Category: Hungary

The current Hungarian Land Registry Act will entirely be replaced by a new Land Registry Code with effect from February 1, 2023. Hereunder we briefly introduce certain rules that might have practical effects on the legal and administrative aspects of real estate development projects being implemented in Hungary.

In the more than twenty years since the entry into force of the current Land Registry Act, significant social and economic changes have taken place, which places new demands on legal regulations and electronic administration. The Government of Hungary has therefore decided to implement the E-Real Estate Register project, the aim of which is to develop the real estate register into a fully electronic database, thereby reducing the administrative burdens of land registry procedures.

Spatial Records and Wider Scope of Public Authenticity

Within the framework of the E-Real Estate Register project, a number of new functions will open up in the land register. One of these is the spatial register, thanks to which it will be possible in the future not only to indicate a building on the plot but also to represent the structures located underground (e.g., underground garages, cellars) or below and above each other (e.g., tunnels, bridges, overpasses).

At the same time, the scope of the authenticity of the land registry will increase. Currently, the land registry is not considered to be authentic in respect to the data of real estate (i.e., area, way of cultivation). This will be changed by the new Land Registry Code and, accordingly, anyone who acquires any right in respect to real estate having trust in the data contained by the land registry will be entitled to be considered as a bona fide purchaser. Further, until the contrary is proven, all data registered in the land registry (even that relating to real estate data) shall be considered as existing as registered.

More Efficient and Faster Electronic Administration

Currently, land registry procedures are still paper-based, but with the new Land Registry Code, paper-based administration will be changed to administration based on electronic documents or paper documents converted to electronic documents by their creator.

Simultaneously with such a conversion, the role of attorneys-at-law and legal counsels will increase, as each document on which the registration of a right is based will require their countersignature. In practice, this requirement will concern mostly the registration of pre-emption rights and land use rights, as currently these rights can be registered based on documents lacking a countersignature.

The rules applicable to ad hoc proxies will also be simplified. The right of representation will need to be proved by completing an electronic form, provided that the proxy does not contain a restriction, or it contains only standard restrictions. In these cases, the E-Real Estate Register will generate the text of the proxy, so that its content can be examined automatically by the system. If the proxy contains restrictions other than the standard ones, the proxy itself will need to be attached to the application.

Allocation of Cases, Ranking of Applications

Thanks to the digitization of the real estate register, it will be possible in the future for any land registry office to handle real estate registration applications within Hungary, regardless of the location of the property. Currently, land registry offices administer only applications regarding properties that are located within their territorial competence, which results in certain land registry offices being overloaded and not able to meet statutory administration deadlines. This situation may be avoided by allowing all land registry offices in the country to handle applications.

Ranking data is also changing due to the update. Currently, the ranking of applications received on the same day shall be determined by the date of the document on which the request is based. In contrast, pursuant to the Land Registry Code, only applications received in the same second shall be deemed to have been received at the same time, and only in that case will it become necessary to apply the above ancillary rule.

Legal practitioners await the detailed implementation rules of the code, as the regulations will presumably entirely turn the market upside down, particularly when considering the current intensity of the Hungarian real estate market.

By Marton Karika, Managing Partner, and Judit Vidoczy-Feher, Attorney at Law, Act Legal Ban & Karika

This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

There is a long-standing and yet unresolved debate within the European Union on how to best provide the freedom of movement and establishment for legal entities under the Treaty on the Functioning of the European Union while, at the same time, protecting the interests of public policy or security at national levels, e.g., creditors or local regulators.

Apart from a couple of legal entities the operation of which is harmonized under European law, such as societas Europaea, uniformity between national corporate laws is lacking. Due to their complexity, such harmonized company forms are rarely used by stakeholders, despite being free to move within the EU. Beyond these, it is currently not possible to transfer a Hungarian company’s registered office to another member state without first winding up the company in Hungary and then re-registering it in the other member state. This is because Hungarian corporate law applies the domicile (real seat) theory, meaning that companies acquire the nationality of the state where they maintain their seat. At the same time, Hungarian courts do not register or recognize foreign companies as Hungarian law-governed entities because they transferred their headquarters to Hungary without conducting a standard company establishment procedure ensuring compliance of the company’s operations with Hungarian corporate law.

