Category: Hungary

The term “whistleblowing” means a procedure for reporting unlawful, harmful for public interest, potentially damaging or simply morally questionable behaviour at work, which helps to identify inappropriate behaviour or situations in organisations where normal channels of communication would not work or would be difficult to use, mainly because of the fear from sanctions. Reportable wrongdoing can take many forms: corruption, fraud, professional misconduct or negligence.

Now it is accepted that the establishment and operation of an effective whistleblowing system, both for public institutions and companies, can be an effective tool to fight against corruption and other forms of malpractice, thus contributing to improving the efficiency of businesses. 

Why do we need to regulate whistleblowing? 

In the spirit of fighting against corruption and other wrongdoing, and to address the aspects of this issue in everyday life, Directive 2019/1937/EU on the protection of persons who report breaches of Union law (the so-called Whistleblowing Directive) was adopted, which was (supposed to be) transposed by the member states by 17 December 2021. 

The Whistleblowing Directive lays down minimum requirements for detailed whistleblowing procedures and whistleblower protection in relation to reporting breaches of certain industry regulations. Such areas are for example financial services, food safety, product safety and compliance, environmental protection, consumer protection, privacy and personal data protection.

As far as Hungary is concerned, it has not developed detailed legislation in line with the Directive yet, but Act CLXV of 2013 on Complaints and Notifications of Public Interest already contains provisions, which the legislator is expected to amend and supplement in order to comply.

What does this mean in practice? 

Under the Directive, companies will be required to set up an internal system, where their employees and partners can report any alleged unlawful activities or behaviour they experience, through a platform that protects them from negative consequences and possible sanctions.

Companies with 250 or more employees are already required to have an internal abuse reporting system in place, while companies with fewer than 250 employees but at least 50 are required to comply with EU law by 17 December 2023.

What are the solutions?

If a company is affected by the obligation to comply with the Directive, the first step is to assess the possibilities for abuse reporting and, if necessary, to set up a reporting system. An important factor by choosing the solution is the way in which the company wishes to set up its reporting system, as there are several possible solutions. Employers may choose to handle whistleblowing internally by appointing an independent trustee or they may choose to seek the assistance of a whistleblowing lawyer.

However, both solutions shall comply with the requirements of the relevant legislation, in particular with regard to the protection of the whistleblower’s personal data, and shall also take into account the need to raise awareness among employees. In addition, an internal policy for the processing and investigation of whistleblowing is essential.

Hungary is obliged to comply with the provisions of the Directive by transposing its provisions into the Hungarian law. As there is a realistic chance of this happening in the near future, it is of the utmost importance for businesses to take the first steps towards compliance with EU standards in due time. The regulatory framework is in place, so compliance can be started even in the absence of detailed Hungarian legislation.

By Judit Vidoczy-Feher, Attorney at Law, act Ban & Karika Attorneys at Law

Three European law firm partners walk into a Bar Association. No punchline here, just a fascinating look into how these partners came together on a mission to translate ICC arbitration rules into Hungarian. To mark the publication of the translated rules, one partner each from Bittera, Kohlrusz & Toth; LFB Laszlo Fekete Bagamery; and Jeantet – Avocats, brainstormed and co-organised a half-day arbitration conference at the headquarters of the Budapest and Hungarian Bar Associations in Budapest.

More than 60 participants attended from Hungary, Slovakia, Serbia, Austria, France, and Italy, including more than 20 in-house counsels. Consisting of two panel discussions and a fireside chat, the event covered issues ranging from the role of general counsel in arbitration, to efficiency in running arbitration, and evidence and witness management.

Andras Daniel Laszlo, Founding Partner at LFB Laszlo Fekete Bagamery, opened the conference, recalling that the founders of the ICC referred to themselves as merchants of peace, quoting the well-known international commercial arbitration book, appropriately named “Dealing in Virtue”. Laszlo highlighted that these values are in as much need of promotion today as they were after the first world war and expressed his hope that the publication of the ICC Arbitration Rules in Hungarian might be a little building block in the process.

