Category: Hungary

The Government Decree on the winter administrative break is out. Here’s what to expect.

Although summer is now over, it is worth taking a look back at the legislation adopted during the summer months, such as the provisions on the (winter) administrative break, which may ease the end-of-year workload not only for the authorities but also for economic actors.

In this article, we address the following questions:

• What is an administrative break?
• What is the duration of the administrative break?
• Why is it important to know about the administrative break?
• What deadlines do not include the duration of the administrative break?

1. What is an administrative break?

An administrative break is a period of time that is aimed at ensuring a balance between the fulfilment of public duties by the State and local authorities, and the right to rest of employees engaged in the performance of these public duties. An administrative break applies to all government administrative bodies and to all employees of said entities. The rules relating to administrative breaks are specified in Act XXVI of 2023 on Administrative Breaks, supplemented by the Government Decree dated 31 August 2023 on the imposition of the administrative break for the winter of 2023.

2. What is the duration of the administrative break?

According to Government Decree 407/2023 (VIII.30.), the winter administrative break in 2023 will last from 27 December to 1 January.

3. Why is it important to know about the administrative break?

The administrative break is not only excluded from the time limit for procedural deadlines, but also for certain substantive deadlines.

4. What deadlines do not include the duration of the administrative break?

We have listed the deadlines for which the duration of the administrative break will not be considered below. It means that the administrative break period from 27 December 2023 to 1 January 2024, can be excluded from the calculation of the following deadlines. This exemption can provide significant relief to economic operators during the end-of-year rush, whether for certain administrative proceedings, the opening of administrative litigations or for the performance of certain contracts. The duration of the administrative break, in this case the winter administrative break, does not include:

• the deadlines for the administration of official and other proceedings before government administrative bodies, and the duration of the stay of proceedings,
• the deadlines for court proceedings in which a government administrative body or its head is a party or a representative of a party (including priority proceedings),
• the deadline for bringing an administrative litigation,
• the deadline for the contractual performance of an obligation specified in a contract concluded by and between a government administrative body or its head as a party, or as the party’s representative,
• the deadline for the administration of proceedings before another body in which the government administrative body is involved as a client, or which have been initiated against a government administrative body, or which involve a request by a government administrative body during an administrative break (including deadlines for criminal proceedings),
  the postal availability deadline,
• the deadline for dealing with requests for access to data of public interest, complaints and notifications of public interest, written questions submitted by Members of Parliament and requests, enquiries or appeals from any other body or person,
• the deadline for the fulfilment of the obligation to be performed for the government administrative body by its employee,
• the deadlines laid down in the Government Decree on town planning and architectural-technical planning councils,
• the deadlines set out in the Government Decree on the simple notification of the construction of a residential building for the commencement of construction activities by the contractor,
• the deadline set by the Government Decree on the ministerial approval of certain contracts of government administrative bodies and certain companies,
• the deadline for the ministerial approval of contracts covered by the Government Decree on the termination and ministerial approval of certain contracts of government administrative bodies and certain companies,
• the deadline for court proceedings in which the Hungarian State is represented by the Minister responsible for the supervision of State property in civil law relations pursuant to Section 3:405 (2) of Act V of 2013 on the Civil Code, and
• the deadline for the contractual performance of the obligation specified in the contract concluded by the Minister responsible for the supervision of state property on behalf of the Hungarian State.

It is important to note that the duration of the administrative break is not included in the calculation of deadlines only in cases where said deadlines are prescribed by law. However, in all other cases, deadlines are calculated according to the general substantive and procedural rules. If you are unsure whether the rules of the administrative break apply to your administrative proceedings, litigations or contracts, do not hesitate to contact us.

By Zoltan Faludi, Partner, and Timea Csajagi, Associate, Wolf Theiss

The position and tasks of the employee are one of the key elements of the employment contract and are typically recorded in the job description. It is often a matter of dispute between the parties whether the employer can unilaterally modify the job description at all, and if so, to what extent. In a recent court decision, a Hungarian appellate court addressed the above question in a situation where the employer supplemented the employee’s tasks with new tasks similar to his existing tasks. In this article, we analyse the recent decision on this matter.

