Category: Hungary

Based on Directive 2019/1158 of the European Parliament and of the Council of 20 July 2019 on work-life balance for parents and carers and repealing Council Directive 2010/18/EU (“Work-Life Balance Directive”), as of 2 August 2022 all Member States shall apply rules to improve work-life balance for parents and carers. In particular, Member States must ensure for working fathers at least 10 working days of paternity leave around the time of birth of the child and the paternity leave should be compensated at least at the level of sick pay.

The relevant provisions of the Hungarian Labour Code as of now ensure 5 days (7 in case of twins) for paternity leave.

However, the Hungarian Labour Code has not yet been amended. According to the information provided by the Innovation and Technology Ministry, the work to implement the regulation of the Work-Life Balance Directive is in progress, and therefore the amendment of the relevant provisions of the Labour Code in the near future is expected.

By Rita Parkanyi, Partner, KCG Partners Law Firm

On 5 August 2022, the Central Bank of Hungary (MNB) announced an update to its supervisory recommendation for credit institutions and Hungarian branches of credit institutions on climate-related and environmental risks. The recipients have to identify, manage, monitor and disclose climate and environmental risks.

Recommendation No. 10/2022. (VIII.2.) was updated to reflect changes in the European Union rules as well as the United Nations Principles for Responsible Banking Guidance Document and market feedback, and to outline more specific expectations and clearer goals related to making operations more sustainable. The Recommendation establishes a timeline with deadlines of 15 September 2022, 1 July 2023, and 1 January 2025. Market players need to consider climate and environmental risks and opportunities in their strategies, business plans and models from 15 September 2022 and integrate them in detail in the following years. Institutions need to create appropriate methodologies, documentation, key performance and risk indicators which covers short, medium, and long-term (at least 10 years) horizons.

On the other hand, corporate governance requirements include the integration of climate change and environmental risks. For this, it is important that the management board is aware of and understands climate change and environmental risks in order for the level of risk to be consistent with the strategy, policies and operations of the institution. MNB expects the institutions to designate a department or manager responsible (ESG centre or chief sustainability officer) for the management and control of climate change and environmental risks, who will report regularly to the management on his/her activities.

Furthermore, expectations regarding risk strategy and risk management policies should be consistent with the climate change and environmental risks and the institutions need to analyse how the environmental risks impact credit, operational, market and liquidity risks, and take environmental risks into account in client and partner rating process. For that, it is important to quantify the risks and create procedures, tools and methodologies.

Finally, credit institutions will also need to take measures against climate change in their operations. MNB expects that the institutions start preparing for the new disclosure requirements if they are subject to them.

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

On 18 August 2022, a government decree on special rules for the employment of third-country nationals in Hungary during the emergency was published. According to the new rules, the list of cases in which the government office is not involved in the consolidated application procedure as a special authority, has been extended. This means that starting from 19 August 2022, government offices do not participate in the consolidated application procedure if the third-country national is employed by the general contractor or its subcontractor as defined under Act VII of 2015 on the investment related to the maintenance of the capacity of the Paks Nuclear Power Plant and on the amendment of certain related acts, including employment through a temporary agency, too.

In addition, the government decree declares that the main contractor and its subcontractors working on the Paks Nuclear Power Plant shoul also be considered a VIP employer for the purposes of employment in connection with the project. Finally, the employment (including employment through a temporary agency) of a third-country national in the territory of Hungary by the main contractor and its subcontractors working on the Paks Nuclear Power Plant does not require a permit for employment.

Put simply, by not requiring the inclusion of the government offices in the consolidated application procedure, by granting shorter processing times which apply to VIP employers only, and finally by not requiring a work permit (only a residence permit will be enough) for these third-country nationals, the government simplified the employment of third-country nationals related to the Paks Nuclear Power Plant.

It is safe to say that, as labor shortages increase, more and more guest workers arrive in Hungary, mainly from neighboring countries. However, since a nuclear power plant is a very specialized field, workers from Russia are also expected to arrive in Hungary once Paks 2 receives green light and construction can fully start.

By Gabriella Galik, Partner, KCG Partners Law Firm

As of 1 July 2022, Hungary’s already existing financial transaction tax has been extended to payment service provision, credit and loan provision, currency exchange and mediated currency exchange services provided on a cross-border basis in Hungary. Provision of cross-border services means financial services provided in a country other than the country where the seat, place of business, head office, or branch of the service provider is located. Basically, this means that non-Hungarian service providers providing such services to Hungarian customers will most probably be affected by this extension.

