Category: Hungary

From the deceptive quiet of early 2023 to a summer bustling with legal reforms and taxing challenges, Jalsovszky Partner Agnes Bejo sheds light on pivotal developments in Hungary ranging from the EU-mandated whistleblowing system to changes in the trust system, environmental responsibilities, and the shifting investment climate in the country.

“For us the year kicked off quite slowly, which was deceptive in hindsight,” Bejo begins. “Then we soon found ourselves swamped with work, especially during the summer.” Noting numerous legal developments, she highlights “the new whistleblowing system, which was implemented as per the EU directive. The initial scope was remarkably broad, leading to a need for revisions before final acceptance,” she says.

Moreover, Bejo reports that recent times have been “hectic for our tax colleagues. A key development was made in our trust system, which was introduced a few years ago, somewhat following the Anglo-Saxon model. It has gotten more and more popular over time, but there have been some uncertainties in the regulation and the use of a certain tax benefit, like the possibility of revaluing assets transferred into the trust fund without incurring taxes.” However, she explains, “the main purpose of our clients has always been wealth structuring for family and inheritance reasons. New provisions would be introduced from September to give more clarity on tax and other related rules, so our summer was consumed with accommodating clients’ needs to adapt to these changes.”

Additionally, Bejo reports that a new fee related to environmental responsibility was introduced: “the Extended Producer Responsibility fee. It’s an environmental initiative covering products like batteries, vehicles, and plastics – it has a complex reporting and fee calculation system, and it significantly impacts businesses across the board,” she explains. “While the spirit of the initiative is commendable, its implementation has been problematic, necessitating authority support for compliance.”

And currently, according to Bejo, the markets have accelerated significantly compared to the start of the year. “Despite various factors, investors remain interested in Hungary,” she says. “At the start of the year, we saw cautiousness in private equity deals and regional players entering Hungary. At the moment, the dynamic is shifting toward more strategic deals, including generational transitions in businesses. Although not all deals are massive, there’s a healthy mix of mid-sized and larger transactions,” she explains. “Foreign investors are often surprised by the rigor of Hungary’s FDI system, yet investment continues.”

Finally, outlining the most vibrant sectors, Bejo says that there has been “a lot of activity in life sciences, particularly in private healthcare and laboratories. However, the second half of 2023 has brought a focus on production, like automotive, plastics, and rubber suppliers. The tech sector, including IT and start-ups, remains vibrant” she reports. “Despite long-standing pessimism and fears of an impending crisis, the market doesn’t seem to reflect that. We’re busy, and I’m personally optimistic about the future, even with the ongoing challenges” Bejo concludes.

From 1 January 2024, companies operating in Hungary will face new significant cyber security related obligations under the Hungarian legislation implementing the EU NIS2 Directive. In this short article, we describe which companies will be affected by the new regulation and what are the most important tasks in the new year.

As regards to the background, the NIS2 Directive which is the strengthened European cybersecurity legislation entered into force in January 2023. To implement the provisions of the NIS2 Directive to the Hungarian legislation, the parliament enacted Act XXIII of 2023 on cybersecurity certification and cybersecurity supervision (“Cybersecurity Certification Act”).

The companies concerned

Service providers and organisations operating in “high-risk” and “risky” sectors are covered by the new law. High-risk sectors include for example energy, transport, healthcare, digital infrastructure and electronic communication. Among others, postal services, food and chemical manufacturing, electronic product manufacturing and digital services are classified as risky sectors.

As a main rule, the Hungarian Cybersecurity Certification Act does not apply to SMEs, only companies that employ at least 50 employees or have an annual net turnover or a balance sheet total exceeding 10 million Euros.

However, companies electronic communications service providers, trust service providers, DNS service providers, top level domain name registrars and domain name registration service providers are covered by the law regardless of their size.

Major obligations

The Cybersecurity Certification Act requires basic cybersecurity measures for the electronic information systems of the entities covered by the act.

As a part of the basic cybersecurity measures, companies concerned by the law shall classify their electronic information systems. Based on the risk of confidentiality, integrity, or availability being compromised, “basic”, “significant” or “high” security class shall be applied.

