Category: Hungary

In June 2023, Kinstellar announced that the first step of OTP Bank’s acquisition of Ipoteka Bank in Uzbekistan – the acquisition of a 73.71% stake from the state – (reported by CEE Legal Matters on December 22, 2022) had closed. 

According to the firm, “with the transaction, OTP has become the first foreign lender to participate in the privatization of Uzbekistan’s banking sector. In the next step of the transaction, the remaining shares of Ipoteka Bank held by Uzbekistan’s Ministry of Economy and Finance will be purchased in three years.”

“Ipoteka Bank is Uzbekistan’s fifth-largest financial service provider, active in both the retail and corporate segments. OTP agreed to acquire close to 97% of Ipoteka Bank under a contract signed in December last year,” Kinstellar announced. The negotiations involved the Uzbek government and the International Finance Corporation. 

As initially reported, Kinstellar advised OTP Bank while White & Case’s London and Tashkent offices reportedly advised the seller.

Kinstellar’s updated team was led by Partner Gabor Gelencser and included Hungary-based Senior Associates Csenge Koller and Eszter Takacsi-Nagy and Associate Judit Sos as well as lawyers from the firm’s Tashkent office.

Kinstellar has advised the Budapest Stock Exchange Plc on listing its shares in the BSE regulated market Standard category. The company went public on June 21, 2023, on the 33rd anniversary of its re-establishment.

According to Kinstellar, “the listing significantly supports the ownership objectives of the National Bank of Hungary as the majority shareholder of the BSE as well as the international ambitions of the BSE, and is of exemplary importance, as the BSE aims to promote the benefits of going public among domestic medium-sized companies.”

“The listing of the BSE is in line with the strategy of developing the domestic capital market, providing the central player of the domestic capital market with a long-term sustainable operating environment that supports value creation, and supporting the efforts of the majority owner, the Hungarian National Bank, to attract new investors to the stock exchange,” the firm reported.

According to the firm, a  total of 5.41 million dematerialized registered ordinary shares of the BSE, with a nominal value of HUF 100 each and a total nominal value of HUF 541 million, “were admitted to the Standard category of the Stock Exchange’s regulated market through a technical listing with the assistance of Concorde Ertekpapir, Ersta Befektetesi, OTP Bank, PwC Hungary, and Kinstellar as advisors.”

The Kinstellar team included Partners Levente Hegedus and Gabor Gelencser, Senior Associate Aron Barta, Associate Judit Sos, and Junior Associate Veronika Heiszer.

According to the legislation in force in Hungary, when entering into a sale or lease contract of a real property, the buyer or tenant must declare in the contract that he/she has received a document called energy performance certificate (“EPC”) which certifies the energy performance rating of the property and EPC’s unique identification number shall be included in the contract.

From 1 November 2023, the system for assessing the energy performance of buildings will be modified and new EPCs will be introduced. Along with the rationale for the government decree, the aim of the amendment is to define a new energy certification model that is more transparent and user-friendly than the previous one. The new system not only assesses the building’s energy performance as a whole and marks it with a letter, but also separately assesses the energy efficiency of individual technical building systems (such as heating, air conditioning, ventilation, lighting, domestic hot water) and building structure elements, and also provides detailed, periodic renovation and modernization proposals for the owner.

Under the new rules, the obligation to obtain an EPC for the sale and rental of a real estate will remain, but its number and receipt of the certificate will no longer be required to be indicated in the contracts. The seller or landlord of a property will be obliged to present the EPC or a copy of thereof to the prospective buyer or tenant by the day of the conclusion of the contract and hand over the certificate or a copy of it by the day of the transfer of possession at the latest. In the case of newly built real estates, the EPS must be obtained by the builder before the application for occupancy authorization is submitted. The validity of the certificates has been reduced from 10 years to 5 years.

Many people are not aware that EPC is not only compulsory for sales or rental contracts, but also when offering a building for sale or rent in an advertisement, the energy performance rating of the building must also be indicated. It is important to note that it is still not mandatory to obtain an EPC if the property is (i) detached and has a useful floor area of less than 50 sqm, (ii) used for holiday or recreational use, where the property is occupied for less than 4 months per year, (iii) a parade building, tent or tent structure intended for use for a maximum of 2 years, (iv) a building used for religious purposes, (v) an agricultural, logistical or industrial building in which the air temperature does not exceed 12°C during the operating time of the heating system or is heated for less than four months and cooled for less than two months, or (vi) in some cases, a workshop or building on industrial land.

By Lilla Majoros, Attorney at law, KCG Partners Law Firm

Although probation may be one of the most well-known legal institutes of the Labour Code and is a standard element of the employment agreements, the latest amendment of the Labour Code will make the parties pay more attention to their related statements.

As of 1 January 2023, the general rule on the duration of the probation period (3 – months or – in the case of a collective bargaining agreement – 6 months) has been amended and it must be established proportionally, if an employment agreement is concluded for a fixed period, with a maximum of twelve months. In the case of renewal of a fixed-term employment agreement or its re-establishment within six months of its termination, no probation period can be included in the agreement if the employee is employed in the same or similar position as previously as in such case probation period would not serve its true purpose.