Facts of the case

The plaintiff (Employee) was employed as a specialist, he usually carried out administrative tasks.

Since the employee had spare capacity, he took over some of the tasks of his supervisor, who was preparing for maternity leave, however these tasks were not specifically mentioned in his job description.

The defendant (Employer) had a recurring annual task of dealing with specific tenders. Given that the Employer had high workload, the Employee was involved in that task too.

The Employee notified the Employer of the significant workload and requested an addition to his job description and asked for financial compensation in connection with the additional tasks.

Since the Employer failed to do so and, in the Employee’s view, the Employer humiliated him in front of his co-workers in response to his request, the Employee terminated his employment with immediate effect.

In his claim, the Employee requested severance pay and an absence allowance based on the Labour Code.

First instance decision

According to the first instance court, the notice of termination was lawful, since the Employee had been assigned other duties in addition to his own job duties, and the Employer failed to reduce his workload despite his request, and the obligation to take part in the administration of tenders was also unlawful.

Second instance decision

The second instance court reached partially different legal conclusions on the basis of the facts established by the first court.

With regard to the tasks taken over from the supervisor, the second instance court found that these tasks, which the Employee had not previously carried out, were purely administrative in nature, i.e. they did not constitute managerial tasks.

However, the change to some of the duties of the post and the assignment of new tasks did not constitute a change in the job description. The employer is entitled to reallocate or modify the duties of the job as long as it does not affect the substance of the job.

The second instance court therefore attached importance not to the comparison of the job descriptions but to the fact that the nature of the tasks assigned to the Employee did not differ from his job as an administrative assistant.

The tasks taken over did not therefore change the Employee’s job title, since he continued to carry out administrative tasks relating to the activities of the department.

The content of the job description is relevant because of the clarity and accountability of the duties to be performed. The Employee was, however, undisputedly aware of his duties and was informed of them in detail.

Furthermore, according to the Hungarian Labour Code, the Employer is entitled to temporarily reassign their employees to jobs other than what is contained in the employment contract, for maximum 44 working days.

With regard to the tasks relating to the administration of tenders, the second instance court found that the Employer had given the Employee additional tasks (which would have required the modification of the job description) based on the above right to reassign the employee for a limited period, therefore the Employer’s instruction did not violate the law.

Comment

In the examined case, the second instance court did not find the above circumstances to be a legitimate ground for immediate termination. With the decision, the court confirmed the Hungarian court practice and jurisprudence, based on which, the employer can unilaterally make minor amendment to the employee’s tasks, as long as it does not affect the essence of his job.

By Agnes Bartus, Junior Associate, and Peter Gritta, Attorney-at-law, SmartLegal Schmidt & Partners

From time to time, there’s news of companies introducing four-day work week. Magyar Telekom has been mentioned several times as the first big fish to do so, but Libri, too, has apparently done the same, as have various local subsidiaries of foreign parent companies. The obvious question is whether this option is available to everyone and, if so, at what price.

First of all, we need to clarify what a four-day work week is. In practice, the term actually covers several concepts or practices. Under one of these (the so called ‘English model’), the employees work four days a week, for eight hours a day, but they still get 100% of their previous (five-day) salary. This model is based on the idea that, assuming the work is done efficiently, the same amount of work can be done in a shorter period of time, thus resulting in a type of ‘salary increase’, as the working week has dropped to 32 hours. Under another common (so called ‘Belgian’) model, employees likewise work four days, but their working hours per day increase proportionately and they work the same 40 hours but now over four days instead of five. In this scenario, their salary (per hour) does not change. Under the third (‘reduced pay for reduced work’) model, employees work four days a week, eight hours a day, while their salaries decrease proportionately, i.e., they actually become part-time employees.