The official introduction from Hjordis Birna Hjartardottir (Counsel at the ICC International Court of Arbitration) was followed by a discussion on the role of general counsels in arbitration procedures. Ioana Knoll-Tudor (Partner, Jeantet – Avocats, Paris), discussed recommended practices for handling disputes – as well as avoiding them – with Michael Mcilwrath (Chair of the Governing Body for Dispute Resolution Services at the ICC International Court of Arbitration).

Mcilwrath, a seasoned expert with over 22 years’ experience as an in-house counsel in charge of international disputes, is also the founder of MDisputes in Florence, Italy. He encouraged using the model ICC clauses to their fullest potential and relying on them as a time-saving solution instead of agonising over potentially convoluted self-drafted clauses.

Knoll-Tudor and Mcilwrath also agreed on the importance of leadership and teamwork for in-house counsels, particularly in the pre-arbitration phase. The value of having everyone on the same page right from the start is often overlooked. Deep involvement in all elements of the arbitration procedure is also critical, meaning that in-house counsels are involved in all correspondence and are present at the Case Management Conference, ensuring their full support every step of the way. Mcilwrath further encouraged adding a mediation phase in arbitration clauses, enhancing the possibility of a productive negotiation before initiating arbitration. Most arbitration rules, including the ICC’s, have a model mediation-arbitration clause that is easy to include in contracts.

After a short coffee break, the conference continued with the first panel, investigating the requirements of designing and running an efficient ICC arbitration (moderated by LFB Partner László).

Referring back to Mcilwrath’s advice of sticking to model ICC clauses, Professor Istvan Varga (Chair Professor, Civil Procedure Department at Eötvös Loránd University, Budapest) began by talking about a recent award rendered in a case with a hybrid HCCI/ICC clause. Commentators both from the panel and the audience agreed that hybrid clauses are risky and should be avoided, while the award (which was sustained in annulment) shows the high level of sophistication of Hungarian arbitration practice and the pro-arbitration stance of the Hungarian courts.

The panel then moved on to the topic of choosing outside counsel for international arbitration, led by Pál Kara (Chief Legal Advisor, MOL Group, Budapest), and discussed whether international, full-service firms, or boutiques specializing in international arbitration are more suitable. While there was no clear-cut or sweeping answer, it was a lively debate that highlighted the challenges posed by the huge volume of complex international arbitration cases, particularly in certain industries.

Covering tips and tricks for appointing arbitrators, Marianne Kecsmar (Partner, PKM Avocats, Paris and Member of the ICC Court) detailed the particularities of the ICC procedure as opposed to other arbitration institutions. Commentators noted the ICC’s uniquely wide pool of arbitrators, enabling it to appoint the best fit in situations where the parties can’t agree. As for whether one should always appoint an arbitrator qualified in the applicable substantive law, the panel was divided.

Michal Kocur (Managing Partner, Kocur and Partners, Warsaw) summarized his principles for devising and conducting an efficient arbitration in terms of cost and time. These principles included the fact that good rules must be adopted both at the very outset of the procedure, as well as at the case management conference, and must be included in the terms of reference. Those rules must subsequently be strictly enforced, and arbitrators must not succumb to due process paranoia.  In the ensuing debate, the panel agreed that the active involvement of in-house counsel at the initial stage of the procedure can substantially increase the chances of having an efficient procedure.  

The second panel was moderated by Milan Kohlrusz (Partner, bktp) and included a round table discussion between Mark Baja (Legal Director Hungary, Microsoft), Peter Ban (Director of Legal and Compliance, E.ON Hungaria), Peter Mittak (Head of Legal Division, Egis Pharmaceuticals Plc), and Dr. Peter Henning (Legal Counsel, AviAlliance GmBH).