However, to provide some flexibility, Hungarian law allows for companies to designate their place of effective management – where the company’s decisions are actually taken – to a place other than their registered office, even if that is in another EU member state. This does not result in losing the company’s Hungarian nationality but does mean that the company’s Hungarian tax residency is moved to that other EU member state.  In some cases, migrating the place of effective management outside of Hungary may result in a dual residency or nationality provided that the new place of effective management will make the entity subject to the laws of the destination state as well.

In light of the foregoing, currently, the only tool for a Hungarian company to migrate its operations to another EU member state – without having to wind up and restart its activities – is participating in a cross-border merger procedure under the relevant EU directive. Such mergers, however, are available for limited liability companies only within the European Union and require another company to be registered in the member state of destination, acting as the surviving company taking over all assets and liabilities of the terminating Hungarian company by way of legal succession.

As of September 1, 2022, if a Hungarian LLC or PLC wishes to re-domiciliate to another EU member state, it will also be able to do so by converting its legal form into a limited liability company form governed by the laws of the destination member state while retaining its legal personality and without being dissolved. This will eliminate the need to establish a company in the country of destination prior to starting the cross-border migration, if not already having one available there within the company group, to participate in the complex procedure applicable to cross-border mergers. By this, cross-border conversion procedures are expected to be simpler and more cost-effective compared to a merger procedure – since only one company will have to complete the compulsory tasks of cross-border transformations detailed below.

The new law on cross-border conversions will come into force to implement the relevant provisions of EU Directive 2017/1132. This directive, among others, introduces cross-border demerger procedures as well and orders similar provisions to govern cross-border conversions and demergers to those already applicable to cross-border merger procedures, which are also subject to some amendments. In our experience, cross-border mergers in Hungary may take up to six-eight months and require significant external and internal resources to complete all procedural tasks, such as the preparation of corporate and financial documentation, publications to third parties, applications with the registering authorities, etc. Further delays in completing cross-border transformations may be expected as, under the new regime, the registering authorities will be explicitly required to examine whether the proposed transaction was set up for abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law, or for criminal purposes. This will end up in several other authorities getting involved in approving these cross-border transformations, which may add an extra one or two months to their timeline.

By Ivan Sefer, Managing Partner, and Denes Csoba, Manager, Vamosi-Nagy Ernst & Young Law Office

This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

In recent years, innovative Hungarian companies are increasingly attracting foreign professional and financial investors who seek their state-of-the-art products and services.

As investors increasingly focus due diligence on a target’s regulatory compliance – relative to innovative companies, increasingly on data protection and IT security – practical data protection compliance gaps become evident. Their evolution since the implementation of the General Data Protection Regulation (GDPR) and potential impact on M&A transactions gives rise to practical considerations.

Technology companies were perhaps more focused on the need to achieve substantive – rather than merely formalistic – compliance with privacy laws. Yet due diligence often reveals fundamental weaknesses in the privacy documentation, even of tech sector companies. The reasons can be traced back to both a lack of data privacy-focused compliance resources and the incredibly rapid growth of companies.

The Hungarian enforcement of the GDPR also seems to have played a role in the relative levels of compliance achieved to date. The level of data protection fines imposed by the Hungarian supervisory authority in recent years is nowhere near the level of fines imposed by authorities in other EU countries. In Hungary, the highest fine imposed to date was HUF 100 million, while fines up to hundreds of millions of euros are not uncommon elsewhere in the EU. Although the Hungarian supervisory authority is keen to use fines as a compliance motivating tool, the level of fines to date seems not to have yet encouraged small and medium-sized companies to invest more in GDPR compliance. Because a significant proportion of the authority’s proceedings are initiated based on complaints from data subjects, legal compliance is often limited to preparing privacy notices. Yet often, for instance, the business procedures for responding to data subjects’ requests or data breaches are not well established, giving rise to exposure of yet more data subject claims.

