Category: Hungary

In recent weeks, the question of how to pay wages in euros has been raised more and more frequently. Can employees ask their employers to stop paying their monthly wages in forints and start paying them in euros? Considering the increasing importance of the issue, in the followings we are assessing whether Hungarian labour law allows for the possibility of setting and paying wages in foreign currency.

At first glance, it may seem that the Labour Code gives a clear and categorical answer: this is only possible in exceptional cases, as the general rule is that wages in Hungary must be set and paid in HUF. Deviation from this rule is only possible if expressly permitted by law, or in the event of work abroad. The latter is the case, for example, when the employee is on a foreign assignment. It is also important to note that the obligation to set and pay wages in HUF applies to all wage elements, i.e. both the basic wage and other wage elements (e.g. wage supplement, performance based wage), and is independent of the legal title of the wage.

However, according to the general rule of the Labour Code, the employment contract may derogate from certain provisions of the Labour Code at the will of the parties, provided that this is done for the benefit of the employee. The question may therefore arise as to whether, if a derogation from the rule on the determination of remuneration were to be in favour of the employee, this would at the same time allow such a derogation in the employment contract. This question is also clearly answered by the Labour Code, since, according to the interpretative provisions, no valid derogation from the above rule is possible either in the employment contract or in the collective agreement. 

As mentioned above, this applies to both the setting and the payment of wages, meaning that in employment contracts wages cannot be set in foreign currency even if the employer would actually pay them in HUF, and vice versa. The prohibition also applies if the wages are fixed in forints by reference to a foreign currency, with the result that the wages would be paid in forints at a predetermined conversion rate.

According to the relevant judicial practice, in an employment contract only agreements where the parties link the rate of increase of the remuneration fixed in forints to the change in the exchange rate of a foreign currency may be valid. Such agreements do not contravene the prohibition on fixing wages in foreign currency. However, this would essentially mean that the employment contract would be subject to frequent amendments. Therefore, a more appropriate solution would be for the employer to, , pay the difference resulting from fluctuations in the euro exchange rate to the employee at specified time periods (e.g. every 3-4 months), even under a different, but appropriate legal title.

In addition to the cases mentioned above, the fixing of wages in euro is only possible in the employment contracts of executive employees. Please note, however, that a recent decision and interpretation of the law by the Hungarian Court of Appeal (Kúria) renders this statement, which at first sight seems easy to support, open to challenge.

By Anita Horvath, Partner, and Eszter Bohati, Associate, Dentons

Hungarian lawyer Attila Bocsak has relocated to Doha, Qatar, to take on the role of General Counsel with Gulf Bridge International.

Prior to his move, Bocsak was a Senior Legal Counsel with Wizz Air in Budapest since 2021 (as reported by CEE In-House Matters on August 6, 2021). Before that, he ran his own law firm – Bocsak Law Firm – between 2020 and 2021. Earlier still, he spent nine years with Turk Telekom International, which he first joined as a Head of Legal in 2011 to be appointed Legal and Compliance Director in 2018. Before moving in-house, he was a Senior Associate with Dentons legacy firm Salans and with Clifford Chance.

Originally reported by CEE In-House Matters.

The Hungarian government has introduced an extra tax of 65% on particular turnover of energy producers from renewable sources.

Legislative and Regulatory Background

The introduction of an extraordinary tax by government decree is permitted by the state of emergency that the Hungarian government introduced in May 2022, as a result of the war in Ukraine. However, it is important to emphasize that the extra tax only applies to renewable energy producers that have switched to or started selling their electricity on the open market, instead of through a government-sponsored purchase scheme.

In Hungary, there are three state support systems to encourage investments in renewable energy: KAT, METAR-KAT, and METAR Premium. Through these state subsidies, the investor has been guaranteed that the electricity generated by the renewable power plant would be purchased at a fixed – so-called mandatory – purchase price for the long term. However, due to the recent significant increase in electricity prices, the sale of electricity on the market (i.e., outside the state subsidy scheme) has become much more profitable and, as a result, many electricity generators have left the state subsidy system and started selling electricity on the open market. In addition, due to high market prices, a number of new projects eligible for government subsidies did not start accessing the government subsidy scheme and sold their electricity on the market.