Opening with a further discussion of Mcilwrath’s earlier statement, the panel debated whether the ICC’s model clause remains a boiler plate, or if parties these days tend more to have strategic views, particularly on aspects such as the taking of evidence, the language of the documents, experts, witnesses, etc.

Moving on to the topic of expert witnesses, the panel discussed how in-house counsels are involved and make decisions in this regard. They concluded that in many cases, while they rely on external counsel, in-house counsels often also send employees to provide information to the experts.

The panel further agreed that most in-house counsels preferred party-appointed experts to one appointed by the tribunal. The general view was that it is not only less expensive, but also that they may have some control on the questions and issues to be covered by the expert. It is also still possible for parties to have their own experts to review and help counsels in addition to the expert appointed by the tribunal, however this option would incur even more expenses.

Members of the panel also agreed that it is not easy to find an expert who has the relevant depth of knowledge on specific industries, or who will fully understand the company’s culture. 

In terms of legal experts, the panel agreed that, while it’s quite a rare requirement, all members were in favour of appointing them when necessary, particularly in situations where a legal expert would add more value and expertise than the external counsel alone.

By Bittera Kohlrusz & Toth

On 31 May 2022 the EU’s securities markets regulator, the European Securities and Markets Authority (ESMA), published its supervisory briefing to ensure convergence in the supervision of investment funds with sustainability features, and in combating greenwashing by investment funds.

Sustainability is a fast-growing area of investment management, so the work aims to provide guidance for convergence on the supervision of sustainability related disclosures, as well as the supervision of how fund managers integrate sustainability risks in their organisational framework and decision-making process. Although the supervisory briefing is non-binding, it provides a useful reference point for market participants and helps to combat greenwashing by establishing common supervisory criteria for national competent authorities (NCAs).

The supervisory briefing covers the verification of the consistency of information in the fund documentation and marketing material, includes presentation of disclosures, fund names, sustainable investment policy and objectives, and investment strategy. For example, the fund documentation should contain a sustainable investment policy and/or objectives, and the fund management should be in-line with that.

The supervisory briefing also focuses on the verification of the compliance with the website and periodic disclosures’ obligations. According to the regulation, fund managers shall publish information on a separate section titled “Sustainability-related disclosures” on the website, and should clearly identify the financial product and remarkably display the environmental or social characteristics, or the sustainable investment objective. Moreover, the supervisory briefing suggests to NCAs to create a checklist based on the information provided in periodic reports.

The additional supervisory action ensures NCAs that all relevant information and data get to the depositaries, which should include all ESG-related investment restrictions in the monitoring of the compliance of the instructions. According to the supervisory briefing, administrative measures may apply in order to combat greenwashing such as in the case for instance, when the SFDR (Regulation 2019/2088 of the European Parliament and of the Council) disclosures are viewed as severely misleading or sustainability risks have not been integrated.

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

Oppenheim has announced the leadership of the firm will be handed over to its three newly-appointed board members – Jozsef Bulcsu Fenyvesi, Aron Laszlo, and Istvan Szatmary – with Fenyvesi and Laszlo to hold non-executive roles and Szatmary to take over the role of Managing Partner on July 1, 2022.

The three take over from Partners Ulrike Rein, Tamas Eless, and Zsolt Cseledi.

Focusing on corporate and commercial law, Fenyvesi has been with the former Freshfields Hungarian office since 2005, making Partner in 2010. Prior to that, he was an Associate with Szalay Gabor Law Firm.

Focusing on IP/IT and trademarks and design, Laszlo also worked with Freshfields in Hungary between 2002 and 2005. He then worked for SBGK, between 2005 and 2013, to rejoin the Oppenheim team in 2014 as the Head of Trademarks and Designs. He was appointed to Partner in 2017.

Szatmary, who will be serving as the firm’s Managing Partner going forward, joined the team this year as its Head of Antitrust, Competition, and Trade (as reported by CEE In-House Matters on May 2, 2022). He returned to private practice earlier this year after serving as Mediaworks Hungary’s General Counsel for three years. Prior to him moving in-house, he worked with DLA Piper in Hungary for 21 years, where he was last a Senior Counsel and Head of Antitrust.