The general rule that no reasoning is required for the termination handed over during the probation period is no longer true as the employee is entitled to request reasoning in 15 days – and the employer must respond in also 15 days – if the employee is of the opinion that the real reason for the termination was the use of so-called carer’s leave, paternity leave, parental leave or unpaid leave to care for a child. The Labour Code lists two other cases as well, however, as the employee is not entitled to request those in the first six months of the employment relationship, those are only applicable if it is explicitly stated in the collective bargaining agreement or other internal regulations.

It is also important that the new rules also make some specific concessions on delivery, namely, the notice of termination with immediate effect during the probation period is still timely if it is posted on the last day of the probation period. If the employee requests reasoning, as set out above, the 15-day deadline for doing so is deemed to have been met even if the request is posted on the last day of the probation period and the same applies to the employer’s 15-day deadline for responding.

Based on the above, the conclusion is that transposing the EU directives 2019/1152 and 2019/1158 has made the working conditions in Hungary more transparent and predictable and made a step forward to achieving better work-life balance.

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

From 1 July 2023, the interest income of natural persons will also be subject to a 13% social contribution tax. This means that – inter alia – interest on deposit accounts, together with personal income tax, will be subject to a total of 28% tax rate.

In accordance with a new Government Decree published on 31 May 2023, interest incomes, as defined by the Personal Income Tax Act (PIT Act), will be subject of social contribution tax.

The Government left not much time for the preparation and admittedly aimed to push small investors towards government bonds.

Who is affected by the increase?
The decree applies to natural persons only, i.e. only the interest income by private individuals is subject to the surcharge.

All savings are affected?

The legislation mentions interest income generally, but not all interest is covered. A natural person is liable to pay social contribution tax on the amount of his interest income as defined in the PIT Act, with the exception of interest income from investment fund units of real estate funds, taken into account as the basis for personal income tax on interest income.

As interest income under the PIT Act, demand deposits, fixed-term deposits and investment funds – except real estate funds – and the interest and yields on corporate bonds will be subject to social contribution tax at 13%. It is important to note that – unlike other capital investment incomes including capital gains and dividends – social contribution on interest income will not be capped, i.e. will be applied without limit.

The wording of the legislation stipulates that no social contribution tax is payable on gains on real estate funds but also implies that investments previously exempt from personal income tax, including some government securities and insurance, might not be subject to the additional contribution tax.

When is the new tax applied?

The change will come into force as of 1 July 2023, however, different transitional rules might apply to various investment types:
• in the case of deposits, the date of maturity will count, and deposits that are tied up until 30 June 2023 will not be subject to the new tax, regardless of the maturity date;
• for demand deposits, the new tax will also be payable on the interest due from 1 July;
• for debt securities, typically corporate bonds, the date of purchase should be decisive;
• securities policies purchased before 1 July should not be subject to the new tax;
• for insurance policies subject to personal income tax, the date of the conclusion of the underlying agreement should be relevant.

The legislation explicitly applies until the current emergency situation persists.

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

A recently published government bill plans to modify the Hungarian personal income tax law by abolishing significant tax advantages associated with Hungarian trusts in a short period of time.

In summary, a Hungarian trust is a three-party relationship between the settlor, the trustee and the beneficiary. The settlor transfers a separate block of assets (such as a share in a business or ownership of real estate) to the trustee by entering into a Hungarian trust deed. The trustee is required to manage the transferred assets in his own name but for the benefit of a designated beneficiary, for a specified fee. The trustee specifies in the trust deed the beneficiary of the designated asset and the conditions under which the beneficiary’s entitlement arises and ceases.

Under the current legislation, an individual settlor is not liable to pay tax and duty when he/she transfers his/her assets to a trustee, even if he/she appreciates the value of the assets (asset disposal at market price) in the course of the transfer.

However, with the adoption of the bill, the tax advantage of appreciation will be lost within a short period of time. This means that, for example, in the case of company share sales, it will not be possible to save the tax burden on the appreciation between the acquisition value and the market value by using Hungarian trusts alone. The effective date of the bill is the 30th day after its adoption, which, due to its forthcoming adoption, is estimated to be around mid-July 2023.

The introduced additional tax burden applies to those Hungarian trusts where the Hungarian trust deed between the settlor and the trustee is signed after the 30th day following the entry into force of the bill. It follows from the above that if parties sign the Hungarian trust deed before the given deadline, the Hungarian trust deed is not subject to the provisions of the modified personal income tax regulation, and the trustee may still benefit from the preferential Hungarian trust arrangement for this short period.

By Lilla Majoros, Attorney at law, KCG Partners Law Firm

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.

Financing plays a pivotal role in upholding sustainability by providing the necessary resources to implement and support environmentally friendly practices and initiatives. Accessible and targeted financing enables businesses, governments and organisations 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.

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 and may need to provide periodic reporting on the environmental impact of the funded activities.

Social loans
A “social loan” is geared towards 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 utilises 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 incentivises 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, for example. The incentivisation is that by meeting the targets, financial benefits – such as a lower interest margin (ie, lower financial costs all together) – may be given to the borrower.

Hungary’s sustainable finance efforts
In Hungary, there is a growing trend towards the use of green loans. This can be seen through programmes developed by the Hungarian National Bank. However, the development of social loans and sustainability-linked loans is still in progress in Hungary.