In addition to planning, designing, and operating data protection compliant business processes, it is important that data controllers also comply with specific obligations under data protection legislation. A key element of that compliance – which is one of the starting points for legal due diligence – is the record of data processing activities. One of the important new features of the GDPR is that supervisory authorities no longer record data processing activities – rather, the data controllers and processors themselves are required to do so. In many cases, even in companies with a relatively mature data protection regime, this type of record-keeping is either missing or does not meet legislative requirements. In addition to being obviously noncompliant with the law, the absence of a register makes a company’s data management practice non-transparent and, therefore, more difficult for a potential buyer to assess.

Stating an appropriate legal basis for data processing activities and complying with the administrative burden of the chosen legal basis also seems to give rise to a considerable substantive challenge for companies. Consent is often the chosen legal basis for data processing, yet it is inappropriate in many instances, such as in employment relationships, where it is not a permitted legal basis because of the hierarchical relationship between the parties. In the case of direct marketing, companies often refrain from asking their customers for consent, fearing that doing so would significantly reduce their marketing campaigns’ effectiveness. Inadequate processes for record of consents and consent withdrawals also create significant compliance exposure – those processes are essential to comply with data controller accountability requirements. In the case of legitimate interest, a regular problem is the absence of the interest balancing test, which, based on current administrative practice, automatically renders the processing unlawful, regardless of the actual existence of a legitimate interest.

Establishing internal processes alongside appropriate policies and regulations will greatly enhance legal compliance and meet the accountability requirement mentioned above. Regular data protection training for employees and business partners is an integral part of achieving in practice a process that is legally compliant.

Data protection compliance can make a transaction significantly smoother, resulting in fewer closing conditions and reducing the risks associated with reps and warranties and indemnifications, which will be reflected in the pricing of the transaction.

By Csaba Vari, Head of IP/Tech Practice Group, Baker McKenzie

This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The rules in Hungary for guarantees of origin (GO) changed at the beginning of this year to ensure the ascension of the Hungarian Energy and Public Utility Regulatory Authority (Hungarian Energy Authority) to the European Energy Certificate System, as a result of which Hungarian GOs will be accepted on international markets.

The GO market in the European Energy Certificate System has been growing steadily, with more than 800 million GOs (each representing one megawatt-hour of electricity) having been issued in 2021, in comparison to the approximately 400 million GOs issued in 2016. Although the prices of GOs widely differ based on many circumstances, the GO market in the European Energy Certificate System is estimated to be worth at least hundreds of millions of euros. The Hungarian renewable energy market may receive a significant boost by the direct access of domestic GOs to the European market, as such access may increase the profitability of renewable energy producers.

The European Energy Certificate System was established by the Association of Issuing Bodies, consisting of organizations authorized by the government to administer energy certificate systems. The purpose of this framework is to provide a standardized system of GOs issued in Europe and to create a regulated platform for trading GOs.

The Hungarian Energy Authority has been a member of the Association of Issuing Bodies since early 2021, however, it only joined the European Energy Certificate System on February 1, 2022. The international trade in Hungarian GOs is expected to commence on March 1, 2022.

GOs are marketable electronic certificates that evidence to final electricity consumers that a given unit of electricity has been produced from renewable energy sources. As the source of the actually used electricity received through the grid cannot be determined, the only way environmentally conscientious consumers can ensure that energy corresponding to their consumption has been supplied by the European network is by buying GOs from particular renewable energy producers.

At the request of a producer, the Hungarian Energy Authority may qualify a given power plant as being suitable for generating electricity from renewable sources or by high-efficiency cogeneration. After such a qualification, the qualified producer can apply for GOs to be issued, which will be done subject to the fulfillment of certain criteria. It should be noted that no qualification is required if the power plant has a license issued by the Hungarian Energy Authority or benefits from the KAT feed-in tariff or the METAR premium support scheme. If the power plant benefits from the feed-in tariff subsidy scheme, then the GO will be registered in favor of the Hungarian transmission system operator and the GOs will be sold at auction.

The main benefit of the Hungarian Energy Authority joining the European Energy Certificate System is that domestic GOs can be marketed on the European market via the so-called “Hub” operated by the Association of Issuing Bodies, which enables the registries of the members of the European Energy Certificate System to communicate electronically to transfer GOs directly. As Hungarian GOs will be exported across Europe, the new system should increase competition for the purchase of Hungarian GOs.

