seem stringent, they are designed to uphold financial transparency and regulatory compliance. It’s imperative for companies to be aware of and adhere to these legal requirements to avoid potential legal repercussions and maintain a seamless operational status.

By Akos Mates-Lanyi, Head of Transactions and M&A, Noerr

Technical guidance published on the websites of the Hungarian Competition Authority (HCA) and the Public Procurement Authority in November 2023 on corruption risks and cartel agreements affecting the fairness of public procurements.

The guidance aims to both raise awareness among contracting authorities on how to ensure the most effective competition and avoid situations of corruption in public procurement procedures and to help them to identify the warning signs of anti-competitive behavior by tenderers. In addition to providing practical, up-to-date information and refreshing the content of the authorities’ previous publications, the guidance also covers, among other things, the risks of corruption and anti-competitive behavior arising from conflicts of interest, what makes a call for tender anti-competitive, and the concept of a public procurement cartel and its legal consequences.

A public procurement cartel is when independent competing undertakings collude to allocate the market for the goods or services to be procured through public procurement and agree on prices or other terms of sale, thereby eliminating or restricting competition between them. Legal consequences include fines imposed by competition authorities, exclusion from public procurement procedures, imprisonment, and private enforcement.

What can the contracting authority do in preparing and conducting a public procurement procedure to ensure that competition is fair?

During the indicative request for proposals and the preliminary market consultation, the contracting authority may not make known to economic operators the date that the procedure will be opened, nor may it specify the need for the supply, the quantity of the supply, or even the delivery date and its timetable. Suitability requirements must be defined in such a way as not to restrict competition. Although the involvement of interested economic operators in preparing the procedure is not prohibited, in such a case the contracting authority is obliged to communicate all relevant information relating to the procedure to the other economic operators as well. Using an external expert is also possible, but it is advisable to ask for a declaration of conflict of interest, as they are acting on behalf of the contracting authority and any collusion with potential tenderers will constitute an infringement on the part of the contracting authority. When choosing the type of procedure to be used, the procedure under Section 115 of the Public Procurement Act should be avoided, (whereby the contract notice is not published publicly but is sent directly to at least five professionally reliable economic operators capable of providing the service requested by the contracting authority), as the open procedure can ensure the broadest competition. Furthermore, it is important that failing to reply to the additional information requested by potential tenderers, should not result in the economic operator interested in the procedure not submitting a tender, and there should be equal opportunities to make up for deficiencies. 

What can a potential tenderer do if the terms of a public procurement procedure restrict competition, and what are the legal options available to the contracting authority if it detects restrictive behavior by tenderers?

If the contracting authority does not modify or clarify the terms of the procedure despite the potential tenderer’s request for additional information and the potential tenderer still considers them to be restrictive of competition, it can initiate a preliminary dispute settlement procedure. If the contracting authority fails to modify the restrictive terms as a result, potential tenderers can also initiate a legal remedy. 

If the contracting authority considers that certain tenderers are jeopardizing a clean procurement, it must notify the HCA by means of a so-called signaling. Price-fixing, false bidding, bid-rigging, bids placed on hold, market-sharing, information cartels and situations where undertakings form a consortium in a joint bid without objective economic justification, even though they could have competed individually, are all considered to be manifest infringements of the antitrust rules. The signaling will be carried out in a secret procedure, without the knowledge of market participants after consultation with the HCA’s Cartel Detection Section. However, this does not automatically lead to the opening of competition proceedings. In opening a case, the HCA will consider, among other things, how de minimis rules may apply to the conduct, whether the legal system allows other ways to remedy the infringement, what the impacts of the challenged conduct on the relevant market are, what the estimated value of the public procurement procedure is, and what the advantages and disadvantages of the HCA initiating an investigation are.

By Kenez Szabo, Junior Associate, Baker McKenzie