The rate of the financial transaction tax for such cross-border service provision is 0.3 % but capped at HUF 10,000 (EUR 25) of the transaction value per transaction. The tax does not apply, among others, if/in the case of:

• intrabank transfers if the owner of the sender and recipient accounts are the same person;
• transfers between payment accounts and securities accounts if the owner of both accounts are the same person and the account holding entities belong to the same group;
• the transaction serves clearing;
• the transfers serve group financing and the there is only one account holding bank (e.g. cash pooling); and
• the account holding bank performs the transfer for another payment service provider, financial enterprise, investment firm, investment fund or investment fund manager.

The amendment of the tax regulation requires cross-border service providers to register themselves with the Hungarian tax authority by 1 September 2022 in case they are liable to pay financial transaction tax as of 1 July 2022.  If they are liable to pay financial transaction tax after 1 July 2022, they are obliged to register with the Hungarian Tax Authority by the 1st day of the month following the day when tax liability has arisen. It causes uncertainty that the law does not specify any further step for cross-border service providers; thus, it is difficult to foresee how the tax will be imposed.  Also, it is not entirely clear what the consequences of failing to register will be or how the tax authority will discover such non-compliance. It is also to be examined whether with careful structuring of their service provision, the cross-border service providers can evade this tax.

By Gergely Szaloki, Local Partner, Schoenherr

Partner Akos Fehervary has been elected as the new Managing Partner of the Baker McKenzie Budapest office, as of July 1. Fehervary takes over the position from Partner Zoltan Hegymegi-Barakonyi, who led the operation for the past nine years.

According to Baker McKenzie, “Akos is a highly qualified cross-border M&A lawyer, with substantial experience in the field of employment law, too. He is mainly active in the industries of oil and gas, automotive, energy/renewable energy, technologies, and pharmaceuticals. He also co-leads the office’s China desk.” Fehervary started his legal career at Baker McKenzie in 1997, as a Junior Associate.

“It is an honor to have this opportunity and to lead the Budapest office,” commented Fehervary. “The bar is high, as I am taking over a very successful operation, but I am committed to further strengthening our businesses and organization.”

“After nine years, I am happy to hand over the Managing Partner position to a colleague who has earned the full trust of our partners based on his hard work and good performance over the years,” added Hegymegi-Barakonyi. “I am confident that Akos will successfully continue the work that was started 35 years ago, when Baker McKenzie opened the Budapest office, and he will further strengthen our firm’s position in the Hungarian market of legal services. As for me, I intend to help him achieve these goals primarily by strengthening and developing our Competition and IP practices.”

On 16 August 2022, a government decree was published amending certain construction, heritage protection, property management and government administration rules.

The amendments also affect the government decree on the design boards for town and country planning, architectural-engineering planning and specified additional cases where the National Architectural Design Council gives an opinion on architectural-technical documentation. Accordingly, from 17 August 2022, the National Architectural Design Council must give an opinion on the architectural-technical documentation for public building investments, for buildings with a total useful floor area of more than 5,000 sqm and for multi-apartment residential buildings of new construction with a total useful floor area of more than 1,500 sqm on a building plot and consisting of at least six dwellings. The building authority will reject the application for the building permit if the planned construction activity is intended to implement the above-mentioned investments and it was not recommended for approval by the central architectural-engineering design council in its technical opinion.

As a result of the amendments, the requirement of near-zero or better energy requirements will apply from 30 June 2024, i.e., the original deadline of 30 June 2022 has been extended by two more years in respect of all construction investments. Until the above date, the energy requirements for buildings in force on 31 December 2020 apply, however, the developer may opt to apply the nearly zero or more favourable energy requirements.

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

Former Wolf Theiss Partner Akos Eros has established a new firm in Budapest: Eros Law Firm.

Specializing in corporate/M&A, Eros has been with Wolf Theiss since 2018 (as reported by CEE Legal Matters on September 11, 2018). He moved there from Squire Patter Boggs, where he last served as the firm’s Managing Partner in Hungary, before the firm closed its Budapest office in 2019 (as reported by CEE Legal Matters on February 19, 2019).

Prior to his 18 years with Squire, Eros was a National Partner with Arent Fox, between 1995 and 2000, and an Attorney at Law with Coopers & Lybrand (now PwC), between 1994 and 1995. His experience includes working as a Lawyer Trainee with Freshfields legacy firm Heller Loeber Bahn & Partners, between 1992 and 1994.

“I am excited to rejoin some of my colleagues from Squire Patton Boggs and serve clients at the highest quality level in Hungary,” commented Eros. “Our experiences and credentials are second to none in the Central European legal market.”

As a result of the concession procedure previously launched by the Hungarian Government, the Hungarian State handed over the operation and maintenance of 1,237 kilometers of motorway to five different private companies from 1 September 2022 for 35 years.

Over the next 11 years, the concession companies have undertaken to renovate 538 kilometers of existing motorways, build 272 kilometers of motorways and add 273 kilometers of new lanes to the existing motorway network. All the sections of the motorways covered by the concession will remain in public ownership. For operation, maintenance and development, the Hungarian state pays a kilometer-based so-called availability fee to the concessionaire companies.