Who Pays?

According to the new government decree, entities that exit the state subsidy system in 2022 or 2023 and those entities that start their commercial activities in these two tax years – but do not conclude the agreement required to receive KAT, METAR–KAT, or METAR Premium – are required to pay an additional tax. Producers that ceased participating in the state subsidy system before 2022 are not subject to this extraordinary tax.

The law appears to be retroactive to the beginning of 2022 with respect to exiting the government subsidy system, but does not apply to power plant units smaller than 0.5 megawatts or power plants generating electricity using solid biomass.

The tax base on which this extraordinary tax of 65% is payable is the difference between the mandatory purchase price and the actual market price.

The electricity producer is required to establish and pay this extraordinary tax before the 20th day of the month following the relevant month, in accordance with a form prepared by the Hungarian tax authority. For each month of the period from January 1, 2022, to July 1, 2022, the special tax shall be determined, declared, and paid by the producer by September 20, 2022. The tax liability in question only applies to 2022 and 2023.

Given that the sale of electricity outside the state aid system is subject to the so-called “Robin Hood income tax,” with a tax burden of 31% for several years, any contemplated exit from the state aid system, together with the new extra-profit tax, results in an extremely heavy tax burden. The new tax type is also particularly disadvantageous in relation with an amendment that entered into force on January 1, 2022, according to which it is prohibited the return to the state subsidy system within 12 months for producers that had previously left the KAT or METAR-KAT systems and switched to selling on the open market. At the time, the amendment was introduced to avoid significant speculation associated with frequent switching between state-subsidized and market sales. It now also prohibits producers from returning to the state aid system for 12 months to avoid this tax on “extra profits.” And, with an even more recent amendment, a producer that leaves the state subsidy system after May 31, 2022, cannot return to this system at all.

By Adam Mattyus, Partner, and Alekszej Dubalar, Senior Lawyer, Lakatos Koves and Partners

This Article was originally published in Issue 9.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Former EY Attorney at Law/Manager Judit Zalan-Lipak has joined Vanguards in Hungary as its Group Deputy General Counsel.

Before Vanguards, Zalan-Lipak worked for EY between 2021 and 2022. Prior to that, she was a Senior M&A Legal Counsel for MET Group between 2018 and 2020, working alongside Dora Szebeni, who is now Vanguards’ General Counsel. Earlier still, she was an Attorney at Law with Lakatos, Koves and Partners between 2015 and 2018. Zalan-Lipak also served as a Copyright Law Expert with the Hungarian National Digital Archive and Film Institute between 2014 and 2015, as a Junior Lawyer with Allen & Overy between 2010 and 2014, and as a Junior Lawyer with E/N/W/C in 2010.

In 2015,. Zalan-Lipak also established her eponymous firm Zalan-Lipak Law Firm (ZLJ Law Firm).

Originally reported by CEE In-House Matters.

In August 2022 the Hungarian Competition Authority (GVH) closed its accelerated sector inquiry into the market for insulation materials, providing recommendations to manufacturers, the public, waste management operators and the legislator, aiming for a decrease in product prices.

An accelerated sector inquiry, as a new competence of the GVH, was introduced by the Hungarian legislator last year to enable the competition authority to quickly and efficiently assess competitive conditions in a market. The current inquiry is the fifth in a series of accelerated sector inquiries, with previous investigations of the competition watchdog covering the markets for Covid-19 antigen and antibody rapid tests, ceramic masonry elements and wooden building materials.

The choice of market is not a coincidence: the price of construction materials has risen sharply and significantly over the past few years, affecting many segments of the economy. The results of the accelerated sector inquiry confirm that the producer/importer prices of the three insulation products under investigation, i.e. mineral wool, expanded polystyrene (EPS) and extruded polystyrene (XPS), have increased by 61 % on average over the last three years. According to the draft report, the price increase is due to higher prices for energy inputs for production (oil, electricity, natural gas), higher prices for imported raw materials used in production due to exchange rate depreciation, and an increase in demand.