The 2019 Green Programme aimed to provide a favourable regulatory environment for financial institutions to promote sustainable operations and introduce green products. After the success of that programme, the Hungarian National Bank initiated the new Family Green Finance Informational Programme in 2023. The aim of the programme is to provide individuals and families with useful and practical assistance in recognising that conscious financial management can also serve the environment. The Hungarian National Bank also aims to help families realise that through their investments, they indirectly contribute to ¦nancing sustainable (ie, sustainability-linked) projects, and that their daily consumption decisions contribute to long-term sustainability and quality of life for future generations.

Apart from the regulator’s activity, there is already an emerging “Hungarian model” to report on sustainability-linked loans on the market
as well.

In a notable display of commitment towards sustainability, Budapest Airport made headlines in 2021 by securing a substantial €200 million sustainability-linked loan. The terms of the loan are structured such that the interest rate is closely tied to the airport’s ongoing
endeavours to combat climate change by lowering greenhouse gas emissions and bolstering the utilisation of renewable energy sources.

Demonstrating a similar dedication to environmentally friendly practices, OTP Bank joined the ranks by entering into a sustainability-linked loan agreement in May 2021. The loan’s interest rate hinges upon the bank’s pledge to support renewable energy financing and sustainable projects. Additionally, OTP Bank made an impactful move by partnering with Mastercard to embark on a joint initiative to plant a staggering 100 million trees, further exemplifying the companies’ dedication to environmental conservation. These initiatives serve as commendable examples of corporations taking proactive steps towards creating a more sustainable future.

Comment
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 favourable terms and conditions, presenting financial incentives that drive companies to adopt sustainable initiatives and resulting in potential cost savings.

Moreover, internationally recognised standards and frameworks, including the United Nations Sustainable Development Goals and the 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.

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

Lawyers are keeping busy with new legislation, dispute resolution, and technology work in Hungary, while transactional work and FDIs show a marked slowdown, according to DLA Piper Hungary Country Managing Partner Andras Posztl.

“During springtime, there was a lot of work for parliament – with many EU directives waiting to be transposed into Hungarian law,” Posztl begins. “The new whistleblowing act was one of them. The concept is not new, but Hungary finally implemented the directive, and it will soon be available to every company and be tested in the current geopolitical context. Every company above 50 employees has to operate a whistleblowing system, either directly or through service providers.” He goes on to explain “its effects are expected to impact not only corruption but also discrimination and gender equality. This is a time of gender equalization and the MeToo movement, so tackling discrimination topics in the workplace – including gender and harassment issues – will hopefully create a positive new dynamic in the Hungarian corporate world.”

On the other hand, Posztl mentions “the transaction business is slowing down. And it’s not just due to general trends in Europe – it is slowing down everywhere – but we’re experiencing a bigger slowdown in Hungary. That’s partially because of the very high inflation and our disputes with the EU – with a significant amount of EU subsidies being either frozen, held back, or not allocated at all.” He says that’s creating “uncertainty for investors. Just last week, the figures came out: we are facing the lowest number of investments in many years. This and the cancellation of close to 300 public projects are clearly having a huge impact on the markets and those law firms that are more focused on large scale/transactional work.”

Still, some larger deals are expected soon, Posztl notes, which might improve Hungary’s FDI numbers. “For one, there’s Dunaferr, a vast steel producer built in communist times – that’s grown to be one of the top employers in the country – and has strategic relevance as it’s supplying our extensive car manufacturing industry.” Dunaferr is owned by a joint venture of Russians and Ukrainians and, “because of their ongoing corporate war, is now in an insolvency procedure, with an auction process ongoing,” he explains. “There is much interest from both western and eastern companies – mainly ones with Indian roots – and it will be a big deal when the auction process ends in the coming weeks. We’ll see then whether the company can be saved by a foreign investor, which stands to impact FDI flows in a big way.” Also, he says “there’s a lot of discussion – unclear whether it’s politics or business driven – about the re-privatization of Budapest airport. This won’t happen in the next three or four months, but the intention and the discussions are public.”

And while transactional work is slowing down, Posztl says there’s a “tremendous amount of work on dispute resolution and in the technology space, with many great mandates from international clients or their local subsidiaries.” He highlights that “companies are working out their policies on whether and how they allow the use of ChatGPT and the like. There are a lot of R&D projects on how to use it properly, what kind of benefits it can yield, or which workplace positions are the most threatened. There are limitations still, of course, but it’s an exciting topic for both clients and lawyers themselves.”

Wolf Theiss has advised a group of investors represented by PolSolar on the engineering, procurement, and construction of a 250-megawatt solar power plant in Mezocsat, Hungary.

According to Wolf Theiss, “the solar power plant boasts an installed rated capacity of 250 megawatts and was officially handed over on June 6, in Mezocsat, Hungary, marking a significant milestone in the country’s transition towards clean energy. This new solar power plant has already undergone rigorous production tests and has been seamlessly integrated into the Hungarian electricity grid. Consequently, solar power generation and electricity export figures have already experienced a notable boost.”