Another advantage is that foreign GOs in the European Energy Certificate System can also be purchased by Hungarian entities via the Hub, without having to file an application to the Hungarian Energy Authority for the recognition of the foreign GOs. Naturally, foreign GOs arriving from outside the European Energy Certificate System will still be subject to the authority recognizing them.

The authority expects that more domestic renewable electricity producers will enter the market and that the new trading system may require further changes regarding the regulation of GOs.

As companies look for sustainable solutions regarding their energy consumption, which is further strengthened by the European Union’s intention to adopt stricter sustainability reporting requirements, the demand for renewable energy sources and GOs will continue to increase.

By Gabor Czike, Partner, and Laszlo Jokay, Senior Associate, CMS

This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Fair commercial practices and communication with consumers have always been a mandatory requirement for all businesses but now, with the updated regulations on unfair consumer practices, communication has an even higher importance – especially in light of rapid technological developments, the growing digital space, new digital solutions, and consumers becoming more and more vulnerable, both as a result of these developments and the already two-year-long pandemic.

That is why several EU directives on consumer protection have been amended via the Omnibus Directive, including the amendment of the Unfair Commercial Practices Directive (UCPD) as well. The amendments of the UCPD have been fully implemented by Hungary into the local Unfair Commercial Practices Act, with changes to enter into force on May 28, 2022.

The legislative updates are mainly related to the rapid development of the digital space and adapt to changes in commercial practices and legal interpretations by EU authorities over the last decade. The EU Commission issued an updated Commission Notice to the UCPD in 2021, covering the recent changes as well, to help follow proper commercial practices and avoid unfair ones.

New definitions have been introduced that were not included in previous regulations such as ranking or online marketplace. The definition of product has also been clarified.

In addition, the list of the so-called important information when looking at calls-to-action for making purchases has been completed as well. For example, it should be made clear who is qualified as the trader, the search results should be made transparent, and, for consumer reviews of products, information should be provided on whether and how the business ensures the published reviews come from consumers who have actually used or purchased the product.

The so-called blacklists annex on unfair commercial practices has been extended to include practices such as abuses of rankings, the provision of misleading information about consumer ratings, or the use of false consumer ratings.

The above are just some examples of the changes from May 28, 2022, which are of great importance for the proper functioning of the market and the fullest possible enforcement of consumer rights. Although several authorities can act in consumer misleading cases, the activities of the Hungarian Competition Authority (GVH) are of outstanding importance. In Hungary, in addition to the classic competition law cases (e.g., cartel, abuse of dominant position), the GVH also has competence in consumer protection cases – it acts in consumer protection cases of nation-wide significance. This guarantees strict controls, consistent decisions, and the development of a clear legal practice to be followed, which benefit all market participants.

In recent years, the GVH has ruled on several cases related to unfair commercial practices, which are also addressed in the updated Commission Notice to the UCPD issued by the Commission. The decisions of the GVH are in line with the UCPD Notice and practice in the EU. In recent years, the GVH has acted in the following types of cases: psychological pressure, moderated consumer reviews, evaluation of website, application structure and visual design, free services versus payment with personal data, or misleading promotional pricing, among others. For example, the GVH has imposed a fine of HUF 2.5 billion on the operator of booking.com for, among others, misleadingly advertising some accommodations as having a free cancellation policy and putting aggressive psychological pressure on consumers to book quickly. Additionally, the GVH imposed a fine of HUF 40 million on the operator of alza.hu, while also requiring the company set up a consumer redress program worth at least HUF 450 million – for aggressively urging consumers to buy quickly with messages with mostly untrue content.

The resolutions issued by the GVH, which provide guidelines for the avoidance of unfair commercial practices, are also very useful for market participants – such as its recent resolutions on green marketing, on influencer communication, and on user reviews.

Ultimately, there is a positive trend that we are seeing: we are receiving requests from more and more companies asking for prior assessments before launching any form of advertising campaign or other consumer activities, communication, or commercial practices, a sign that companies are all too aware of the significance of these developments.