The inquiry has not revealed any circumstances that would justify opening competition supervision proceedings; however, it did identify certain adverse market factors. To mitigate these factors the GVH proposed a number of measures, most of which focus on sustainability goals.

Recommendations of the report

The GVH encourages manufacturers to increase their production capacity. To compensate for the significant increase in raw material prices, greater emphasis should be placed on the integration of waste materials and recovered products into the manufacturing process, on recycling, and on developing the necessary technological background. Recycling can help manufacturers to address possible shortages of raw materials and reduce production costs, which can be reflected in consumer prices. The GVH also calls on manufacturers to pay more attention to ESG (environmental, social and governance) aspects when planning their transport and haulage capacities.

For the public, the GVH suggests that clients and designers consult with the insulation contractor as early as possible to determine the types of insulation materials to be used, taking into account the current price and availability. The accelerated sector inquiry has revealed that substitution possibilities exist among the different insulation materials concerned. However, as insulation is included in the technical and fire protection plans, there is no possibility for subsequent modification once these plans have been adopted – as the draft report points out.

Furthermore, waste management operators are recommended to adapt the selective waste collection system in a way that the public can simply drop off styrene and polystyrene packaging materials free of charge at several locations. The clean product collected could be sold to domestic EPS and XPS manufacturers, which could cost-effectively recover raw material for production from the recycled packaging materials.

Finally, the GVH advises the Hungarian legislator to keep the demand for insulation products stable in the long term by means of various state subsidies for housing and building renovation, in order to avoid occasional extreme fluctuations in demand. This will help in planning production capacity and investment decisions by manufacturers, which will provide more certainty on the supply side of the market and a better chance of avoiding product shortages.

Market players may submit comments to the draft report until 15 August. The HCA will then publish the final report shortly after on its website, taking into consideration the comments received.

By Anna Turi, Head of Competition, and Balint Szabo, Associate, Schoenherr

On 22 July 2022, the Central Bank of Hungary (MNB) suspended the placement of shares of FuturAqua Nyrt. (Issuer) to be issued in the course of the share capital increase and imposed a supervisory fine of HUF 5 million (~ EUR 12,500).

On 29 June 2022, the Issuer decided to increase its share capital through a private offering of shares. In the event of an increase of share capital with a cash contribution, the shareholders of the issuer will have a preferential right to receive the new shares to be issued. In its extraordinary announcement (Announcement), the issuer invited shareholders to exercise their pre-emptive subscription rights, which will be valid for a period of 15 days after the decision.

MNB established that the Announcement was a public offer and the process is a public offering, since it contained sufficient information for the offer and the offered securities to the investors. Prior to the public offering of securities, and at the beginning of the public offering at the latest, the issuer must publish a prospectus or a minimum prospectus, which must be approved in advance by MNB. Based on the preferential right, the issuer is not automatically exempted from the obligation to draw up a (minimum) prospectus, and the offer to the public for the purpose of securing a right of pre-emption may also constitute a public offer. To sum it up, if the offer for the purpose of securing pre-emptive subscription rights does not qualify for an exemption under the applicable laws, the issuer is obliged to draw up a (minimum) prospectus. In this case the Issuer did not publish any approved minimum prospectus, so MNB decided that the Issuer has not complied with its obligation.

The disclosure of a (minimum) prospectus is essential to protect investors. Failure to disclose it in an appropriate manner is a fundamental breach of the legitimate interests of investors and, except in cases of exemption, the subscription or contract of sale of the securities in a public offering is therefore null and void. The suspension lasts until the issuer publishes an approved minimum prospectus in a way that is available to the public.

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

The main amendments to the decree of the Ministry of Justice on certain aspects of the company registration procedure and the register of companies entered into force on 1 August 2022, while certain provisions enter into force on 1 September 2022. The new rules became necessary to comply with Directive (EU) 2017/1132 of the European Parliament and of the Council.

According to the modifications, a company may also be established online, and in this case, a limited liability company may also prepare its articles of association by the proper filling of the sample. The amended decree specifies the definition of the formation, which means the entire process of setting up a company, including the drafting of the company’s articles of association and all the measures necessary for its registration in the Company Register. It is also clarified that a branch of a foreign enterprise in Hungary is not ‘established’ but ‘registered’, and such registration means the process and all necessary measures by means of which the documents and particulars relating to the newly established branch are registered in the Company Register and published (including the preparation of the company’s articles of association).