According to the firm, “the Mezocsat solar power plant accounts for 8% of the total electricity generated by solar power plants in Hungary. The new plant spans a vast area of 440 hectares, featuring an astounding 466,000 solar panels, 80 medium-voltage transformer stations, and an intricate network of 1,000 kilometers of cables. The power plant can produce 372 gigawatt-hours of electricity annually; which amounts to enough clean energy to meet the energy needs of the nearby city of Debrecen, home to a population of 200,000, for half a year. The investment of over HUF 90 billion (approximately EUR 245 million) highlights the commitment of both private and public entities to the expansion of renewable energy sources. The expected lifespan of the investment is projected to be a minimum of 15 years, ensuring a long-lasting positive impact on Hungary’s renewable energy sector.”

The Wolf Theiss team included Partner Laszlo Kenyeres and Associate Adam Lukonits.

Contributed by Forgo Damjanovic & Partners

1. SUMMARY 

The Hungarian renewable energy sector has developed recently, mainly focusing on photovoltaic power plants. According to the data publication of the Hungarian transmission systems operator, the installed capacity of the Hungarian solar power plants has exceeded 4,000 megawatts in 2022. There are future projects which have already received access to the transmission grid in an amount of approximately 5,000 megawatts. Therefore, the installed photovoltaic capacity might double within a few years, and the Hungarian target of 6,000 megawatts of total installed solar capacity by 2030 could be reached much earlier. 

The Hungarian capacity of wind farms is around 330 megawatts. All of the wind power plants were authorized and constructed before 2016, since then, no new wind power plant has been established in Hungary due to the very restrictive legislation, which makes the construction of wind farms practically impossible.

Due to the rapid growth of the Hungarian renewable energy sector, the electricity system currently faces a capacity deficiency. A national transmission system upgrade is necessary to enable the integration of the electric capacity generated and requested by weather-dependent energy sources.

2. OVERVIEW OF THE COUNTRY’S RENEWABLE ENERGY SECTOR 

2.1. Legal Framework

The legal framework of the renewable energy sector is determined by Act LXXXVI of 2007 on the electric energy (Electricity Act), government decrees, decrees, and resolutions issued by the Hungarian Energy and Public Utility Regulatory Authority (HEA) and various regulations (e.g., Commercial Code) of the Hungarian transmission system operator (TSO), MAVIR Zrt. 

In Hungary, electricity from renewable energy sources was supported by the mandatory offtake (KAT) support scheme until 31 December 2016. The principle of the KAT support scheme is that the power plants may sell the produced energy in the mandatory offtake based on an annual fixed amount. The fixed tariff is 40,34 HUF/kilowatt hour in 2023. The amount of electricity and the period of the mandatory offtake are determined for each eligible electricity producer. The provisions of participating in the KAT scheme have changed several times in recent years. Currently, the producers in the mandatory offtake system are not allowed to leave the support scheme and sell the produced electricity in the free market.  

A new renewable energy support scheme (METAR) was introduced in January 2017. The introduction of the METAR scheme does not interfere with the previously obtained KAT entitlements. The METAR scheme comprises three sub-systems determined by the power plant’s capacity: a feed-in tariff (for plants below 0.5 megawatts), a green premium without tendering (for plants below 1 megawatt) and a green premium granted through tendering procedures for all kinds of renewable power plants. 

The principle for the feed-in tariff support system is the same as for the KAT support scheme. In the METAR green premium (without tendering) support system, the producers may sell the electricity generated from renewable sources on the free market at market price, and the producers receive administrative premium support above the market reference price as a surcharge claim (the so-called market premium). The budgets of the feed-in and the green premium (without tendering) systems determined for 2020-2026 were exhausted in 2019; therefore, new entitlements cannot be requested. 

However, the METAR green premium tendering procedure is still available for new renewable energy projects. The tenders are technology neutral, with one bidding round and a price-based evaluation. The winners will be granted green premium support at the initial supported price in the winning bid for the period determined in the tender call, but for 20 years at most. The HEA organizes the tenders, and the last tender took place in March 2022. 435 gigawatts hour/year support was requested in the tender. 

The regulatory body of the energy sector is HEA, an independent regulatory authority whose responsibility covers licensing, supervision, price regulation, and tariff-and-fee preparatory tasks in the fields of electricity. 

The HEA licenses are necessary to establish and operate power plants generating electricity, to operate electricity storage facilities, and to trade electricity.  

Different rules and licensing procedures apply to power plants based on their nominal capacity, and a license is not required for power plants with less than 0.5 megawatts capacity. Small power plants with a capacity between 0.5 megawatts and 50 megawatts are subject to a simplified licensing procedure; The HEA issues a combined micro power plant license for constructing the power plant and the electricity generation in a single procedure. Power plants with a capacity of 50 megawatts or more shall obtain a separate license for the establishment of the power plant and a separate license for the operation of the power plant.

The main rules of the grid connection and the capacity allocation are determined in the Electricity Act, and within this framework, the TSO determines the detailed rules. Theoretically, grid connection capacity can be obtained through competitive allocation tender or in an individual procedure, but currently, there is no capacity to apply for. For the details, see Section 3.1.

The environmental impact assessment of a renewable project is required if the project exceeds certain thresholds in terms of the size of the land or the installed capacity and pursuant to a preliminary assessment, the project has a significant impact on the environment. If a project is subject to environmental impact assessment, the activity may only begin after the issuance of the environmental protection permit. 