So, can we introduce a four-day working week in Hungary?

The answer from a legal point of view is clear: yes. Whichever of the above models an employer chooses, it is legally able to establish any of them in its business if it believes it supports the company’s working culture or other objectives of the employer.

More to the point, however, is whether the employer is entitled to introduce the four-day working week unilaterally, purely at its own discretion. And the answer to this is: it depends. Needless to say, a model in which the employee’s salary is reduced (in line with a reduction in working hours) and the employment contract is changed to part-time work cannot be introduced by the employer without the employee’s consent.

And as appealing as it may seem for employees, the so-called British model (where less work means the same salary for the same amount of work) cannot be introduced without the employees’ consent either. By having the employer reduce the 40-hour working week to 32 hours, but with the employee still being entitled to his or her full pay, the parties are in fact applying shorter full-time working hours, which is also something that needs to be mutually agreed in the employment contract.

The situation is more specific in the case of the Belgian model. Here, it will depend on the terms of the employment contract whether the employer is entitled to set the working time of the employee at, for example, four times ten hours instead of five times eight hours. In principle, it is the employer’s right and responsibility to determine and establish the work schedule, and so in general it is at the employer’s discretion to establish a different work schedule, subject to the employment contract and to any other restrictions specified in the Labour Code.

A plethora of legal problems

Whoever finally decides to introduce the four-day work week will, in addition to the changes mentioned above, find themselves faced with a sizeable number of additional legal tasks and, in certain cases, problems. We’ve chosen a few to highlight for you here.

For example, the issue of managing holidays arises. The number of holidays to which the employee is entitled does not change per as a result of the four-day workweek. The question is, however, whether holiday can be granted for the fifth day (when the employee is actually not performing work). So, if the employee has taken a two week-long holiday, is this now eight days’ or ten working days’ holiday? If, for example, the work week is four working days Monday to Thursday, can the employee say that he or she is only going to take holidays from Monday to Thursday and therefore this should be recorded by the company as four day long holidays and not five? Do the answers to the above questions vary for the different models? These are many questions that have not yet been answered precisely based on Hungarian labour-law practices.

It is also a question whether a four-day work week can be introduced if it is limited to a specific group of employees or to a specific site of the employer. For example, if the IT department’s work schedule is changed to a four-day work week, can the finance department demand the same for itself? Or is it possible, to designate certain members of staff in the IT department to whom the four-day work week will not apply? These questions can generally be answered from the starting point that no discrimination is allowed, and then looking at what is possible given the employer’s business, the nature of the work concerned, the workload implications, and so on.

Practical issues in introducing the four-day work week

It is clear that, in addition to the matter of its legal feasibility, a number of practical considerations need to precede the introduction of the four-day work week. Even if its introduction would not require an amendment of the employment contract, it is probably essential for its success that the employer consults the employees concerned in advance. Full transparency and information on the matter, including, where appropriate, consultation with employee representative bodies, should be provided for.

It may also be useful to first implement the system, if possible, for a pre-defined group of employees or for a pre-defined period of time, in order to test it. Based on the introduction of, or experimentation with, similar large-scale changes, it is likely – and experience bears this out – that a minimum of four to six months is needed to assess the impact of the reduced work week and its potential teething problems and to enable the employer to make a final decision.

By Dora Agnes Nagy, Attorney, Jalsovszsky

A new law amending certain acts concerning the functions of the Minister of Agriculture amended a number of agricultural acts as of 1 July 2023, including Act on the Protection of Agricultural Land.

The most significant amendments relate to use linked to a specific location. Agricultural land can only be used for other purposes in exceptional cases, primarily by using lower-quality agricultural land. Agricultural land of better-than-average quality can only be used for other purposes on a temporary basis or linked to a specific location.