The Hungarian State will continue to operate 237 kilometers of motorway, and in addition, maintains 31,000 kilometers of other roads connecting and passing through municipalities. Most of the roads within municipalities, more than 140,000 kilometers in total, will continue to be maintained by local municipalities.

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

This article provides an up-to-date overview of the currently existing FDI regimes in Hungary.

Legal basis

Two parallel FDI screening mechanisms now apply in Hungary:

Approval of the Ministry of the Interior

Act No. LVII of 2018 on the Control of Investments Detrimental to the Interests of Hungarian National Security (the “Act”).

Government Decree No. 246/2018 (XII. 17.) on the execution of Act No. LVII of 2018 (“Decree 246/2018”).

Government Decree No. 532/2020. (XI. 28.) on economic measures during the pandemic (“Decree 532/2020”)

Hereinafter referred to as “MI FDI Screening”.

Approval of the Ministry of National Economy

Act No LVIII of 2020 on “the transitional rules connected to the termination of the emergency situation and pandemic alert” effective until 30 June 2021 (“Act 2020”) and Government Decree No 289 of 2020 (VI.17.) on the definition of strategic companies.

Hereinafter referred to as “MNE FDI Screening”.

EU FDI Screening Regulation (Regulation (EU) 2019/452), OJ L 79I, 21 March 2019.

Filing requirement

1.MI FDI Screening

MI FDI Screening applies to (i) investors from outside the EU, Switzerland and EEA, and to (ii) any subsidiary of such an investor if the subsidiary is established in the EU, Switzerland or an EEA member state and the investor holds a majority of the voting rights in voting rights in the subsidiary or has a decisive influence in it. Under Decree 532/2020, investors from the EU, Switzerland and EEA must also be regarded as foreign investors until 30 June 2021. The foreign investor must obtain the prior approval of the Ministry of the Interior if it intends to:

– directly or indirectly acquire more than a 25 % interest (in the case of a publicly listed company, a 10 % interest) in an existing or yet to be established company with its registered seat in Hungary, provided this company pursues activities that are deemed to be sensitive for national security (“Hungarian Company”);

• acquire decisive influence in a Hungarian Company;
• establish a branch office in Hungary; or
• acquire a right to operate or use sensitive infrastructure or assets in Hungary.

All transactions that result in a foreign investor acquiring more than a 25 % interest in a Hungarian Company are subject to foreign investment screening. Moreover, prior approval is required when a foreign investor acquires an interest of less than 25 % but this acquisition results in more than a 25 % interest in the respective Hungarian Company being held by (several) foreign investors.

2.MNE FDI Screening

Under Act 2020, investments by foreign investors acquiring an interest exceeding (i) 10 % and a value of HUF 350m (approx. EUR 1m), (ii) 15 %, 20 % or 50 % irrespective of its value, or (iii) 25 % if acquired by more than one foreign investor, require the approval of the Ministry. The foreign investor must notify the Ministry if it intends to acquire the right to use or operate infrastructure necessary for pursuing activities in strategic sectors (including using such strategic infrastructure as collateral).

A “foreign investor” is (a) a company or organisation domiciled in, or a citizen of, a state outside of the EU, the EEA or Switzerland, or (b) a company or organisation whose majority owner is domiciled in, or a citizen of, a state outside of the EU, the EEA or Switzerland. However, certain acquisitions of a majority interest require the Ministry’s approval if the foreign investor is a company or other organisation domiciled in the EU, the EEA or Switzerland. Act 2020 applies to investments in companies that have their seat in Hungary and:

1. are a limited liability or private limited or public (listed) company; and
2. operate in specified “strategic”

However, Act 2020 is not applicable if a transaction affects the foreign company directly, if the foreign company has a Hungarian subsidiary that qualifies as a strategic company. Therefore, transactions over the level of a Hungarian subsidiary (qualifying as a strategic company), may not be approved by the Ministry. This exemption applies to asset deals as well. Moreover, Act 2020 is also not applicable in case of intra- group transactions.

Relevant sectors

1.MI FDI Screening

The Act contains a complex system regarding the sectors and activities which are under scrutiny. These activities in the specific sectors include activities that:

• are traditionally considered sensitive, g. manufacturing of arms, dual-use items and secret service equipment;
• are under the Hungarian Gas Act and Water Supply Act, Electricity Act, Credit Institutions Act and the Electronic Communications Services Act; and
• involve the creation, development or operation of communication systems of the Hungarian State and Hungarian municipalities.

