Category: Hungary

Kinstellar has advised the Electrolux Group on the sale of its manufacturing facility in Nyiregyhaza, Hungary, to Qvantum for EUR 38 million. CMS reportedly advised Qvantum.

The Electrolux Group is a Swedish home appliances manufacturer.

Qvantum is a Swedish heat pump manufacturer.

The Kinstellar team was led by Managing Associate Barnabas Sagi and included Partners Annamaria Csenterics and Peter Voros, Managing Associates Peter Gullai and Daniel Peter, Associates Bertalan Vanya and Judit Sos, and Junior Associates Anna Szilagyi and Szabolcs Szilagyi.

Editor’s Note: After this article was published, CMS confirmed it had advised Qvantum. The firm’s team included Partner Gabor Czike and Senior Associate Zsofia Zsurzsa.

The Hungarian Government plans to further develop the regulatory framework for geothermal energy, according to the REPowerEU chapter of Hungary’s Recovery and Resilience Plan.

On 18 May 2022, the European Commission presented its REPowerEU plan as a response to the hardships and global energy market disruption caused by the conflict between Russia and Ukraine. REPowerEU seeks to end the EU’s dependence on Russian fossil fuels, make further advances in tackling the climate emergency, promote energy efficiency and savings, and boost the share of renewables in EU energy consumption.

The chapter titled REPowerEU of Hungary’s Recovery and Resilience Plan is designed to plan how to contribute to the objectives set out under the Commission’s REPowerEU. The chapter outlines 14 investment points and 14 reform points, one of which deals with the development of the geothermal regulatory framework. The regulations regarding the exploration of geothermal resources and the use of geothermal energy changed significantly in 2023. The previous concession obligation and redundant authorization processes have been abolished, and a wide range of legal entities can apply for geothermal exploration permit to the mining authority.

The planned reform aims at amending the regulation to ensure the quality of geothermal research and exploitation work programmes submitted by developers. The quality of the work programme is understood in the context of the exploration concept and the market needs for geothermal energy. Proposals for changes to the current legal framework will be fleshed out after an evaluation of the lessons learned from the current exploration licensing process.

The planned deadline for implementing the reform is set for the last quarter of 2024. The reform is expected to make the regulation of geothermal energy exploitation transparent and competitive, improve geothermal exploration and exploitation work programmes and consolidate the regulated market for potential geothermal energy suppliers.

By Gabriella Galik, Attorney at law, KCG Partners Law Firm

Already last year, it was noticeable that after several years of decline, the Hungarian Tax Authority conducts more and more tax audits. In 2022, the number of tax audits increased by 6.2% compared to the previous year. Experience shows that this trend is expected to continue even more strongly this year. The most commonly audited tax category remains VAT.

Stricter tax authority action

But it is not only the number of tax audits that is showing an increasing trend. Contrary to the taxpayer-friendly approach in recent years, the Hungarian Tax Authority is now acting much more rigorously during the tax audits. One consequence of this more assertive approach is that in an increasing number of cases, criminal proceedings are initiated in connection with the tax audit, and in many cases, the so-called increased tax penalty of 200% is being imposed. Another noticeable sign of the stricter and more assertive approach is that the Hungarian Tax Authority restores to temporary security measures more and more frequently. This means that the Hungarian Tax Authority, without any prior notice, already freezes the amount corresponding to the alleged tax shortfall and the planned tax penalty on the taxpayers’ bank accounts before the tax audits are closed. Such a measure can potentially cripple the operations of taxpayers.

The reasons for the increase: declining tax revenues

The main underlying reason behind the increase in the number of tax audits is likely that, unlike in previous years, tax revenues significantly lag behind projections. Despite record-high inflation and the rising cost of consumer baskets, the opposite effect is being triggered: consumers are spending less and less, leading to significantly less VAT revenue flowing into the central budget. Figures published by the Ministry of Finance in August 2023 show that the projected VAT revenues for 2023 are already approximately HUF 620 billion behind schedule. This trend is further exacerbated by the abolition of certain tax categories, such as the restructuring and slimming down of green tax, which previously generated revenue in the tens of billions Hungarian forints. And it seems that the loss of tax revenue cannot be compensated by newly introduced special taxes.