Use “linked to a specific location” may include the expansion of an existing facility, the construction of transport and utility connections, or the construction of other facilities necessary for extracting natural resources. From 1 July 2023, the area required for the excavation and preservation of the archaeological find will also be classified as use linked to a specific location. The existence of the ground for such specific use must be proven by the recipient at the time of the application. The legislation states that the use linked to a specific location is not justified by the mere desirability of locating the facility, by the ease of the investor because of the willingness of the owners of the land to cooperate, or if the user incurs additional costs if the investment were to be made on other property.

It is an important novelty that if the quality of the land has changed from above-average to average or below-average as a result of a land classification procedure, the land may be used within 5 years from the change in the quality of the land only if the Government declares that specific land a target investment area by a decision published in the Hungarian Official Gazette.

Failure to comply with or circumvention of these rules constitutes a serious procedural infringement, and the decision authorising the use for other purposes or subsequently consenting to the unauthorised use for other purposes taken in the procedure must be annulled or revoked and, if necessary, a new procedure must be initiated.

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

With the hiring of third-country nationals becoming ever more prevalent on the Hungarian job market in recent years, the number of problematic employment cases is on the rise.

Employers invest several months in the recruitment and immigration process, in addition to incurring significant costs. They usually hope that after such investment, they cover a position for a while, and they can terminate third-country national employee contracts in the “usual” way. In reality, employers are often unfamiliar with the rules of employment of third-country nationals and the potential consequences, thus they often encounter unpleasant surprises. The most common are: (i) being unable to terminate employment despite employee underperformance; (ii) redundancies necessary due to relocating business activities from Hungary to other countries, especially in the SSC sector; or (iii) employees leaving before the end of the fixed term. This article seeks to shed light on issues surrounding these termination cases.

Termination by the Employer

Third-country nationals may only be employed for a fixed period of maximum 2 years. Work permits may be extended by further 2-year periods. Compared to indefinite term employment contracts, employers are limited in the termination options available to them for employees under fixed-term contracts. Redundancy is not a valid reason for termination, whilst underperformance and behavioral problems may only lead to termination if they are so serious as to justify extraordinary termination.

During probation an employer may terminate the employment with immediate effect, however, in many cases probation is often not long enough to assess professional skills and suitability for the position. A psychological factor likely also comes into play – after significant investment in recruitment, employers may be reluctant to terminate employment during probation even if the performance or personality match is not perfect.

After probation an employer may only terminate fixed term employment with ordinary notice in the following circumstances: (a) during winding-up or bankruptcy proceedings; (b) for a reason related to the employee’s capabilities; and (c) if the employment relationship becomes impossible to continue for an unavoidable external reason. Termination based on capability is usually viable only within the first 6 months of employment. It is important to note here that capability does not mean ordinary performance issues, rather the lack of necessary professional or personal capabilities (e.g., people management skills). The third circumstance may rarely be used (e.g., a complete business shutdown).

There is a final, but costly possibility. Fixed term employment may be terminated with immediate effect and without reason if the employer pays the employee the value of their salary to the end of the fixed term (maximum 12 months).

Otherwise, an employer may only terminate the employment with immediate effect.

What if the Employee terminates the Employment?

It is simply a fact that employees may receive better job offers. In Hungary employees may only terminate fixed term employment for reasons according to which it would be impossible for them to continue the employment or would cause disproportionate harm. A better job offer is not such a reason. We experienced a significant rise in such cases recently. Even if employers know or suspect that reasons referred to in an employee termination are untrue (e.g., family or health issues), they rarely take these cases to court as damages employers may claim from the employee are capped at 3 months’ salary. If the employee leaves Hungary, the enforcement procedure would simply be too burdensome and expensive.

What can Employers do?

To mitigate the issues discussed above, employers may wish to closely monitor the performance of third-country national employees during probation and document all performance or capability issues. Even if employers do not terminate the employment during probation, such documentation may assist, if the employer wishes to pursue capability-based termination after probation. Furthermore, in documenting all problems and issuing written warnings employers may find that ongoing breaches of employee obligations may add up to grounds for extraordinary termination.