The specific security measures applicable to each security class will be laid down in a ministerial decree and shall be applicable as of 18 October 2024.

The companies covered by the act have until 30 June 2024 to register with the Regulated Activities Supervisory Authority.

Further, until 31 December 2024 the companies shall appoint an independent auditor who shall conduct the first NIS2-compliant cybersecurity due diligence until 31 December 2025.

Fines

In accordance with the NIS2 Directive, the companies concerned that fail to comply with the cybersecurity related obligations may face administrative fines of a maximum of 10 million euros or 2% of their total worldwide annual turnover.

Based on the above, we advise companies operating in Hungary to check whether they are covered by the new Cybersecurity Certification Act and if yes, to start the preparation of the necessary measurements.

By Anita Vereb, Attorney-at-law, SmartLegal Schmidt & Partners

CMS has advised coordinator and facility agent Raiffeisen Banking Group on the EUR 600 million nine-banking-group club multicurrency revolving credit facility for the MOL Group. Baker McKenzie advised the MOL Group on the deal. CMS also acted as transaction counsel on MOL’s JPY 14.6 billion bilateral revolving credit facility and its EUR 50 million bilateral EUR/CNY revolving credit facility.

The three agreements – with MOL Group Finance Zrt as borrower and MOL Plc as guarantor – constitute a full refinancing of the revolving credit facility agreement signed by the MOL Group in December 2017 for a total of EUR 750 million, which would have matured in 2024. The tenor of the new facilities is five years with up to two one-year extension options.

The CMS team included Partner Ana Radnev, Senior Counsel Eszter Torok, and Associate Balazs Bibok.

The Baker McKenzie team included Partners Jozsef Vagi and Michael Foundethakis and Associate Andrea Weinraub.

Mandatory Deposit Refund System (DSR) comes into effect as of 1 January 2024 in Hungary. The newly introduced legislation clarifies the key points of the system and the specific obligation of the parties concerned.

As a general rule, from a consumer’s perspective, deposit refund schemes charge users an extra fee when they buy a product, which is refunded if the product packaging is returned for recycling or reuse. Similar, but not unified schemes have already been implemented throughout the EU with Hungary joining in as of 1 January 2024.

The Mandatory Deposit Refund System will apply generally to the non-reusable or reusable packaging of ready-to-drink or concentrated beverage products, in the form of bottles or cans, plastic, metal or glass material, with a capacity of 0.1 to 3 litres (but excluding milk and milk-based beverage products). Small producers under 5000 covered products a year are exempted from the DSR obligation. Producers are also free and encouraged to extend the DRS voluntarily to additional items not covered by the mandatory DRS.

DRS will be operated and monitored by MOHU, a subsidiary of MOL Nyrt. as concessionaire.

Producers are required to register their products 45 days prior to placing those on the market and to pay connection fee and service fee for reusable products subject to a mandatory return fee, and a connection, service and return fee for non-reusable products to MOHU. With the introduction of DSR, EPR (extended producers’ responsibility) legislation has been also amended so that the EPR fee does not apply, where a DSR fee is due.

Distributors are required to accept and refund the products under DSR. In practice, for stores selling food with a sales area of more than 400 sqm, the return and refund should be made available via automatic reverse vending machine. Such machines, based on the request of the distributor, are to be provided by MOHU. The mandatory deposit of HUF 50 per non-reusable product will be charged and invoiced to and paid by the consumers and will be refunded upon return (deposit for reusable products will be set by the manufacturers).

The registration of producers and application for reverse vending machines was due earlier this year, but the registration for products is still open by 15 November 2013 and for voluntary DRS continuously going forward. 

By Bálint Zsoldos, Head of Tax, KCG Partners Law Firm

The Hungarian Whistleblower Protection Act has entered into force this July. While bigger companies have to operate the internal whistleblowing system since the above date, medium sized businesses (50-250 employees) were given a prolonged period until the 17th of December 2023 to implement the reporting channel. Since the deadline is approaching, we summarize how Hungarian SMEs can comply with the Act.