The distribution and transmission tariffs (such as electricity system usage fees, connection fees, and special fees) are subject to regulation and determined for price regulation cycles. The current price regulation cycle started on  April 1, 2022, and the framework rules are described in HEA Decree No. 12/2020. (XII. 14.). The fees are calculated and determined by the HEA taking into account the principle of the least cost and the justified costs of the network licensees. When determining the fees, large changes from one year to the next shall be avoided as far as possible.  

As renewable energy projects have only started to become widespread in recent years, there are several areas where special legislation has yet to be adopted, including renewable power purchase agreements, electricity storage requirements, and the operation and maintenance of renewable energy projects.

2.2. Domestic Sales and Imports/Exports 

In 2021, the share of electricity from renewable energy sources in the gross final electricity consumption was 14.3%, with a 56.5% increase in electricity generated by solar power. The goal is to increase the share of renewable energy sources to at least 21% by 2030. 

In recent years, the most dynamic growth appeared in using solar power, renewable district heating and heat pump systems, and biofuels with mandatory blending rates. The expansion of small-scale hydropower capacity is also planned, in addition to maintaining existing hydropower plants.

In the heating and cooling sector, there is great potential for the efficient use of biomass and ambient heat through heat pumps. Only 10-15% of Hungary’s geothermal potential is currently exploited, although geothermal energy can be a competitive alternative to other energy sources. Given the geological conditions of Hungary, the aim is to exploit the geothermal thermal energy potential. In addition, the possibility of the biodegradable fraction of municipal waste for useful heat production should be exploited.

Hungary’s import energy dependence is high. The import dependence rate for all energy sources was 54.3% in 2021. However, Hungary is devoted to eliminating its reliance on imported energy sources and boosting electricity production relying on nuclear and solar energy. The goal is to stabilize the share of energy imports below 20% by 2040.

2.3. Foreign Investment and Participation 

Hungary currently has a two-folded FDI regime: 

The Act LVII of 2018 on controlling foreign investments violating Hungary’s security interests regulates a national security-type screening in the “classic” strategic sectors, including certain services under the Electricity Act. According to this regime, a ministerial acknowledgment is required if a foreign investor intends to acquire – directly or indirectly – at least 25% of the ownership of a company (or 10% of a public company), falling under the scope of applicability of the relevant regulation.

In May 2020, due to the pandemic, a new regime was introduced: ministerial acknowledgment is required for certain transactions if a foreign (including EU/EEA/Swiss) investor intends to acquire a strategic company (e.g., any Hungarian-based company with an activity in the energy sector) The stake which triggers the notification obligation depends on the investor: in case of non-EU/EEA/Swiss investors the acquisition of 5% (or 3% of a public company) is the threshold, while in case of EU/EEA/Swiss investor, only the acquisition of majority influence falls under the regime. In some instances, an additional condition is that the investment value reaches HUF 350 million (approximately EUR 875,000). This new regime was initially introduced as a temporary one, but it is still in force, currently with reference to the Ukrainian situation. 

2.4. Protection of Investment 

Hungary is one of the 53 signatories and contracting parties to the Energy Charter Treaty, which provides a multilateral framework for long-term cooperation in the energy sector, including energy trade, transit, and investment. The treaty protects foreign investors in energy, promotes the progressive liberalization of international energy trade, and aims to transfer its provisions to the WTO, thereby giving them global reach.

Hungary is also a party to the Paris Agreement on climate change. Its goal is limiting global warming to well below 2, preferably to 1.5 degrees Celsius. Hungary, among other signatory governments, contributed, before and during the Paris Conference, with a comprehensive national climate action plan to reduce their emissions, additionally committed to publishing action plans every five years, with increasingly ambitious targets in each plan. 

The EU also set a target in the Renewable Energy Directive (2018/2001/EU) to cover 32% of the EU’s energy consumption with renewable energy sources by 2030 and to decrease carbon dioxide emissions by 40 % compared to 1990 levels. In compliance with the directive, the Hungarian Parliament adopted the Electricity Act.

In addition, the European Green Deal, signed by all 27 EU Member States, including Hungary, aims to reduce net greenhouse gas emissions (GHG) by at least 55% by 2030, compared to 1990 levels, and turn the EU into the first climate-neutral continent by 2050. Each country was required to draw up its own energy strategy, which Hungary has done. 

Additionally, in the framework of its regulatory role, the Parliament passed a new law on climate protection (Act XLIV of 2020) containing the above EU climate objectives along with setting a target for Hungary to achieve a 40% reduction in greenhouse gas emissions compared to 1990 and a share of renewable energy sources in gross final energy consumption at least 21% by 2030.

3. DEVELOPMENT OF RENEWABLE ENERGY PROJECTS 

3.1. Granting of Grid Connection Rights 

The transmission and distribution networks are available in exchange for the network access fee. In April 2021, a new system for connection to the transmission grid was introduced, whereby producers may connect to the transmission or distribution grid by either participating in a competitive allocation tender or in an individual procedure. 