What can we do?

To face tax audits with ease and confidence, it is important to keep and maintain up-to-date documentation and information related to economic activities. This is particularly recommended since, due to the deadlines for tax audits, the Hungarian Tax Authority often gives taxpayers only 5 or even 3 working days to make a statement or submit documents.

Perhaps even more important, is the selection of the right business partner, and during the partner selection process, conducting the necessary due diligence procedures and documenting their completion. Unfortunately, we increasingly find that taxpayers tend to take this lightly, treating it generously, even though in many cases, this is the quickest and most painless way to conclude a tax audit.

Having an internal scenario for what to do if the Hungarian Tax Authority initiates a tax audit can greatly ease the taxpayer’s situation. A well-structured scenario can serve as a crutch, for example, in

terms of who can make statements during tax audit and in connection with what; how to handle short deadlines of 3-5 days; when to involve an expert in the procedure; what to expect when during testimony, etc. A well-elaborated scenario can preempt haste and the potential for resulting mistakes.

Finally, regardless of type of the tax audit, it is advisable to engage an expert from the very beginning who can oversee the process with a tax litigation logic. There are documents that, if not submitted during the tax audit, cannot be replaced later. Moreover, anything we communicate to the tax authority during the tax audit can be used against us in the tax proceedings. With a thoughtless statement, we may lose the case before the tax audit has even substantially.

By Henrik Bereznai, Attorney, Jalsovszsky

Social media platforms significantly changed the ways how people express their opinions: sharing views became easier than ever. On the one hand, this is positive, but on the other hand, it is also dangerous in the employment context, as the employee’s opinion may be prejudicial to the employer’s interests. A recent decision of the Hungarian Supreme Court gives answer to the question whether the employer can dismiss the employee for expressing his opinion on Facebook.

Facts

The claimant was a professor at a Hungarian university, he was the respected member of the academic community.

A post was published on the Facebook in relation to the Center for Fundamental Rights, a Hungarian research institute and the claimant made a public comment about the Center’s analysts which among others stated that “at least they are pretty, I wonder what other functions they have”. A few days later, the claimant shared a post on his Facebook page which contained further quite offensive remarks about the Center’s colleagues.

The university, the claimant’s employer started an inadmissibility procedure against the claimant and as a result of the procedure terminated the claimant’s employment as a civil servant. According to the justification of the dismissal, the claimant made public posts and comments on a well-known social media platform which were defamatory, degrading to the female gender and violated equal treatment and the human dignity. The posts were incompatible with the university’s values of respect for human dignity and gender equality and could harm the employer’s reputation.

The university sent a statement to the Hungarian News Agency commenting the claimant’s behavior, stressing that it is undignified and unacceptable.

First and second instance judgement

The claimant sued the employer and demanded reinstatement, alternatively damages and severance pay. Further, he requested grievance award claiming that the defendant violated his privacy rights, specifically his right to protection of personal data.

The first instance court found that the dismissal was lawful. According to the court the reputation of the defendant was seriously damaged by the fact that the claimant’s post created outrage and negative value judgements among readers, his profile included the defendant as his employer and it was widely known by his numerous followers, which created a direct link between the claimant’s post and the defendant. Nevertheless, the claimant was entitled to grievance award since the defendant infringed his right to protection of personal data when it stated in a press release the reasons for the termination of the claimant’s employment.

The second instance court agreed with the first instance court’s findings and upheld the judgement. The court emphasized that the comment about women and the statements about the colleagues of the Center were capable of causing serious damage to the defendant’s reputation. In accordance with the court practice even in the absence of indicating the defendant, the claimant could be linked to the defendant institution. Further, the expression of the claimant’s opinion was not protected in view of the manner in which it was communicated, as it resulted in the violation of the fundamental rights of others.

The decision of the Supreme Court

The Supreme Court analysed the case based on the emerging case law and made the below conclusions.

In the Supreme Court’s view, if a user wishes to express his opinion in the social media, he is expected to do so in full awareness of the basic functional characteristics of the forum used. In the present case, although the post itself did not indeed contain the identity of the claimant’s employer, it could be found out from the claimant’s profile in two clicks without any special technical knowledge, establishing the direct link between the claimant and the defendant university.

