Category: Hungary

The Hungarian tax authority published its annual tax audit guidelines with the clear aim of supporting compliant taxpayers and take firm actions against intentional tax evasion by utilizing various data sources available in the process. E-commerce, real estate industry, data-based risk analysis remain key elements.

The tax audit plan sets out the following four main focus points:

1. Sectors and activities with significant budgetary risks

E-commerce and trade of computer hardware remain hot topics, as well as the construction sector, tourism and hospitality, food industry (including food delivery services this year and agricultural products), inter alia, are expected to be under scrutiny this year.

Among the thematic tasks, a new focus will be on KIVA (small business tax) audits and transfer pricing audits in the automotive sector. As to the personal income taxation – partly due to the specific tax incentives and exemptions provided lately – reimbursements will be also under scrutiny in 2022 and self-employed entrepreneurs will be in focus.

In addition, due to the discrepancies regarding inaccessible companies, registered seat service providers, companies without actual seats and companies changing seats will be subject to risk analysis and monitored closely.

2. Taxpayers with significant budgetary risks

Based on the vast data from the reporting systems introduced and/or extended in the recent years (i.e. online invoice data disclosure obligation, “Employee Alert” system and international exchange of information on cross-border tax structures) a targeted risk analysis is available for the tax authority to focus its audits on risky taxpayers.

Recent years saw a significant increase in e-commerce, exacerbated by the pandemic situation with the simultaneous undervaluation of import goods and spread of VAT evasion in intra-Community and domestic trade. The aim of the tax office in those regards is immediate reaction to prevent entering into free circulation (if necessary), therefore importer companies and indirect customs representatives should expect increased attention from the tax authority.

3. Large taxpayers

In order to secure budget revenues and due to their economic weight auditing large taxpayers remains a key element of the Hungarian tax authority’s plan with additional emphasis on data gained from international exchange of information on cross-borders structures and transactions.

Additionally, large taxpayers without profit after tax in the past two years (with net turnover over HUF 60 billion but with negative or zero profit after tax) should be monitored and audited closely.

4. Promoting voluntary compliance

To support voluntary compliance by taxpayers, the tax authority intends to use so called supporting procedures (in the case of minor discrepancies) and compliance audits (for more significant discrepancies) without sanctions, at first.

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

Bird & Bird has advised the Hungarian subsidiary of electronics manufacturer Flex on its HUF 100 billion primary offering of bonds. CMS advised lead arranger Raiffeisen.

According to Bird & Bird, the bonds were placed with the National Bank of Hungary and other institutional investors, are secured by a Hungarian law parent company guarantee of equivalent value from December 2021, and registered on the Xbond multilateral trading facility operated by the Budapest Stock Exchange.

“This transaction marks the entry of Flex into the growing Hungarian bond market with the support of the Bond Funding for Growth Scheme launched by the NBH on July 1, 2019,” a firm press statement informed. “By increasing the liquidity of the bond market, the NBH intends to improve the efficiency of monetary policy transmission and to also encourage economic actors to rely on this type of financing, in addition to bank loans, to a sufficient proportion.”

The Bird & Bird team was led by Partner Konrad Siegler and included Associates Gabor Szabo, Gyorgy Boros, and Anna Hetyesy.

The CMS team consisted of Managing Partner Erika Papp, Senior Consultant Arpad Lantos, and Senior Associate Sandor Kovacs.

From 1 April 2022, substantial changes were made to the provisions of the government decree on the construction and construction-related profession exercising activities, i.e. designers, construction technical supervisors, responsible technical leaders and construction experts.

The new provision of the decree now uniformly provides for all activities subject to the decree that a firm may start and continue a professional activity subject to the decree if it has announced its intention to do so and its managing director, member contributing personally or employee working at least 20 hours a week has a professional qualification in the given field and the activity is carried out by the person holding the qualification.

The successful entitlement exam (in Hungarian: “jogosultsági vizsga”) has become a condition for the permission of all profession exercising activities subject to the decree, however, the obligatory “report” (in Hungarian: “beszámoló”) that the profession exerciser should have completed within one year, has been eliminated. In the event that the level of specialisation cannot be established from the qualification certificate during the examination of the fulfilment of the qualification requirement, the expert body operated by the Hungarian Chamber of Engineers or the Hungarian Chamber of Architects is entitled to give an expert opinion on the specialisation of the qualification during the permission procedure in the first and second instance, which is taken into account by the regional and national chambers when establishing the entitlement.

According to the new rules, the regional chamber may award a professional title to an applicant who is a member of the chamber. However, as a result of the amendments, the title of “investment adviser” and the title of “particularly experienced” have been deleted.

The types of training have also been modified, resulting in that the following two types of training will be required: (i) a legal training during the five-year training period, and (ii) a professional training in the manner specified in the regulations of the national chamber. Furthermore, the provisions of the decree on the legal consequences have also been amended, for instance, the secretary of the regional chamber shall impose a fine of HUF 100,000 on the responsible technical leader and the construction technical supervisor for violation of the conflict of interest rules.

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

DLA Piper has advised Indotek on its acquisition of a 47% stake in Auchan holdings. Szecskay and, reportedly, D’Ornano Partners advised Auchan on the deal.

Indotek is a Hungarian property developer. Following the transaction, Indotek will become a minority owner in Auchan Retail Magyarorszag and Ceetrus Magyarorszag. Auchan is a French multinational retail group headquartered in Croix, France.