According to this new system, the Hungarian TSO, MAVIR Zrt. regularly determines the free capacity of the transmission grid, and the developers can apply for these free capacities. The first publication was released at the beginning of May 2022, and according to that, there was zero capacity in the system. Therefore, developers can only obtain grid connection through an individual procedure, where the developer has to establish its grid connection. All costs of such developments will be borne by the developer, including the costs of the necessary public network development. 

3.2. Ownership by Foreign Companies 

According to the Electricity Act and its implementing decree, small power plant licenses may only be granted to companies with a registered seat in Hungary, while licenses for the establishment and operation of power plants with a nominal capacity of 50 megawatts or more may only be granted to limited liability company (korlatolt felelossegu tarsasag) or joint-stock companies (reszvenytarsasag) with a registered seat in Hungary. 

Thus, power plants may not be owned directly by foreign companies. However, indirect foreign ownership is generally not restricted. Typically, the power plants are owned and operated by Hungarian project companies, and licenses and authorizations are granted to these project companies. Therefore, foreign investors typically establish project companies or acquire shares in the project companies already holding the necessary authorizations. 

HEA’s prior consent is necessary before acquiring, directly or indirectly, shares or voting rights, which represent at least 5% or more of the votes in any license-holder company, except for combined micro power plant license holders (PV plants with a nominal capacity between 0.5 megawatts and 50 megawatts), where the HEA has to be notified only after the acquisition. 

3.3. Stages of the Development Process 

Before the actual construction of the power plant, the developer has to secure the land on which the power plant will be built and apply for capacity to access the transmission grid. 

The power plant can be established on one’s own property or property owned by a third party; however, in the latter case, the owner’s consent is required for the construction. 

There are special requirements and preconditions regarding projects which will occupy more than 2 hectares, or the nominal generation capacity of the plant’s unit will reach or exceed 500 megawatts. In these cases, the assessment of the planned project’s environmental effect and preliminary authorization by the HEA is necessary. The preliminary authorization is granted for three years and might be extended for additional three years. In the preliminary authorization, HEA defines the technical requirements for the power plant to ensure the functionality of the electricity system without interruptions and the security of operation and electricity supply. 

For power plants with a nominal capacity below 500 megawatts but above 0.5 megawatts, a combined micropower license or a license for establishing the power plant is necessary. The HEA issues these licenses for an administrative service fee, the amount of which depends on the nominal capacity of the power plant (approximately between EUR 1,250 and EUR 5,000). Both licenses are granted for a definite period with a possibility of extension. Based on a combined micro power plant license, the developer is authorized to establish and operate the power plant and also to sell the self-produced electricity. In the case of a power plant above 50 megawatts nominal capacity, the license for the establishment authorizes the developer only for the construction of the plant, and a separate license is required for permanent electricity generation.

To secure the power plant’s access to the transmission grid, the developer has to apply for capacity with the TSO through the competitive allocation tender (if there will be any capacity to allocate) or in an individual procedure. In both cases, the developer must provide financial security in the amount of 900,000 HUF/megavolt amperes (approximately 2,250 EUR/megavolt amperes). Once the grid capacity is secured, the developer enters into a grid connection agreement with the local DSO. The agreement might contain provisions for the public network intervention to connect the power plant to the grid. The agreement is typically concluded for an indefinite period. 

If these licenses/authorizations are in place, the developer may apply for the building permits, separately for the power plant and the cable connection required to connect the power plant to the respective substation. These permits are typically valid for two years and might be extended for an additional two-year period. The permits authorize the developer to establish the power plant and the production cable on the given property in line with the submitted technical documentation. The building authority issues these permits after consultation with expert authorities such as environmental or disaster management authorities. The building authority and the expert authorities may determine special conditions which must be met during the construction work.

3.4. Obligatory State/Public Participation 

In Hungary, there is no mandatory participation for the state or any other public bodies in renewable energy projects or their development. Nevertheless, through MVM Group (the state-owned group of electricity companies), the Hungarian state indirectly participates in renewable energy projects: MVM has a solar power capacity of approximately 200 megawatts, and they are continuously expanding their capacity from year to year. MVM also owns five hydroelectric power plants, including the two largest Hungarian ones located at Tiszalok and Kiskore, with a nominal capacity of 41 megawatts. 

There are two main taxes that specifically burden the electricity producers in Hungary: the income tax of energy suppliers (Robin Hood tax) and the extra-profit tax. 

The Robin Hood tax is an income tax payable by energy suppliers and public utility suppliers, including electricity generation license holders and electricity trading license holders (but excluding, e.g., renewable energy producers who participate in the KAT or METAR support schemes). The tax base is the pre-tax profit modified with certain increasing and decreasing items. The tax rate is 31%. 

In June 2022, another special, so-called “extra profit tax” was introduced, payable by renewable energy producers who are entitled to participate in the KAT or METAR support schemes but leave or fail to enter the respective support scheme in 2022 or 2023. The tax base is the difference between the hypothetical revenue that the producer would have generated by selling the electricity under the KAT or METAR support scheme and the revenue generated on the market. The specific tax rate is 65%. 

3.5. Risks to be Considered

Currently, the most significant risk related to developing renewable energy projects is the lack of grid capacity. See Section 3.1.