In general, companies or other legal entities employing at least 50 workers are obliged to establish channels and procedures for internal reporting and for follow-up.  

The term “worker” used by the Act is a broader term than employee, as it also includes other legal relationships aimed at the employment of natural persons.

Entities with less than 50 workers may choose to voluntarily set up a reporting channel.

In case of certain activities stipulated in the Act, for example activities falling within the scope of the AML Act, the reporting channel shall be established regardless of the number of workers.

The operator of the reporting channel is obliged to investigate the reports and, if necessary, to take the appropriate measures, and to inform the reporting person about the report.

As a first step, the entity shall create a suitable reporting system, either by itself (e.g., an email address) or by entrusting an external service provider, who usually provides an online interface on a monthly fee basis.

Then, the legal entity must designate the person(s) or department who handle and investigate the reports, which can be either an internal person/department within the entity or an external agent independent of the entity.

The internal person must be impartial, the external agent must also comply with the conflict-of-interest rules defined in the Act.

To comply with the Act, the legal entity must establish an internal policy regarding the reporting channel, and employees must be informed about it. Since the operation of the reporting channel involves the management of personal data, the entity must ensure data protection compliance, including updating the relevant data protection documents.

To summarize the above, medium sized businesses (50+ workers) in Hungary have to establish internal reporting channel before 17 December 2023. It is advised to involve a legal expert in the process as most of the service providers who advertise online focus on the IT aspects of the reporting, which alone is not sufficient to comply with the Act.

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

Lakatos Koves and Partners has advised Ukrainian postal and courier company Nova Post on corporate and regulatory aspects of its Hungarian market entry and the opening of its first Hungarian branch. 

Nova Post is a logistics company that offers a full range of logistics services for both private individuals and business clients ensuring fast and reliable delivery of documents, parcels, and cargo across Europe, as well as between the EU and Ukraine. It has already opened offices in the Czech Republic, Germany, Estonia, Latvia, Lithuania, Moldova, Poland, Romania, and Slovakia and, according to the firm, has plans for further expansion. 

The LKT team included Partner Adam Mattyus and Senior Lawyer Kornel Dirner. 

The Hungarian Competition Authority (HCA) recently published a draft report on its findings based on an accelerated sector inquiry into Hungary’s online accommodation booking market. The sector inquiry was launched on 24 August 2023 after the HCA received numerous complaints during the peak summer holiday season about the practices of Booking.com, a key market player, for withholding payments to accommodation providers.

However, the sector inquiry was not limited to the investigation of Booking.com’s alleged unlawful practices, which would have entailed only a targeted investigation of that company. The HCA wanted to gain insight into the online accommodation booking market in Hungary and to establish whether competition on the market has been harmed in any way. It therefore analysed the sector from the competition law point of view as well as from an unfair consumer practice perspective, as the Hungarian watchdog is also in charge of the country’s most significant consumer protection matters.

The HCA focused in particular on how online accommodation booking sites deal with their contractual partners, the accommodation providers. This sector inquiry is not without precedent: the HCA conducted a similar inquiry into the practices of online accommodation intermediaries in 2016.

As part of the current investigation, the HCA conducted dawn raids at the offices of major accommodation booking sites in Hungary, seizing documents and data storage devices. It also contacted market players with information requests and reached out to accommodation providers connected to these online platforms via market research. After analysing the collected data, the HCA formulated its conclusions and made a number of legislative recommendations regarding the online accommodation booking market. In the following we will summarise the most important findings of the draft report. OTAs and accommodation providers should pay attention when the final report comes out, as depending on the recommendations, the HCA may enforce the findings shortly after the report is published.