By Zsofia Bitai, Managing Partner, CLM Bitai & Partners

This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

At the end of April 2022, the Commission proposed the digitalization of the Schengen visa process, replacing the visa sticker, and introducing the ability to submit visa applications online through a visa platform. This way, applying for a Schengen visa will become easier and the visa itself will be more secure and less vulnerable to theft and fraud.

The aim of developing a common solution to allow Schengen visa applications to be lodged online in was explicitly stated back in 2019 by the European Parliament and the Council. Also, the COVID-19 pandemic, which led to the slowing down of Schengen visa operations worldwide partly due to the difficulty of receiving visa applicants in consulates and visa application centres, prompted to speed up work on the digitalization of visa procedures. Finally, the Pact on Migration and Asylum, proposed by the Commission in September 2020, set the objective of making the visa procedure fully digitalized by 2025, with the introduction of a digital visa and the ability to submit visa applications online.

Bringing the EU’s visa policy into the digital age is a welcomed and awaited step, as third-country visitors coming to the EU requiring a Schengen visa usually consider the visa application burdensome. By providing quick, safe and web-based EU visa application and payment platform for the citizens of the 102 third countries that require a short-term visa to stay in the Schengen area for a period not exceeding 90 days in any 180 days, the visa application process can be significantly improved. This is done by reducing the costs and the burden on Member States as well as the applicants, while also reducing security risks posed by the physical visa stickers, which could still be prone to falsification, fraud and theft. In addition, harmonizing and unifying visa application procedures within the Schengen area will help to avoid the so called “visa shopping” by applicants who may be tempted to lodge an application with a Schengen country that offers faster visa application processing than with a country that is actually their destination.

The Commission’s proposal will now have to be discussed by the European Parliament and the Council. The proposal, once voted, will be applied by the countries applying the Schengen acquis in full:  the EU27 (except Ireland and Bulgaria, Romania, Croatia and Cyprus as they are not applying the Schengen acquis in full) + Iceland, Norway, Lichtenstein and Switzerland. This is 26 countries in total, who will then have five years to switch to the unified online visa platform. The development of the platform could start in 2024 and become operational in 2026. Considering the five-year transition period, following the gradual phasing out of the national portals, all Member States could use the platform in 2031.

By Gabriella Galik, Partner, KCG Partners Law Firm

Lakatos Koves and Partners has advised GLP on its long-term lease agreement with online retailer Alza.hu for a 22,000 square-meter warehouse within the Sziget Logistics Centre in Hungary.

According to LKT, construction is already in progress and the building is due to be finalized in the third quarter of 2022.

GLP is an investor and developer of logistics warehouses and distribution parks.

According to LKT, “Alza will use the new multifunctional facility to improve its distribution and fulfillment services. With this new, ten-year contract GLP and Alza bring their cooperation in the CEE region to the next level: the originally Czech e-commerce player has already partnered with the developer in GLP Park Bratislava, Slovakia, and recently in GLP Park Prague Chrastany, Czech Republic. Apart from the 20,000 square meters of grade-A warehouse space, the building will host another 2,000 square meters of office space, a showroom, and an Alza Drive pick-up point.”

LKT’s team included Partner Attila Ungar and Associate Kata Molnar.

VJT & Partners has advised Navitasoft and its owner on the three-round HUF 1.2 billion capital investment by the Blue Planet Climate Protection Fund. Gardos Mosonyi Tomori reportedly advised the fund.

Navitasoft is a Hungarian company providing IT solutions for the electricity and gas market. 

According to the Blue Planet Climate Protection Fund, its aim is to “increase the sensitivity of society to environmental and sustainability problems and to involve local communities in solving them. To this end, the foundation strongly supports the creation and development of multi-level education on environmental protection and climate change, the development of society’s environmental awareness, and the change of individuals’ and society’s values and behavior as well as producer and consumer habits and aspirations.”

VJT & Partners’ team included Managing Partner Janos Tamas Varga and Partner Andras Lovretity.

GMT’s team included Partner Daniel Szabo and Associate Lili Keszler.