In addition, securing the land required for the project may also be problematic in the case of lands classified as agricultural land. According to the applicable legislation, agricultural lands cannot be acquired or used by companies in Hungary, which means that the ownership of the land can only be secured following the construction of the power plant and the reclassification of the land. As a result of this situation, in these cases, the close cooperation of the developer and the private individual owners is required throughout the development phase, which has its own pitfalls. 

4. RENEWABLE ENERGY CONSTRUCTION AND PRODUCTION 

4.1. RTB Status 

Generally, a Hungarian renewable energy project can be considered “Ready-to-built” if it has the following authorizations: (i) ownership or other right securing the use of the land;(ii) combined micro power license for power plants with a nominal capacity between 0.5 megawatts and 50 megawatts or a license for the establishment of the power plant above 50 megawatts nominal capacity;(iii) building permit for the power plant;(iv) separate building permit for the production cables, including transformer station and switching station;(v) grid connection agreement.

4.2. Construction of Renewable Energy Projects 

The power plant project has to be constructed in line with the provisions of the building permits and the HEA licenses. Both authorizations contain a timeframe for constructing the power plant, which the developer has to meet. If the developer fails to complete the plant in the given timeframe, the building permits will expire, and the HEA will revoke the HEA license. Constructions are typically carried out within the framework of turnkey EPC agreements. 

After the construction of the power plant, a commissioning procedure is conducted, and a so-called occupancy permit has to be acquired for the permanent commercial operation of the plant. The building authority grants the occupancy permit if the construction work was carried out in accordance with the building permit and the related documentation, the plant is in a condition suitable for its safe use, and the consent of the relevant operators of public utilities is given.

If the plant is not established in accordance with the specifics determined in the building permits, instead of an occupancy permit, a continuation permit must be requested from the building authority. In this case, even if the building authority grants the continuation permit, a fine will be imposed simultaneously. 

The project owner also has a notification obligation toward the HEA and the TSO regarding the proposed date for the commencement of commercial operations, the completion of commissioning, and the actual commencement of commercial operations.

4.3. Granting of Renewable Energy Production Licenses

Please see Section 2.1. for the main legislation for obtaining renewable energy production licenses. 

An operating license is required for the operation and electricity generation of power plants with a nominal capacity above 50 megawatts. The HEA issues the license for a definite period with the possibility of an extension. In the case of power plants with a nominal capacity between 0.5 megawatts and 50 megawatts, the combined micro power plant license obtained before the construction of the plant also covers electricity generation. These licenses authorize the producers to sell self-produced electricity. 

The terms and conditions of the operation are determined in the operating license. In the event of a breach of any of these terms, the HEA may issue a written notice to comply with the obligations and/or impose fines. If the license holder fails to remedy the infringement, the HEA may amend or revoke the license. The revocation of the license is obligatory in some cases, e.g., if the electrical installation is operated in a manner that seriously endangers the electricity supply, human life, health, operation, property safety, or the environment.

4.4. Renewable Energy Production by Foreign Investors 

See Section 3.2.

4.5. Operation and Maintenance of Renewable Energy Projects

There are no specific regulations on the operation and maintenance of renewable energy projects. However, the expert authorities might determine special conditions in the occupancy permit for the operation of the power plant with regards to environment, nature or soil protection rules or disaster management requirements, etc.

In most cases, the operation and maintenance are performed by third-party contractors in accordance with the terms of the parties’ agreement.

4.6. Decommissioning Process 

There is no specific regime in Hungary in relation to the decommissioning of renewable energy projects, disposal of equipment, or recovery of fields. The reason for the lack of legislation might be that the Hungarian renewable energy market has just started growing, so probably no real need has arisen so far concerning the decommissioning of these renewable energy projects.  

Nevertheless, the provisions of the WEE Directive (2012/19 Directive of the European Parliament and the Council on waste electrical and electronic equipment) have already been implemented, mainly by Government Decree No. 197/2014. On waste management activities related to electrical and electronic equipment. This government decree does not explicitly regulate the decommissioning process of renewable energy projects, but with certain limitations, it can be applied to decommissioning power plants. 

4.7. Risks to be Considered

The most significant factor holding back developers of renewable electricity projects might be the rapid and often unpredictable changes in the regulatory environment. In the past years, significant changes were introduced concerning the grid connection procedure, resulting in zero grid connection capacity. New taxes have been levied on the energy generator, and the rules of the support schemes and the balancing system are also changing continuously, which might require the investors to reconsider their business operations from time to time.  

5. BALANCING OF RENEWABLE ENERGY PROJECTS, STORAGE, SALES 

5.1. Balancing of Renewable Energy Projects 

The Hungarian regulatory framework for balancing renewable energy projects is in line with the 2017/2195 EU Commission Regulation on establishing a guideline on electricity balancing. The framework rules for balancing are determined in the Electricity Act and in its Implementing Decree, while the detailed rules are specified in the Business Rules (Kereskedelmi Szabalyzat) of the Hungarian TSO. 

The Hungarian TSO’s responsibilities include ensuring that the electricity system functions smoothly and without interruptions, as well as balancing the electricity system, and also the operation, maintenance, and improvement of the transmission network. To fulfill these obligations, the Hungarian TSO operates the networked meter-balancing system (balancing circles) and makes arrangements for settlement with the balancing circle accounts. 