According to the highest judicial forum, in deciding the dispute, the claimant’s position had to be assessed in greater detail: the claimant, as a university lecturer of recognised standing in his profession and as a member of the Senate and the Faculty Council of the defendant, is subject to higher expectations.

The publicity of the communication was also assessed. The claimant’s first comment was widely publicised by being published under a public post by a politician, and the incident was also reported by a portal. The publicity can be established in relation to the other post as well, since the claimant has hundreds of friends and followers.

The Supreme Court stressed that the content and form of expression of the communication are also reprehensible. The first comment can be interpreted as a degrading statement about women, calling into question the equal treatment of women. The second one also contains vulgar statements in an unjustifiably offensive and insulting manner, which is also not accepted by consistent case-law.

As regards the purpose of the communication, it cannot be established that it was expressly aimed at damaging the defendant’s reputation. However, in terms of its effect, in particular the outcry caused among other commentators, the claimant’s conduct was objectively capable of damaging the reputation of the employer: the expression of his opinion was contrary to the principles of the defendant.

Comment

The final judgement is in line with the evolving court practice regarding the limitations of the freedom of expression in the context of social media platforms. The Supreme Court made it clear that, given the nature of social media, namely that the link between the employee and the employer may often be easily established, employees should exercise increased caution when expressing their opinions on such platforms. Since a comment, especially if it receives a lot of publicity like in the above case, can seriously damage the reputation of the employer, the expression of an opinion in an inappropriate form and content should not be protected, and therefore may be a legitimate ground for dismissal.

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

The regulation of artificial intelligence (AI) is not a new issue. We understand that the use of such technologies can bring many benefits – such as better healthcare, safer and cleaner transport system, more efficient production, or cheaper and more sustainable energy – but we also are aware that they can pose significant risks if not properly regulated.

Specific objectives of the European Union

As part of the European Union’s (EU) digital strategy, the European Commission proposed the first EU regulatory framework for artificial intelligence in April 2021. The European Parliament examined the Commission’s proposal and set out its own objectives.

Its general aim is to ensure the proper functioning of the single market by creating the conditions for the development and use of reliable artificial intelligence systems in the EU. The framework sets out a harmonised legal framework for the development, marketing and use of AI products and services on the EU market.

In addition, the Parliament sets further specific targets. In this context, it aims to:

• ensure that AI systems placed on the EU market are safe and respect existing EU law,
• ensure legal certainty to promote investment and innovation in AI,
• improve the governance and effective implementation of EU law on fundamental rights and safety requirements applicable to AI systems; and
• facilitate the development of a single market for legitimate, safe and trustworthy AI applications and preventing market fragmentation.

The Parliament also believes that it is essential that AI systems should operate only under human supervision, rather than automation, in order to prevent harmful consequences. 

Defining artificial intelligence 

Currently, there is no universally accepted definition of “artificial intelligence” by the scientific community, and the term is often used as a generic term for computer applications based on various techniques that exhibit capabilities that are commonly and currently associated with human intelligence.

However, the Commission has found that a clear definition of artificial intelligence is crucial for the classification of legal liability. The Commission also proposed that the definition of “AI” and “AI system” should be established at EU level, thus ensuring legal harmonisation and certainty. The framework defines the concept of an “artificial intelligence system”, largely based on the definition already known and used by the Organization for Economic Cooperation and Development (OECD), as follows: 

“…software that is developed with [specific] techniques and approaches [listed in Annex 1] and can, for a given set of human-defined objectives, generate outputs such as content, predictions, recommendations, or decisions influencing the environments they interact with.” 

Risk-based classification

The use of AI may have a negative impact on the fundamental rights of individuals and on the security of users, given its specific characteristics (e.g. opacity, complexity, data dependency, autonomous behavior). To address these concerns, the framework introduces a risk-based approach, whereby the level of legal intervention is always adapted to the actual level of risk. Accordingly, the framework distinguishes the following levels.