“After more than one and a half decades of leadership, I am happy to support the new generation of talented professionals in the transition process and wish them all the best in their new roles,” Rein commented, with Eless adding: “The appointment of the three experienced, yet dynamic partners into the top-level leadership of the firm will bring in new management initiatives that quickly respond to the current challenges of businesses.” From the former leadership’s side Cseledi concluded that “the operational model built by the management team in the last 15 years is a strong foundation for the new members, and they can use it as a stable basis for their future work.”

On the new management side, Laszlo commented: “I am personally very devoted to bringing the organization to the next level while preserving its unique values,” with Fenyvesi noting that his “many years of experience in leading the corporate and M&A team of the firm can be well utilized when dealing with firm-wide issues.” The new Managing Partner, Szatmary, concluded that he sees his executive role as a “service that should be for the benefit of the firm’s staff at all levels, and should improve operational efficiency whilst preserving all those characteristics of Oppenheim that have made this successful team unique in the market.”

A new tax regime and extended price cap regulations are aimed at addressing Hungary’s high inflation rates and growing energy prices, while the economic prognosis for the autumn and winter seems gloomy, according to Nagy & Trocsanyi Managing Partner Peter Berethalmi.

“In Hungary, we had elections recently and a newly formed government now faces a severe economic situation, with high inflation rates, growing energy prices, and a shortage of raw materials,” Berethalmi begins. “What’s even worse is that, at this point, we are preparing for a more challenging period over the autumn and winter.”

“To address the situation, the government has put a number of measures in place,” Berethalmi says. “For instance, a new tax regime is being introduced these days for the financial sector, airlines, pharmaceutical industry, telecommunications, retail industry, etc. The government explains that a special tax regime is needed to provide more money for those sectors particularly affected by the pandemic and the war in Ukraine, which are healthcare and defense.” Therefore, he says, “the government claims that the business sectors that made an extra profit during the last couple of years are now taxed more heavily. This might be true about some sectors such as finance, but is questionable when it comes to airplanes.” Berethalmi adds that “the affected sectors should not charge consumers for the increased taxes, otherwise they might face some kind of liability. However, this statement by the government is a bit vague and does not seem to include any legal possibilities for protecting consumers.”

According to Berethalmi, Hungary, similarly to the rest of Europe, has seen increased energy prices. “The government’s policy is to keep energy prices low. Some companies are already paying much higher energy prices, while others enjoy some benefits and pay the same price as consumers,” he notes. “Hungary got an exemption from the oil and gas sanctions and, consequently, we can freely import oil from Russia for the time being.” According to him, “just a few days ago, to address increased energy prices and inflation in general, as well as the shortages of raw materials, the government extended price caps on certain products and fuel and the credit moratorium until the end of the year.”

Berethalmi highlights that a new land registration act will come into effect in January, next year. “We don’t know all the specifics yet, but we know that the government aims to go digital and promote electronic communications rather than paper,” he points out. “The act will also introduce a 3D map system, which is a quite modern approach. In addition, immediate land registration will be available with certain exceptions.”

“Other than that, as a law firm, we had a slight shift towards litigation,” Berethalmi adds. “Real estate, construction, FDI, and the banking sector still remain busy. Interestingly, if you look at foreign investments, Hungary became a pioneer in producing electric vehicle and battery components. There are many investors from China, Japan, and South Korea.” According to him, “apart from having some large automotive manufacturing plants near Debrecen, a new development is being announced every month. We can only hope that the automotive industry won’t crash anytime soon.”

The Budapest Chamber of Commerce (“BCC”) in May 2022 proposed the change of the system of the itemised tax of small businesses (“KATA”). The main goals of the change are to keep the advantages of the system, but also to prevent and eliminate unlawful tax avoidance.