On 6 April 2022, Council Directive (EU) 2022/542 amending the EU VAT Directive was published in the Official Journal of the EU with substantial changes on place of supply rules and re-shaping the VAT rate system.

Place of supply for virtual entertainment

Electronically supplied services are part of our daily life, but the taxation thereof still can pose challenge to the regulators and the taxpayers alike. Regarding the specific place of supply rules for webcam sessions the European Court of Justice (ECJ) had to consider the L.W. Geelen case (C-568/17), where such online entertainment activity is ‘physically carried out’ for the purposes of VAT place of supply. The ECJ’s decision in 2019 – arguing that in such cases ‘physically carried out’ should mean the place where the supplier has established his business – highlighted that the EU Directive did not necessarily keep pace with technical developments and the place of supply for entertainment services is still based on offline logic whereas an increasing number of entertainment services are now provided in the online space.

As a consequence, Council Directive (EU) 2022/542 contains that, in order to ensure taxation in the Member State of consumption, it is necessary for all services that can be supplied to a customer by electronic means to be taxable at the place where the customer is established, has his permanent address or usually resides. The current amendment to the Directive contains accordingly that

• in B2B relations, to admission to the events with virtual attendance the taxation at the place of the event rule is not applicable to services; and
• in B2C relations, where the services and ancillary services relate to activities which are streamed or otherwise made virtually available, the place of supply is the place where the non-taxable customer is established.

Member States now have to implement the modifications until 31 December 2024.

New VAT rate regime

In accordance with the previous proposal, as part of the European Green Deal, Member States should be given the possibility to contribute to a climate-neutral and green economy by means of applying additional reduced rates on environmentally friendly supplies, while, at the same time, preparing the phasing out of the existing preferential treatment of environmentally harmful supplies. The amendment also aims to address possible future crises (i.e. pandemics, humanitarian crises or natural disasters) and Member States entitlement to respond swiftly to such exceptional circumstances.

Until now, Member States: (1) should apply a standard rate of no less than 15% for all goods and services (no maximum rate is regulated), (2) may apply a reduced rate of no less than 5% to goods or services listed in Annex III of the VAT Directive, and (3) may apply a special rate even under 5% as derogation (for historical reasons and under certain conditions).

According to Council Directive (EU) 2022/542, all Member States would be entitled to apply, in addition to the two reduced rates above 5%, one or two rates below 5% or equal to zero (with right of deduction) to some of the categories of goods and services listed in Annex III in line with the goals of the amendment (environmental commitment, flexibility in critical situations); e.g. goods and services considered to cover basic needs, solar panels, medicines, pharmaceutical products, health and hygiene products. The amendment also aims gradual abolition of reduced VAT rates or exemptions on fossil fuels and other goods with a similar impact on greenhouse gas emissions, as well as chemical fertilizers and chemical pesticides.

Simultaneously, Member States should limit the application of the various reduced rates to a maximum of:

• 24 of the categories referred to in Annex III in the case of reduced rates of more than 5%;
• 7 of the categories eligible for a rate of less than 5% (Member States which currently apply derogating rates to more than 7 categories will have until 1st January 2032 to be compliant).

The corresponding rules are expected to come into force gradually, Member States have by 2025, 2030 and 2032 at the latest to have their legislation and applicable rates aligned with the new rules.

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

Former Head of the Consumer Protection Group at Cerha Hempel Andrea Magdolna Nagy has joined EY Law Hungary and will lead the firm’s Consumer Protection practice.

Nagy previously worked at Cerha Hempel Dezso and Partners between 2020 and 2022. Before that, she spent eight and a half years with Lakatos, Koves and Partners as Counsel, and, earlier still, she was Head of the Market Surveillance Department and Head of the Legal Department at the former Hungarian National Consumer Protection Authority, between 2003 and 2011.

“We are delighted to have Andrea on board with her 20 years of extensive experience in consumer protection laws,” EY Law Partner Ivan Sefer commented.

“Issues relating to consumer protection and unfair commercial practices laws are getting a lot of attention from authorities around the globe and especially in the European Union,” added Nagy. “It is extremely important for companies during such volatile periods to be responsive and shape their practices accordingly.”