Each electricity producer has to join a balancing circle. In every balancing circle, there is one member, the balancing circle manager, responsible for providing the required schedules and ensuring that the quarter-hourly balance of their producers and consumers is zero.

The goal of this system is to ensure that the amount of electricity fed into the balancing circle and fed out of the balancing circle is the same in every settlement time unit. In case there is a deviance from the schedule (either positive or negative), the TSO charges the cost of the balancing energy supply to the balancing circle manager. 

5.2. Storage 

There is no specific electricity storage regulatory regime in Hungary, however, the concept was introduced in the Electricity Act in 2016: electricity storage activity is subject to a licensing procedure in accordance with the provisions applicable to power plants.

As the weather-dependent renewable energy projects prove to be a challenge for the TSO in terms of maintaining the balance, the TSO (in line with the authorization of the Electricity Act) amended its Operational Code in 2022 and implemented a requirement for weather-dependent power plants to have a storage unit with at least a capacity of 30% of the nominal capacity of the power plant. This requirement has been suspended due to the Ukrainian situation.

5.3. Sales

Renewable energy producers are entitled to sell the self-produced electricity in possession of their combined micro power plant license and operating license issued by HEA. Other market players have to apply for an electricity trade license at HEA. 

The license holders are obliged to offer their available generation capacity to ensure the system-level services and the distribution flexibility services required by the electricity supply regulations.

The electricity producers participating in one of the subsidy schemes (either KAT or METAR) are only entitled to sell the produced electricity in accordance with the provisions of the subsidy scheme. Producers who do not participate in the subsidy schemes may sell their generated electricity on the free electricity market. The sale of the generated electricity may be carried out either directly on the Hungarian Power Exchange (HUPX), which is the organized Hungarian power market or through market-based sales contracts or power purchase agreements.

PPAs are subject to the general legislation of the energy sector and the applicable industrial codes of the TSO, but there are no specific legal restrictions on the conclusion of power purchase agreements between renewable energy producers and electricity traders as off-takers, so the terms and conditions of such agreements can be freely determined by the parties. With respect to corporate power purchase agreements, there are some regulatory provisions to comply with, but the terms and conditions are mainly also subject to the agreement of the parties. 

6. ROOFTOP, OFFSHORE, FLOATING, AND AGRICULTURAL RENEWABLE ENERGY PROJECTS 

6.1. Offshore Wind and Floating Photovoltaic Projects  

N/A

6.2. Rooftop Photovoltaic Projects 

In Hungary, rooftop photovoltaic projects are mainly widespread among households and companies to cover their own electrical needs.

These projects are so-called household power plants, which are basically micro power plants connected to the low-voltage system with an interconnection capacity of less than 50 kilovolt amps at a connection point. The general rule regarding this kind of power plant is that the produced electricity shall be accepted and bought by the electricity trader or universal service provider upon the producer’s request. However, due to network capacity issues, Government Decree No. 413/2022 (XI.26.) temporarily suspended the possibility of feeding the electricity generated by household power plants into the public network and only those household power plants may be installed which produce electricity solely for their own electricity consumption. This restriction does not concern those household power plants which were implemented based on connection requests submitted before October 31, 2022. According to the latest news, the review of this temporary suspension is in progress, but the development of the necessary network capacities takes time.

6.3. Agrivoltaic Projects 

No information is publicly available in Hungary on implemented agrivoltaic projects. However, an amendment of Act CXXIX of 2007 on the protection of agricultural land foresees future agrivoltaic projects as it enables the establishment and operation of a power plant that produces electricity using solar energy in accordance with the agrivoltaic system on agricultural land if it does not prevent the utilization of the area below the plant as agricultural land. The act also stipulates that the detailed rules will be determined in a government decree, but this legislation is yet to be issued.

7. TRADING OF GREEN CERTIFICATES/CERTIFICATES OF ORIGIN 

7.1. Certification  

The Hungarian guarantees of origin (GO) system has been operated by the HEA since January 1, 2014. GOs are tradeable electronic certificates that prove to the final customer that a certain share of the electricity was produced from renewable energy sources. 

GOs are issued in an electronic registry by the HEA upon application submitted by either the electricity producer or the account holder authorized by the electricity producer. To register into this electronic registry and open an account, the electricity producer has to enter into an agreement with HEA. 

GOs are registered after production, so the trading is disconnected from the physical electricity products; it is performed retrospectively. 

On February 1, 2022, the HEA joined the European Energy Certificate System (EECS), which means that Hungarian GOs may now enter the international market and foreign GOs received within the EECS are recognized in Hungary.

7.2. Trading 

The Hungarian GO market was launched in July 2022. It is an organized, auction-based market operated by HUPX Zrt. HUPX maintains a registry of tradable products that are listed either in the Associations of Issuing Bodies or the HUPX register and offers financial clearing and settlement services to ensure reliable trading processes.

The HUPX GO market started with the single-seller model (MAVIR, the Hungarian TSO), and the multiple-seller model was only launched later in September 2022. According to HEA publications, a total of nearly 1,073 gigawatts hour of domestic and 10 gigawatts hour of foreign GOs were sold for around EUR 3.53 million at the September 2022 auction of HUPX.