Since its introduction, over 450,000 entrepreneurs choose this type of tax due to its low tax amount and the easy administration procedure. The amount of KATA, since its introduction in 2013, remained unchanged, while the national minimum wage nearly doubled in the same period. As a result, many companies use the KATA system as an alternative to employment, which reduces the tax revenues of the state.

According to BCC, the previous change – namely that taxpayers should pay a 40% tax in case they pay a total amount of over 3 million Hungarian forints, calculated cumulatively from 1 January each year, to the same small taxpayer – failed to fulfil its ambitions. According to the preliminary expectations, around 100,000 taxpayers should have been involved with this payment, however only fragments of this amount were realized. While, according to the survey of the BCC in which over 6,000 entrepreneurs were involved in 2020, more than 42% of the entrepreneurs could accept an increase in the amount of KATA if the ease of the administration remains unchanged.

According to the experts of BCC, it is vital to incorporate the increase of the minimal wage into the KATA to ensure the pension rights for the full time KATA entrepreneurs, while the correction with other taxes is also important to eliminate the competitive disadvantage. BCC confirmed that it investigates the tax behaviours of the part time KATA entrepreneurs as well as it also provides considerable scope for abuse. The introduction of a new specific job-related tax regulation is also under examination, and it also investigates the possibility to use the database of the invoicing system connected the Hungarian Tax Authority for the audits to minimize the tax avoidance as much as possible.

After finalisation of the proposals, BCC intends to launch online conversation with the entrepreneurs and negotiation with professional organizations.

By Gabriella Galik, Partner, KCG Partners Law Firm

Facial recognition system is considered an artificial intelligence solution empowered by a camera system, which can identify persons viewed based on image data stored in a related data base. Such systems have already been implemented around the globe in many countries and generally faced severe criticism, especially in Western democracies. Naturally, facial recognition systems have the capability of helping to prevent terrorist attacks and similar severe crimes an detect suspects and other persons of interest. In practice, however, such systems often provide inaccurate or biased results.

With regard to the above, the European Parliament adopted a resolution on 6 October 2021, banning the public use of facial recognition systems for law enforcement purposes. Similarly, the European Data Protection Board and the European Data Protection Supervisor adopted a joint opinion on 21 June 2021 calling for ban on AI for automated recognition in public spaces.

The Draft EU AI Regulation also generally prohibits the use of ‘real-time’ remote biometric identification systems for the purpose of law enforcement with certain exceptions (including the targeted search for specific potential victims of crime, the prevention of terrorist attacks or similar threats, detection, localization, identification or prosecution of perpetrators of certain serious crimes). It is highlighted, however, that currently such systems do not certainly seem capable of serving law enforcement purposes effectively especially due to the risks associated with algorithmic bias, effects on democracy and non-compliance with data protection requirements.

The data protection authority and court practice in Europe also have such fears about facial recognition systems and their effects on democratic societies. The Italian data protection authority, for example, imposed a data protection fine of EUR 20 million on Clearview AI, a US company offering facial recognition solutions. A number of data protection authorities and courts in Europe also imposed a ban or a similar fine on facial recognition systems implemented in schools. The Hungarian data protection authority also reviewed the CCTV operation of a local municipality in Hungary, which was allegedly empowered by facial recognition capabilities, however, it turned out that such function of the system was not activated.

In line with the above, facial recognition systems currently do not seem to be capable of serving law enforcement purposes without serious risks of bias, opacity and non-compliance with privacy and data protection laws.

By Daniel Necz, Senior Associate, DLA Piper

In 2019, two EU directives were adopted which must be transposed into Hungarian labour law within a short deadline. In order to comply with EU Directive 2019/1152 on transparent and predictable working conditions and EU Directive 2019/1158 on work-life balance for parents and carers, the modifications of the Labour Code should be adopted by the beginning of August 2022. According to the current information, no substantive work has been started by the Hungarian legislator to modify the Labour Code in order to ensure the compliance with the provisions of the EU Directives.