Implementing policies on repayment obligations for relocation support and immigration costs should an employee seek early termination may work as a deterrent as well. Lastly, it may be advisable to take selected cases of wrongful terminations by employees to court, to act as a deterrent once again against potential future cases.

By Greta Baksa, Attorney at Law, OPL gunnercooke

On 19 July 2023, the Constitutional Court established that certain provisions of the act on public construction investments are unconstitutional, therefore it cannot enter into force as planned on 1 August 2023.

The bill was published on the website of the Ministry of Construction and Transport in January 2023 for public consultation. Although the bill was quickly adopted by the Hungarian Parliament and was signed by the chairman of the Parliament, the President of Hungary lodged a constitutional veto, which led the Constitutional Court to state that the petition was well-founded.

The act would have been applicable to those construction projects which are financed at least 50% from the Hungarian central budget sources or EU budget funds. The justification of the bill states that it aims to increase the efficiency of the implementation of public works, to provide adequate legal, professional and budgetary guarantees for the persons involved in public works in order to ensure the predictability of these legal relations and to strengthen and unify the public organisation involved in the implementation of public works.

The act laid down detailed and comprehensive rules on the public works investment regime, some of which are also set out as cardinal provisions (in Hungarian: “sarkalatos rendelkezes”), the modification of which is only possible by the votes of the two-thirds of the present members of the Parliament. However, the bill allowed for derogations from its own rules in the provisions at issue, even by ministerial decree. The Constitutional Court stated in its resolution that such a quasi-blanket authorisation, which potentially overrides the exclusive legislative powers of Parliament, is contrary to the Fundamental Law. In addition, the Constitutional Court established that the legislation which is contrary to the legal institution of cardinality, gives scope to amend the content of the cardinal law by a lower source of law and potentially erodes its content is unconstitutional.

Since the Constitutional Court found that the act is contrary to the Fundamental Law, the Parliament is obliged to renegotiate the act. The necessary amendments can only be adopted by the Parliament in the 2023 autumn session expectedly.

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

In business life parties often use promissory notes to secure transactions since these instruments allow creditors to get back their money rapidly and easily. What special regime applies to promissory note litigations in Hungary? This article summarises the Hungarian promissory note litigation regime.

Promissory notes in general

A promissory note is an unconditional promise in writing made by the debtor to the creditor to repay a sum of money in the future within a specified deadline, which is often used to secure loan and other financial transactions.

According to the principle of independency, the promissory note is completely independent from the underlying relationship between the parties, allowing fast and hassle-free recovery of the amount certified by the promissory note, even if the base contract itself is defective for any reason. (e.g.: invalidity etc.).

Promissory notes are governed on international level by the Convention providing a Uniform Law for Bills of Exchange and Promissory Notes, dated in Geneva, 7 June 1930. („Geneva Convention”), to which Hungary is a signatory.

The Geneva Convention lays down not only the requirements of form and content of promissory notes, and the rights and obligations arising out of these instruments, but also some procedural provisions in relation with litigations based on promissory notes.

In addition, in the Hungarian Promissory Note Act (“HPNA”), which has transposed the Geneva Convention into the Hungarian legal order, the lawmaker adopted a special regime for promissory note litigations, to further accelerate the enforcement of these instruments in front of Hungarian courts.

Which court can decide on the case?

Promissory note litigations are legal disputes, in which special legal knowledge is needed, for this reason only regional courts shall have jurisdiction to hear the case at first instance regardless of the value of the subject-matter of the action. This also means that legal representation is mandatory in promissory note litigations in Hungary.

Besides the general territorial jurisdiction rules, according to which the court where the defendant has it registered seat shall be competent (actor sequitur forum rei), in a promissory note litigation, the plaintiff can seize the court of the place of payment, as well.

Moreover, based on the principle of independency, the jurisdiction or choice-of-court clause in the main contract (e.g. a loan agreement) does not apply to the action on a promissory note.