The HCA’s findings and recommendations

The HCA recommends to the Hungarian legislator to prohibit both narrow and wide price parity clauses. Narrow price parity clauses are those applied by online booking platforms restricting accommodation providers from offering prices on their own sales channels (e.g. on the hotels’ own website) that are lower than prices for the same room on the respective OTA sites. Wide price parity clauses prohibit the accommodation providers from offering lower prices anywhere for the same room – either on their own sites or on any other sales channel, including on the website of another OTA – than the prices offered on the respective OTA sites. By recommending the legal prohibition of both price parity clauses to the Hungarian legislator, the HCA aims to follow a solution that has been applied in other European countries and hopes to boost competition on the market, as the market report has revealed that accommodation providers tend to apply the same prices on different sales channels, even if there is no obligation to do so under a narrow price parity clause. This marks a change from the Hungarian watchdog’s position in its 2016 market report, which only spoke out against wide price parity clauses but considered the use of narrow price parity clauses to be a suitable solution at that time.

More transparency in the ranking of search results for rooms

The HCA also points out in its draft report that an offer for specific accommodation appearing on top of the search list or at a lower position influences competition between accommodation providers. The ranking of an offer may depend on several factors, such as guest ratings, booking statistics, additional services offered by the accommodation provider, or in certain cases additional payments to the online booking platforms.

In the HCA’s view it is problematic if online platforms provide better ranking results for accommodation providers in exchange for higher referral fees without informing customers. The HCA is also not satisfied with a solution where certain information on ranking methods is available for consumers but without providing clear, easily understandable orientation for them about how the search results are ranked.

The HCA recommends that accommodation intermediaries should start making the criteria for ranking search results transparent on their sites, including visible guidance notifying customers that a certain accommodation ranks higher because its provider agreed to a higher referral fee. The HCA also plans to set a 90-day deadline after publication of the final version of its report for platforms to comply.

More effective complaint management systems and suggested changes in contracts

One of the instigations for the inquiry was a series of complaints in the summer of 2023 that Booking.com withheld payments from its contractual partners, the accommodation providers.

The HCA highlights that while the general terms and conditions of the OTAs foresee a detailed and well-defined set of rules regarding the contractual shortcomings of hotels and other accommodation providers, the same cannot be said about similar situations where online platforms violate their obligations under their contracts with hotels.

To resolve this, the HCA urges large online booking sites to introduce a contractual framework with clear, well-defined mechanisms, including the consequences of a breach of contract by online platforms, and to set up a more effective system for dealing with complaints from contractual partners, guaranteeing a more effective in-house problem-solving mechanism.

Next steps

The report is still considered a draft, which market players are allowed to comment on until 20 November 2023. Therefore, its content and conclusions may still be subject to changes due to the various comments. Nevertheless, the draft report provides a good indication for market players of current or previous practices that the HCA suspects may violate the applicable competition and unfair consumer practices rules. The HCA’s recommendations set out red flags that the HCA will be looking for in its future investigations.

The Hungarian parliament seems to be following the draft report closely even at this stage. The economic committee has already put the draft report on its agenda and discussed it. This may signal that the parliament is keen to assist the HCA by legislative means, though perhaps a little prematurely given that the comments phase has not been completed yet.

In any case, online accommodation booking providers in Hungary are advised to keep an eye on the adoption of the final report and to review their contractual frameworks, complaint management systems and current practices, as these will need to comply with the standards set by the HCA in its report. Once a report is adopted, the HCA will act on and enforce the rules and recommendations laid down in it within a short time.

By Anna Turi, Counsel, and Kristof Lehoczky, Associate, Schoenherr

Baker McKenzie has advised Deutsche Telekom IT Solutions on its headquarters relocation to the Hungarian Telekom building in Budapest. DLA Piper advised developer WING on the lease.

According to Baker McKenzie, Deutsche Telekom IT Solutions “is the largest business service center in terms of the number of employees in Hungary, and its office move has included 3,000 employees of the company.”

The Baker McKenzie team included Partner Benedek Kovacs.

The DLA Piper team included Partner Gabor Borbely, Attorney Angela Toth, and Senior Associate Bettina Boncok.

Some significant amendments to the Hungarian Competition Act have entered into force. The Hungarian Competition Authority (HCA) has been very active recently in various sectors. This summary briefly describes the most important changes. Some of the changes require an update to the compliance materials for Hungary.

Antitrust / Consumer protection

As of 1 September 2023, the maximum fine which may be imposed under the Hungarian Competition Act increased from 10 % to 13 % of the worldwide net turnover of the entire group of undertakings in the last closed financial year.