2.MNE FDI Screening

“Strategic” sectors such as manufacturing of medicines, medical devices or other chemicals, fuel production, telecommunications, retail and wholesale (including motors and cars), manufacturing of electronic devices, machinery, steel and vehicles, defence industry (e.g. manufacturing and trade of arms and ammunition as well as technologies used for military purposes), power generation and distribution, services connected to the state of emergency, financial services (including insurance, brokering and other services), processing of food (including meat, milk, grains, tobacco, fruits and vegetables), agriculture, transport and storage, construction (including the production of building materials), healthcare, tourism (hospitality and cafeteria services) and others (e.g. constructing a dam). 

Process and timetable

1.MI FDI Screening

Competent authority: Ministry of the Interior Mandatory filing requirement: Yes

Filing deadline: The foreign investor must file its request for approval within 10 days from (i) the date of execution of the underlying agreement, preliminary agreement, or undertaking, or (ii) the date of registration of activity change by the respective commercial registry.

Responsibility for filing: The foreign investor and its management (as the acquirer) are responsible for obtaining the necessary approval.

Standstill requirement: Yes

Sanctions: Implementation of the transaction ahead of local regulatory clearance is subject to (i) criminal sanctions,

(ii) fines under Decree 246/2018, and if the Ministry of the Interior prohibits the transaction (iii) invalidity of the underlying agreement(s) and corporate actions (e.g. shareholders’ resolution). In addition the foreign investor must (iv) sell its shares or eliminate its influence in the Hungarian Company or the Hungarian Company must modify its activity within three months or the foreign investor must close its branch.

Length of the proceedings:

60 days, which may be extended by an additional 60 days.

2.MNE FDI Screening

Competent authority: Ministry of National Economy Mandatory filing requirement: Yes

Filing deadline: The request for the approval must be made within 10 days from the execution of the underlying agreement.

Responsibility for filing: The foreign investor and its management (as the acquirer) are responsible for obtaining the necessary approval.

Standstill requirement: Yes

Sanctions: Implementation of the transaction ahead of local regulatory clearance is subject to (i) criminal sanctions, (ii) fines under Act 2020, and if the Ministry of National Economy prohibits the transaction (iii) invalidity of the underlying agreement(s) and corporate actions (e.g. shareholders’ resolution).

Length of the proceedings:

30 business days, which may be extended once by an additional 15 calendar days.

Other articles from this series:

FDI Screening in Austria.

FDI Screening in Bosnia & Herzegovina.

FDI Screening in Croatia.

FDI Screening in the Czech Republic.

FDI Screening in North Macedonia.

FDI Screening in Montenegro.

FDI Screening in Moldova.

FDI Screening in Poland.

FDI Screening in Slovakia.

FDI Screening in Serbia.

FDI Screening in Romania.

By Kinga Hetenyi, Managing Partner, and Adrian Menczelesz, Attorney at Law, Schoenherr

Ban, S. Szabo, Rausch & Partners’ busiest practice has been M&A, primarily driven by the consolidation trend in the Hungarian market, availability of investment money, alongside major companies seeking product diversification, according to Managing Partner Janos Rausch.

“M&A transactions – both large-scale and medium-sized, have kept us extremely busy last year,” Rausch explains. “To name a few,” he says, “we established strong cooperation with fund managers such as Focus Ventures, who we advised in some of their recent investments. We represented E.on Hungaria on the sale of Elmu-Emasz to MVM. The MOL Group is one of our recurring clients as well.” The list of clients and transactions, according to Rausch, is quite varied. 

Rausch notes, that it is rather difficult to highlight one particular factor that led to this trend. “The main driver behind increased M&A activities is the consolidation trend in the Hungarian market,” he points out. “Otherwise, the parallel availability of investment money and having interesting targets is also a fundamental reason for investments in certain projects and companies. Last but not least, service and product diversification of major players like MOL is also part of the reasons for these transactions.”

Looking ahead, Rausch points out that it is difficult to predict the future, especially with respect to transactional work. “The economic situation in Hungary is not so good at the moment and the recent changes to taxation might lead to reduced activities in many fields,” he says, noting that “some of the old projects are stopped, energy prices have peaked, and a war in a bordering country are not promising factors at the moment.”  

“Our experience tells us that M&A deals tend to dry out in an economic environment where there is stagnation and uncertainty,” Rausch notes. “The situation was similar during 2008 when a huge boom of M&A work preceded a downward trend in the subsequent two to three years. That being said we remain optimistic and maintain our focus on M&A. We are fortunate that our M&A team and the competition law team are busy with some transactions in the automotive business that will carry us through the rest of this year and probably the beginning of next year also.” At the same time, he notes, “we also focus on some of our other traditional practice areas such as regulatory, corporate, litigation, and energy which areas are less sensitive to recessions. We are confident that these practice areas will continue to provide a steady stream of work for us.”