How speedy is the litigation?

Due to the privileged position of the promissory note claim, the Hungarian Promissory Note Act law lays down a fast-track procedure for promissory note litigations compared to ordinary actions.

As a rule, the court acts as a matter of priority by default at all stages of the proceedings, including in appeal proceedings.

In general, the time-limit fixed by the judge shall not exceed thirty days, including any extension, unless the preparation of the expert opinion requires a longer period.

The time limit for submitting a written statement of defence and set-off is fifteen days (instead of 45 days).

Moreover, the HPNA sets out further rules aiming to prevent the prolongation of the procedure: for example, a claim based on a promissory note cannot be combined with a claim based on a non-promissory note. Furthermore, no intervention by or joinder of third-parties shall be permitted in the procedure.

To which extent is the party’s right of disposal limited?

While the civil litigation is based on the free disposition of the parties, in a promissory note litigation the court shall consider of its own motion i) that the instrument is not a promissory note due to the absence of the mandatory requirements laid down by law, ii) that the set-off is excluded under the HPNA, and iii) that the substantive objection is not valid under the HPNA.

In order to avoid the lengthening of the litigation, only the following claims may be set off against a claim which is based on a promissory note: i) a claim based on the final and enforceable decision; ii) claim recorded in a public deed; iii) a claim acknowledged by the holder of the promissory note, or iv) a claim based on an overdue promissory note,

Summary

Promissory notes can fulfil their business function in case their enforceability in front of courts is hassle-free and fast. In line with the international standards, the Hungarian promissory note litigation regime allows a fast-track recovery mechanism for creditors who secure their claim with this instrument.

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

Kapolyi and Lendvai and Partners have advised AutoWallis on the acquisition of ShareNow Hungary. Kapolyi also advised the buyer’s major shareholder, Wallis Asset Management. Moore Legal advised Wallis Automegoszto’s shareholder Szechenyi Tokealap-Kezelo.

AutoWallis is a mobility provider in Central and Eastern Europe. ShareNow Hungary is a shared mobility company.

Kapolyi and Lenvai and Partners previously advised on AutoWallis’ acquisition of Nelson (reported by CEE Legal Matters on January 31, 2023). In 2021, Kapolyi advised AutoWallis on preparing a public share issuance (reported by CEE Legal Matters on October 27, 2021).

The Kapolyi team included Managing Partner Jozsef Kapolyi, Partner Viktor Krezinger, and Attorneys at Law Martin Gortva, Adam Menyhart, Gabor Horvath, and Vivien Szekeres-Benczik.

The Lendvai and Partners team included Partners Andras Lendvai and Akos Kalman and Associate Petra Nikolits.

The Moore Legal team included Partner Marton Kovacs and Senior Associates Balint Juhasz and Aron Kanti.

The 2024 tax package bill accepted by the Hungarian Parliament on 4 July 2023, brings changes in various areas.

One notable change is the transformation of the excess profit tax, which becomes a green tax for airlines, together with the introduction of a contribution based on emissions per passenger. Additionally, in the realm of personal income tax, measures stemming from emergency government decrees are elevated to legal status. This includes benefits for young mothers, support for chronically ill and disabled children, and an increase in commuting cost reimbursements. For simplified employment, social contributions and pension funds align with the minimum wage.

Changes are also on the horizon for bank tax, transaction fees, and income tax for energy providers through the elevation of emergency government decrees to legal status. Excise tax on fuels will also increase to comply with EU minimum tax standards, with changes in diesel tax rates as well.

Entrepreneurs must consider appointing a registered certified accountant if their annual net revenue surpasses HUF 20 million. The training and oversight of tax advisors and experts will be governed by a regulatory authority.

In addition to the bill, the Government implemented further modifications effective from 1 July 2023. Notably, the tax rate for petroleum product producers will decrease to 1 percent next year (from 2.8 percent). Rules regarding airline contributions, mining royalties and extraction obligations have also changed for companies operating in government-designated hydrocarbon fields. Within the framework of the Extended Producer Responsibility (EPR) system, the Government revised the description of the term “advertising carrier paper.”