• Applicable not only to antitrust but also to mergers (e.g. gun jumping) as well as to unfair commercial practices (breach of UCP/consumer protection rules)
• Unclear yet if it will have a substantial effect on the actual fines imposed
• Different maximum fines if the HCA proceeds on an EU law and HU law basis in parallel?
• Temporal scope is not defined (applicable to ongoing proceedings vs. new proceedings vs. new infringements)

Formal notice – a new tool of the HCA

• By way of a formal notice, the HCA may contact and inform an undertaking about its concerns regarding the undertaking’s allegedly unlawful practices, without or prior to opening formal proceedings

Merger control

New mandatory filing thresholds

The thresholds for mandatory filing to the Hungarian Competition Authority have increased significantly (the combined threshold by 25 % and the individual threshold by 50 %). As a result, a concentration must be notified to the HCA provided the groups of undertakings achieved the following Hungarian turnover in the last closed financial year:

• Combined HUF 20bln – approx. EUR 50m (previously HUF 15bln); and
• Individual HUF 1.5bln – approx. EUR 3.75m (previously HUF 1bln)

Voluntary filing now indeed voluntary, threshold the same

In addition, at the request of the industry, the legislator has clarified that if the mandatory notification thresholds are not met, the notification of mergers exceeding a HUF 5bln combined threshold is indeed voluntary and not an obligation.

Filing form revised – new ones issued

Since 1 July 2023, new filing forms must be used. These have been further simplified but are still longer than many filing forms outside Hungary.

Furthermore, a new short form filing was introduced under certain conditions with a significantly reduced list of questions, e.g. if no overlapping and/or related markets can be identified; or creation of a full-function joint venture which will not have substantial market activity in Hungary within a foreseeable period.

Fine for gun jumping

The maximum daily fine increased from HUF 200,000 to HUF 300,000 (approx. EUR 750), but the minimum fine requirement was abolished.

DMA

The HCA has been given new powers to enforce the EU Digital Markets Act (DMA).

• The HCA may launch competition proceedings to determine whether, in their opinion, digital platform providers with significant market impact, i.e. so-called gatekeepers, are complying with their obligations under EU law. The HCA is to report the results of its investigation to the European Commission responsible for enforcement.

Enforcement trends

Sector inquiries

Enforcement trends: The HCA has conducted several accelerated sector inquiries in the sectors most affected by inflation in the last couple of years:

• food sector (dairy products, canned food, alcoholic and non-alcoholic beverages, etc.);
• previously in the building industry (bricks, lumber);
• online travel sector (Booking.com).

The HCA is entitled to carry out dawn raids in case of accelerated sector inquiries!

HCA to fight against inflation:

• The HCA – unusually for a competition authority – has developed an online price watch system on its website to compare prices of the most popular food retail products from the largest food retail chains.

Antitrust

The HCA has not lost its focus on public procurement proceedings and recently closed an eight-year-long cartel investigation and fined companies in the road construction sector as well as in the passenger transportation (boat) sector.

The HCA warned producers and importers of packaged products about possible competition law infringements by the coordinated passing of waste recycling fees (extended producer responsibility fees, EPR) to customers.

The food sector is a priority for the HCA: further to several sector inquiries, the HCA has also initiated antitrust proceedings in the sector (e.g. investigating the setting of minimum (re)sale prices of soft drinks at large retail chains).

Hungary’s supreme court, the Curia, recently ruled on and provided guidance on non-poaching agreements as well as other conditions agreed on by an association.

By Anna Turi, Counsel, and Mark Kovacs, Attorney at Law, Schoenherr

In a recent decision, the Hungarian Supreme Court had to decide in case, where the amount called by the beneficiary of the guarantee was more than the actual costs incurred. Does call on the bank guarantee shall be proportionate to the costs actually incurred? Shall the beneficiary settle accounts with the debtor after the bank guarantee has been called?

Facts

In 2010, the defendant („Defendant”), as the customer, and a consortium, as the contractor (“Contractor”), led by the plaintiff (“Plaintiff”), entered a contract for the construction of a primary school.