It is also included in the new rules that on the EU’s E-Justice portal, several details of a limited liability company, a private or public company limited by shares and a European company limited by shares are available free of charge, for instance the company name, registered seat, company registration number and EUID.

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

Moore Legal Hungary has advised Alpac Capital on its EUR 2 million investment in TC2.

Alpac Capital manages the East-West Venture Capital Fund that invests in digital small and medium-sized companies. Founded in 2015, TC2 is an Amazon Web Services (AWS) partner company in Hungary.

“When we were approached by Alpac Capital, the picture of a very interesting team emerged in front of us: a kind of mixture of VC and professional investor,” TC2 Co-Founder Robert Revesz commented. “In addition to the capital increase, they offered us joint work, joint development, and a business relationship system. This gives us the opportunity to further develop our professional staff and to target international and domestic business opportunities that require further organizational growth. In joint work with Alpac Capital, we want to develop, among other things, the data-driven operation of our customers related to machine learning and artificial intelligence, the implementation of the significantly more efficient and cheaper operation of the company’s systems, applications, and products systems on the AWS platform, and AWS-based application development.”

The Moore Legal Hungary team included Managing Partner Marton Kovacs and Associates Aron Kanti and Andras Zsirai.

Moore Legal Hungary did not respond to our inquiry on the matter.

 On 8 July 2022, the U.S. Treasury Department announced the termination of the double taxation treaty with Hungary concluded in 1979. The termination is effective from 1 January 2024.

According to the experts, the motive behind the termination is Hungary’s position on the global minimum tax, which is strongly opposed by the Hungarian government. The absence of any double tax treaty could potentially lead to increased tax burdens and administrative difficulties for both countries’ taxpayers. The termination of the double-tax treaty will affect US investors in Hungary less than Hungarian investors in the US due to high withholding taxes in the US. The tax effects of each international transaction will have to be established in parallel according to the domestic laws of both contracting states.

However, there is a pending procedure regarding a new double tax treaty between the parties which might be applicable after the termination of the old one. The new double tax treaty was concluded between the parties in 2010, however, it has not yet been ratified by the United States Senate and thus has not entered into force. It may give some hope that the two states still have 1.5 years to smooth out their differences.

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

On 12 July 2022, just one day after its proposal, the Hungarian Parliament accepted the new law that affects more than 430,000 KATA taxpayers in Hungary, most of whom will no longer be eligible for this tax regime starting from 1 September 2022.

While Fixed-Rate Tax of Low Tax-Bracket Enterprises (acronym in Hungarian: KATA) was under scrutiny by the government and the tax office in the past years and restructuring KATA has been on the table for some time, the final version of the proposal was introduced and then accepted just under two days. Moreover, the new regulation will come into force in September, leaving less than two months for current KATA taxpayers to decide whether to choose the new KATA regime or an alternative taxation scheme (or close down business eventually).

Under the current regulations, more than 430,000 businesses and entrepreneurs pay taxes under KATA, most of them will now lose their eligibility starting from 1 September 2022, since currently there are several forms of businesses that can opt to pay taxes under KATA, e.g., self-employed, one-person companies, law firms and limited partnerships that have only natural persons as their members. However, the new KATA regime will only allow for self-employed in full time to renew their KATA status. In addition, under the new KATA regime, taxpayers might issue invoices only to natural persons. Any (former) KATA taxpayers with B2B relations, except for the privileged taxi drivers, will lose either their clients or their eligibility. 

The flat tax rate of HUF 50,000 and 75,000 (approximately EUR 125 and EUR 190) remains intact as it was introduced ten years ago, while the income threshold – for the few that still can apply it – will be even increased to HUF 18 million (approximately EUR 45,500).

Current KATA taxpayers now have until September 25 and October 31 respectively to decide whether they (can and) want to choose the new KATA system or the next best thing for most: the fixed cost accounting under the general personal income taxation.

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