 

Unacceptable risk – Prohibited	AI systems that pose an unacceptable risk and are explicitly prohibited. These systems are clearly a threat to people’s safety, livelihoods and fundamental rights.
High risk – Regulation obligation	High risk AI systems that have a harmful impact on people’s safety or fundamental rights. Their development, use and distribution are not prohibited by the proposal, but new rules are to be introduced.
Limited risk – Transparency requirements	Limited-risk AI systems only have to comply with specific transparency requirements. Examples of such systems include systems that interact with humans (e.g. chatbots such as ChatGPT), certain emotion recognition systems, systems capable of biometric identification, and AI systems that produce or manipulate image, audio or video content (e.g. deepfake).
Low or minimal risk – No legal obligation	AI systems that do not fall into the above categories, i.e. low or minimal risk AI systems, can be developed and used in the EU without further legal obligations.

Where are we now? 

On 14 June 2023, Members of the European Parliament decided by 499 votes to 28, with 93 abstentions, on the Parliament’s negotiating position for the debate in the European Council on the proposal for a law on artificial intelligence. In particular, the position taken is that there should be a complete ban on the use of biometric surveillance, predictive policing and machine emotion recognition in law enforcement, border control, the workplace and educational institutions. Furthermore, when using generative AI systems (e.g. ChatGPT), it should be clearly indicated that the content was generated by artificial intelligence. Finally, the use of AI systems to influence voters’ votes should be considered a high risk. 

Negotiations have already started with the Council on the final text of the legislation. The current position is that the legislation will be adopted at the level of a regulatory legislation. Therefore, the new legislation will be directly applicable throughout the EU without transposition into national law. The reason for regulation at the ordinance level is to ensure uniform regulation, identical and predictable conditions for development, use and distribution, and thus to provide a properly regulated framework for improvement. The aim is to reach agreement on the final text of the legislation by the end of the year.

By Kamilla Bodori, Junior Associate and Istvan Solt, Attorney at Law, Act Legal Kuzela, Partner, and Tomas Zwinger, Lawyer, Act Legal

Schoenherr has advised Standard Motor Products Inc. on its asset-deal purchase of an industrial facility in Pecel, Hungary, from German production company Certus-WM Group International. Germany’s Ladenburger Rechtsanwaelte advised the seller.

According to Schoenherr, Standard Motor Products is a leading manufacturer and distributor of replacement parts for motor vehicles in the automotive industry, listed on the New York Stock Exchange since 1977. “This transaction increases the local footprint of Standard Motor Products, Inc. in Hungary,” the firm announced.

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

Lakatos Koves & Partners has advised ConvergenCE on the lease agreement with its new tenant, the Arago Group, which will be moving into the Academia office building in Budapest.

ConvergenCE is an asset, property, and project management company.

According to LKT, “the renovated Danube riverside office building is reopening its doors at the end of September. Equipped with advanced technology, Academia will provide 900 square meters to house the Arago asset management company. The Arago Group will establish its headquarters in Academia at the beginning of 2024.”

Earlier in 2023, LKT advised ConvergenCE on its lease agreement with Trax (as reported by CEE Legal Matters on February 13, 2023) and, back in 2021, on the lease agreement with Doktor24 (as reported by CEE Legal Matters on May 26, 2021).

The LKT team was led by Senior Lawyer Zsuzsanna Ilyes.

LKT did not respond to our inquiry on the matter.

The Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil or Commercial Matters (“Convention”) entered into force on 1st September 2023 in all EU countries (except Denmark). What impact will the Convention have in relation to the enforcement of third country judgments in Hungary and the enforcement of Hungarian judgments in third countries?

The Convention in general

The Convention was concluded in 2009 in the framework of the Hague Conference on Private International Law (HCCH), with a view to set minimum standards for the circulation of foreign judgments.

By providing predictable rules for the recognition and enforcement of foreign judgments, the Convention promotes effective access to justice and facilitate international trade and investment, and mobility.

It is noted that the Convention is complementary to the Hague Convention of 30 June 2005 on Choice of Court Agreements.

Scope of the Convention

The Convention shall apply to the recognition and enforcement of judgments in civil or commercial matters.