Directive 2019/1152 redefines the employer’s obligation to provide information. The information should be more detailed and cover a wider range of circumstances. For example, more information must be given to the employees on the working time schedule and the method of ordering and paying overtime. The employees should receive the basic information on their employment relationship as soon as possible, but within 7 days at the latest from the start of their employment (the current Labour Code requires to inform the employees within 15 days from the start of employment). The written information required by the Directive can also be provided to the employees electronically. The Directive also contains other provisions not yet covered by the Hungarian Labour Code; for example, it requires that in the case of fixed-term employment, the probationary period must be proportionate to the length of the employment relationship.

The aim of Directive 2019/1158 is to promote equal opportunities between women and men by encouraging men to take on more caring responsibilities than before. Accordingly, the Directive provides for 10 working days of paternity leave, which can be taken at the birth of a child (according to the current provisions of the Labour Code, 5 days paternity leave is available for fathers). The workers who care for a relative should be entitled to at least 5 working days’ leave per year. For the above leaves, it must be ensured that the employees receive remuneration. In addition, workers should be able to request flexible working arrangements until the age of 8 of their children. Flexible working arrangements can mean work reorganisation, such as teleworking, part-time work or flexible working hours.

By Eszter Ila-Horvath, Attorney at Law, KCG Partners Law Firm

CMS Budapest Partner and CEE Managing Director Dora Petranyi has been appointed as Global Co-Head of the firm’s Technology, Media, and Communications Group, alongside CMS Germany’s Pietro Fringuelli.

According to CMS, Petranyi has “extensive, partly in-house, experience in telecoms and media with a special focus on all types of regulatory, competition, and general commercial matters … She has established and leads the firm’s managed legal services delivery center from Budapest.”

Petranyi has been with CMS since 2009. Prior to that, she spent over two years with Squire Sanders & Dempsey and, earlier, eight years as Chief Legal Advisor with T-Online Hungary, between 1999 and 2007. She started her career in 1994 with PwC Legal, where she spent five years as a Manager.

Small and medium-sized enterprises could save tens of billions of forints a year by reducing employment administration, according to the latest proposal by the Ministry of Finance.

Businesses spend 1.7% of their annual revenue on tax administration in Hungary and a significant part of it is related to employment. According to a survey from 2019 with cooperation and funding of the EU, HUF 92 billion is spent annually on employer returns and data reporting.

In addition to tax returns, businesses have to provide around 20 different types of data to various state organizations, such as the Central Statistical Office, the Hungarian State Treasury and the National Health Insurance Fund. Furthermore, the various forms and data requirements apply different or overlapping terminology that leads to duplication of or errors in data provision. According to the proposed solution, further to international best practices, the current form-centric approach would be replaced by a so-called event-based logic. Instead of reoccurring reporting of the very same data (e.g. status of the employee), the data is generated for public administrations from the basic building blocks of business processes, i.e. events triggering a change. It would imply that an event only needs to be sent by the employer once, eliminating the current redundant data provisions and the data processing role would be shifted to the recipient.

From the data provided in a single channel, the ‘state’ administration should generate the required forms from the event data it receives, without the involvement of the data provider. The processed data would then be stored in consolidated administrative systems. In that way the timing and format of data provision need not be aligned to the specific data needs of the various state bodies.

The Ministry of Finance expects that by fundamentally re-shaping the data provision system and logic, the proposal has the potential to substantially reduce the administrative burden on employers and thus increase competitiveness on a national level, simultaneously raise the quality of public services and also enable a higher level in terms of data security. Furthermore, a key element of the envisaged system is transparency: employers and employees alike would have direct access to their information. On the other hand, the proposal itself implies that the new system would not replace payroll functions but integrate those, therefore the actual saving on business side is yet to be seen in practice if and when the system is implemented.

As a first step the proposal is available for public consultation and can be expected to go live only after 5 years of development and implementation, once approved.

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