By Krisztian Kiralyvolgyi, Attorney at Law, KCG Partners Law Firm

In the world of finance, the rise of environmental, social and governance considerations has compelled bankers, investment professionals and banking and finance lawyers to reevaluate their mindset.

Moreover, from this year, this will also affect families and private individuals. The Hungarian National Bank’s Family Green Finance Informational Program, introduced in 2023, targets individuals and families, aiming to provide practical assistance and useful information to promote conscious financial management that also serves the environment.

The program aims to educate and raise awareness among families about the indirect impact of their investments on financing sustainable projects. It emphasizes the long-term sustainability and quality of life for future generations through daily consumption decisions and investment choices.

Sustainability is crucial for ensuring the long-term wellbeing of the planet and future generations. It encompasses responsible practices that preserve natural resources, mitigate climate change and promote social and economic balance, ultimately creating a harmonious and sustainable world for all.

Acknowledging that there is no one-size-fits-all approach to ESG, the financial sector now faces a significant shift in its financing approaches.

Financing plays a pivotal role in upholding sustainability by providing the necessary resources to implement and support environmentally friendly practices and initiatives. Businesses are increasingly turning to corporate social responsibility financing, particularly ESG financing. This encompasses green loans, social loans, sustainability linked loans and transition loans in order to demonstrate their commitment to environmental considerations.

Accessible and targeted financing enables businesses, governments and organizations to adopt sustainable practices, develop innovative solutions and mitigate the negative impact of human activities on the environment.

Moreover, financing also facilitates research and development efforts, promotes education and awareness campaigns and fosters collaboration between stakeholders, all of which are crucial for achieving long-term sustainability goals.

ESG goes beyond mere shareholder strategy or marketing campaigns; it exerts a crucial influence on markets, extending its financial benefits even to countries like Hungary.

Sustainable Financing

Green loans

A green loan is specifically designed to finance projects or activities that have positive environmental impacts. It provides funding for projects focused on:

• Renewable energy;
• Energy efficiency;
• Pollution prevention;
• Sustainable transport; or
• Other environmentally friendly initiatives.

The borrower is typically required to use the loan proceeds exclusively for eligible green projects, such as renewable energy, energy efficiency, pollution prevention, sustainable transportation or other environmentally friendly initiatives, and may need to prepare regular reports on the environmental impact of the funded activities.

Social Loans

A social loan is geared toward financing projects or activities that generate positive social outcomes. It aims to address social issues such as:

• Poverty alleviation;
• Healthcare access;
• Affordable housing;
• Education; or
• Community development.

The borrower utilizes the loan funds to support projects that have a demonstrable social impact. They may be required to report on the progress and effectiveness of their social initiatives.

Sustainability-Linked Loan

A sustainability-linked loan, on the other hand, is a broader financing instrument that incentivizes borrowers to achieve predetermined sustainability performance targets. Unlike green loans and social loans, the use of proceeds is not restricted to specific green or social projects. Instead, the borrower’s interest rate or other loan terms are linked to the achievement of pre-agreed sustainability performance targets.

As a result, the proceeds may be used to finance any kind of business activities that the borrower is pursuing, regardless of whether they are project-based or acquisition-based, or example. The incentivization lies in the fact that the borrower may be given financial benefits, such as a lower interest margin, i.e., lower financial costs altogether, if they meet certain targets.

Transition Loan

A transition loan aims to decarbonize emissions-intensive entities or economic activities that are crucial for future socioeconomic development but lack low- or zero-emission substitutes.

While no specific percentages of subsidization are defined, as no precise definition exists for the transition loan, the lender may offer financial support tailored to the borrower’s transition needs. This support could include favorable loan terms, flexibility in repayment or advisory services to facilitate the transition to more sustainable practices.