The Convention expressly excludes several matters from its scope, for instance, revenue, customs, or administrative matters. Moreover, the Convention shall not apply to, among others, the status and legal capacity of natural persons, family law matters, intellectual property etc. The Convention shall not apply to arbitration and related proceedings.

Conditions for recognition and enforcement

The Convention establishes a common framework under which judgments from one Contracting Party (State of origin) will be recognised and enforced in another contracting state (requested State) if they are eligible for circulation in accordance with the provisions of the Convention and there are no grounds for refusal.

A judgment is eligible for circulation under the Convention if there is a minimum connection between the case and the State of origin under Article 5 (1) of the Convention (e.g. habitual residence or place of business of defendant was in the State of origin, etc.).

An important feature of the Convention is that there shall be no review of the merits of the judgment in the requested State and there may only be such consideration as is necessary for the application of this Convention.

Moreover, a Convention establishes an exclusive basis for recognition and enforcement in case of judgments that ruled on rights in rem in immovable property. These judgments shall be recognised and enforced if and only if the property is situated in the State of origin.

Grounds for refusal

The recognition or enforcement may be refused only on the grounds specified in the Article 7 of the Convention.

However, the grounds for refusal listed in the Convention are not mandatory, consequently, the acting court can exercise discretion on whether to refuse the foreign judgment.

The grounds listed are commonly accepted grounds for refusal, such as breach of due process, public order, risk of inconsistent judgments etc.
Relationship with other instruments

The Convention does not prevent or limit the recognition and enforcement of judgments under national law, bilateral, regional or other international instruments, with the exception of the immovable property.

Possible impacts

Considering that recognition and enforcement of judgments between EU member states is regulated by the Brussels Ia Regulation, from the point of view of Hungary, this Convention may be relevant for countries that are not EU member and with whom Hungary does not have a bilateral agreement on the mutual recognition and enforcement of judgments.

However, as the Convention entered in force only in the EU and Ukraine on the 1st September 2023, and it will be in force in Uruguay from 2024, in a short-term, it is unlikely to have a major impact on Hungary and on the Hungarian judgments to be enforced in third countries.

It is noted that more countries signed the Convention, for instance, USA, Russia, Israel, Montenegro, North Macedonia, however, they have not ratified it yet. If, for example, the Convention enters into force in a major trading state, like the USA, it may persuade many more countries to ratify it, or to join the Convention.

For this reason, it is not easy to predict whether the Convention will have significant effect in the near future.

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

Oppenheim has advised Colliers on the lease agreement for its new Budapest headquarters in the Bem Center building located in the city’s first district.

The Bem Center is a mixed-use development project consisting of office and hotel elements and has a total gross leasable area of approximately 22,000 square meters.

According to the firm, Colliers is renting approximately 800 square meters of office space on the fifth floor and is planning to move into its new Budapest headquarters in October 2024.

The Oppenheim team included Partner Mark Pinter and Associate Mark Ratkai.

Dora Zombori has joined Dentons’ Budapest office as a Partner, to strengthen the firm’s Energy and Government Affairs practice.

According to Dentons, “with her extensive background in energy policy and international government, corporate negotiation, and leadership experience, Dora Zombori brings a unique expertise to Dentons.”

Prior to joining Dentons, Zombori served as the Deputy State Secretary for Energy Security at the Ministry of Foreign Affairs and Trade of Hungary. Her career also includes tenure as Ambassador-at-Large for Energy and Climate, between 2021 and 2022, and being the Deputy Chief of Mission and Charge d’Affaires of the Hungarian Embassy in Washington D.C. between April and December 2020. Earlier in her diplomatic career in Washington D.C., she spent almost four years as a First Counselor for Energy and Political-Military Affairs at the Hungarian Embassy, and was a Transatlantic Diplomatic Fellow at the US Department of State, from 2015 to 2016.

“We are delighted to welcome Dora to the Dentons family,” Budapest Managing Partner Gabor Kiraly commented. “Her strength in advocacy, coupled with her deep understanding of energy policy and government affairs, will undoubtedly bolster our 360 offering, allowing us to provide our clients with even more comprehensive and impactful solutions.”