Under the contract between the parties, the Contractor was required to provide a bank guarantee equal to 5% of the gross contract price for the guarantee period of 60 months. The Contractor complied with this obligation.

The Contractor implemented the primary school, however, during the technical handover, and subsequently until 2016, several defects regarding the flooring, the plaster on the facade and the wood panelling were discovered.

The Contractor corrected some of the defects, however, he also disputed certain defects, moreover, he also failed to rectify certain acknowledged defects. In August 2016, the Defendant called on the full amount of the bank guarantee.

First Instance Court decision

In its statement of claim, the Plaintiff requested the Defendant to pay appr. 94% of the amount of the bank guarantee called on by the Defendant, while the Defendant disputed the wrongfulness of the call.

Based on the expert’s opinion, the first instance court (“First Instance Court”) found that the Defendant had lawfully called up to the 86% of total amount of the bank guarantee, while the remaining 14% of the guarantee amount was called on without legal basis.

Consequently, the First Instance Court ordered the Defendant to pay to the Plaintiff the 14% of the guarantee amount and its interests.

Second Instance Court decision

The second instance court (“Second Instance Court”), which acted on an appeal by both parties, examined only whether the call on the bank guarantee was wrongful or not, as according to its view, the Plaintiff did not submit a claim for settlement between the parties in its claim, he invoked only the wrongfulness of the call.

Based on the expert’s opinion, the Second Instance Court, concluded that the Plaintiff performed defectively, which justified the call on the bank guarantee.

Furthermore, the Second Instance Court held that the call on a bank guarantee is similar to a right of retention, under which the beneficiary may withhold a proportionate part of the consideration until the repair or replacement. Therefore, the proportionality requirement applies also to the calling on the bank guarantee.

In the present case, the difference between the cost calculated by the expert and the amount of the bank guarantee called is 14%, which cannot be considered disproportionate given the scope and volume of the defects. Therefore, the Defendant’s calling of the entire amount of the bank guarantee was not wrongful.

Based on the above, the Second Instance Court altered the First Instance Court decision and dismissed the Plaintiff’s claim entirely.

Decisions of the Hungarian Supreme Court

Acting on the request for review of the Plaintiff, the Hungarian Supreme Court agreed with the Second Instance Court and laid down that the beneficiary was obliged to settle the amount of the called bank guarantee with the obligor.

In essence, the amount of the bank guarantee called upon can be used by the beneficiary only to cover the costs actually and legally incurred in connection with the obligation secured by the bank guarantee, and any amount in excess of that amount must be repaid to the debtor (settlement of accounts).

The Hungarian Supreme Court held that, contrary to the finding of the Second Instance Court, the Plaintiff had in fact submitted a claim for settlement.

Furthermore, the Hungarian Supreme Court mentioned that the analogous application of the provisions of the retention right to the bank guarantee was wrong as the retention right can be interpretated in case of a consideration of a certain thing, however, the bank guarantee, which is an ancillary obligation, cannot be interpreted as a consideration in the context of the relationship between the contracting parties.

Consequently, the Hungarian Supreme Court set aside the final judgment and ordered the Second Instance Court to conduct a new trial and render a new decision.

Comment

In its decision, the Hungarian Supreme Court confirmed the domestic court practice according to which, in case of a call on the bank guarantee, a claim for the wrongfully called amount can be made against the beneficiary of a bank guarantee. In other words, beneficiaries of a bank guarantee have an obligation to settle accounts after a guarantee call.

Moreover, the Supreme Court also laid down that when assessing the wrongfulness of a call on the bank guarantee, the proportionality of the call compared to the amount is not relevant.

Based on the present decision of the Hungarian Supreme Court, it can still be concluded that the bank guarantee can provide a solution beneficial to both parties in securing contractual obligations, especially in construction projects.

(In the article, we analysed Supreme Court Decision published under No. Pfv.21190/2022/4.)

By Richard Schmidt, Partner, and Peter Korozs, Junior Associate, SmartLegal Schmidt & Partners