Hungary’s Path to Net Zero

Hungary is making impressive progress in its journey toward achieving a net-zero future fueled by a rising trend in the use of green loans. The Hungarian National Bank and the Hungarian government have spearheaded programs that reflect this commitment, although the development of social loans and sustainability-linked loans is still a work in progress within the country.

As outlined in the Hungarian National Clean Development Strategy 2020-2050, the government is prepared to take proactive measures, investing approximately HUF24.7 billion (around $74 million) in early action to achieve climate neutrality. In June 2020, Hungary demonstrated its dedication to decarbonization and alignment with global climate change efforts by introducing the Climate Protection Law.

This amendment signifies Hungary’s recognition of the urgent need to reduce greenhouse gas emissions and address environmental challenges head-on.

Building on the success of the Funding for Growth Scheme Green Home Program, the Green Renewal of Qualified Consumer-Friendly Loan Program, launched in April, aims to support energy efficiency improvements in existing housing.

From April 1 this year, consumers opting for qualified consumer-friendly loan products can benefit from significant discounts, thanks to the inclusion of green key performance indicators within the program.

The introduction of such loans by nearly half of the banks offering consumer-friendly mortgages, with interest rate reductions of approximately 0.25%-0.5% compared to other housing loans, demonstrates a growing commitment to sustainable financing options.

One of the recent initiatives driving sustainable practices is the Factory Rescue Program, launched in late 2022, which focuses on supporting energy efficiency and renewable energy generation-related investments by large firms.

Through subsidies for energy efficiency measures and renewable energy projects, the factory rescue program acts as a catalyst for sustainable practices in the industrial sector and promotes the adoption of environmentally friendly technologies.

Recognizing the importance of transitioning to cleaner transportation alternatives, the Hungarian government has introduced a series of tax benefits and cash support to promote the adoption of electric vehicles.

The Green Program, launched in 2019, introduced green products and provides a favorable regulatory environment for financial institutions to promote sustainable operations.

In addition to regulatory efforts, a Hungarian model for reporting sustainability-linked loans in the market has emerged in the Hungarian National Bank’s family green finance program, already discussed.

Looking ahead, a notable deal is to be made between DiG Hungary Kft. and KS Orka, as outlined in the letter of intent signed in November 2022, highlight the implementation of a new facility in Tura as the first project for 2023.

This endeavor aims to increase the volume of the renewable energy market in Hungary and unlock the country’s vast geothermal potential, potentially paving the way for additional projects in the future.

Despite these positive developments, ESG funds are still considered new products, and it takes time for investors to become fully aware of and invest in them. However, Hungary’s strides in promoting green loans and sustainable practices are indicative of a promising trajectory toward a greener and more sustainable future.

Rise of Sustainability-Linked Loans 

The rise of sustainability-linked loans is expected to become an increasingly prominent trend in Hungary. With the government’s proactive measures to foster sustainability and green financing, a conducive regulatory environment has been established for such loans.

Notably, sustainability-linked loans offer favorable terms and conditions, presenting financial incentives that drive companies to adopt sustainable initiatives and resulting in potential cost savings.

Moreover, internationally recognized standards and frameworks, including the United Nations sustainable development goals[6] and the U.N. principles for responsible banking, provide a common language and structure for sustainability-linked loans.

This harmonization facilitates the process for businesses and lenders to effectively structure and evaluate these financing arrangements.

By accessing sustainability-linked loans, companies can secure the necessary funds, while showcasing their commitment to managing environmental risks, further reinforcing the significance of such financing solutions.

Comment

In Hungary, while green loans are becoming increasingly popular, the development of social and sustainability-linked loans is still a work in progress.

Nonetheless, commercial banks are supporting these trends and Hungarian companies are signing up for sustainability-linked loans. With time, social and sustainability-linked loans are expected to gain further momentum in Hungary, given their positive impact on the environment and society.

By Gergely Szalóki, Local Partner, Bodó Bálint, Associate, Schoenherr