DLA Piper’s team included Local Partners Szilard Kui, Zoltan Kozma, and Viktor Radics, Counsel Attila Sari, Senior Associates Gabor Spitz, Eszter Fodor, Bettina Boncok, Angela Toth, Peter Virag, and Balazs Soth, Associates Kristof Szeredi and Eszter Varga, and Junior Associates Krisztina Kasza-Toth, Fanni Oroszi, Katalin Banasz, Eszter Toth, and Beatrix Polya.

Szecskay’s team included Senior Partner Patrick Tausz, Partners Sandor Nemeth and Bence Molnar, Of Counsel Sam MacMahon Baldwin, and Junior Associate Daniel Bihary.

The Hungarian Government adopted a decree on 24 February 2022 that allows people fleeing the Russian-Ukraine war to enter Hungary and guarantees ‘temporary protection’ for them. This temporary protection applies to all Ukrainian citizens and refugees who lived in Ukraine and their relatives. The temporary protection, at this stage, is available for one year. In order to get the temporary protected status, after entering Hungary, people must register at the Immigration Authority or at one of its sub-offices at the reception centres located near the Ukraine border. With the temporary protected status Ukrainian citizens are entitled to get accommodation, food, medical care, also dental treatment, maternity care, vaccinations and education for children. They are also entitled for monthly cash allowance for the duration of their protection. The monthly amount of the allowance is HUF 22,800 (approx. EUR 62).

Those Ukrainians who get temporary protection in Hungary can work in certain jobs without a special work permit, where there is shortage of Hungarian workforce. For example, these jobs include IT professionals, engineers, software developers and jobs in the construction industry. If they apply for position where there is no shortage of workforce, they shall apply for work permit, but it is issued in a simplified fast-track procedure.

The Government also issued several decrees in order to tackle the challenges that may arise, e,g. on granting financial support for employers hiring Ukrainian citizens fleeing the war. The financial support is paid directly to the employer who must use it to cover the employees’ accommodation and travel expenses. The amount of the financial support is maximum 50% of the employee’s monthly accommodation and travel expenses, which may not exceed HUF 60,000 (approx. EUR 162) per employee per months.

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

The Hungarian Data Protection Authority (Nemzeti Adatvédelmi és Információszabadság Hatóság, NAIH) has recently published its annual report in which it presented a case where the Authority imposed the highest fine to date of ca. EUR 670,000 (HUF 250 million).

The case involved the personal data processing of a bank (acting as a data controller) which automatically analysed the recorded audio of customer service calls. The bank used the results of the analysis to determine which customers should be called back by analysing the emotional state of the caller using an artificial intelligence-based speech signal processing software that automatically analysed the call based on a list of keywords and the emotional state of the caller. The software then established a ranking of the calls serving as a recommendation as to which caller should be called back as a priority.

The purposes of the processing activity was determined by the bank as quality control based on variable parameters, the prevention of complaints and customer migration, and the development of its customer support’s efficiency. However, according to the Authority, the bank’s privacy notice referred to these processing activities in general terms only, and no material information was made available regarding the voice analysis itself. Furthermore, the privacy notice only indicated quality control and complaint prevention as purposes of the data processing.

The bank based the processing on its legitimate interests to retain its clients and to enhance the efficiency of its internal operations. The data processing activities in connection with these interests, however, were not separated in the privacy notice and in the legitimate interests tests, they became blurred.

In the course of the procedure before the Authority it became evident from the statements of the bank that for years it had failed to provide to the data subjects proper notice and the right to object, because it had determined that it is not able to do so. The Authority emphasised that the only lawful legal basis for the processing activity of emotions-based voice analysis can only be the freely given, informed consent of the data subjects.

Additionally, the Authority highlighted that although the bank had carried out a data protection impact assessment (DPIA) and identified that the processing is of high risk to the data subjects, capable of profiling and scoring, the DPIA had failed to present substantial solutions to address these risks. Furthermore, the legitimate interest test performed by the bank had failed to take into account proportionality, the interests of the data subjects, it merely established that the data processing is necessary to achieve the purposes it pursues. The Authority further emphasised that the legitimate interest legal basis cannot serve as a ‘last resort’ when all other legal bases are inapplicable, and as such data controllers cannot refer to this legal basis at any time and for any reason. Consequently, the Authority, in addition to imposing a record fine, obliged the bank to cease the analysis of emotions in the course of voice analysis.

In conclusion, the Authority highlighted that “artificial intelligence is generally difficult to understand and monitor due to the way it works, and even new technologies pose particular privacy risks. This is one of the reasons why the use of artificial intelligence in data management requires special attention, not only on paper but also in practice.”

By Zoltan Kozma, Local Partner, and Mark Almasy, Junior Associate, DLA Piper

The Hungarian register of ultimate beneficial owners contains the data of the data providers falling under the scope of the act ruling the register of ultimate beneficial owners, for instance limited liability companies, public limited companies, associations, foundations or notary offices.

On 1 February 2022, further provisions of the act entered into force. From this date, in order to perform its statutory tasks, the authority, the prosecutor’s office, the court and the supervisory authority may disclose information obtained from the register of the ultimate beneficial owners (a) to an authority, prosecutor’s office, court or supervisory authority of another Member State of the European Union and (b) under certain conditions, to an authority, prosecutor’s office, court or supervisory authority of a third country.

In addition, from the above date, service providers under the Money Laundering Act (e.g. credit institutions, financial service providers, auditors or attorneys-at-law) may access, free of charge, the data of data providers stored in the register of ultimate beneficial owners in order to fulfil their customer due diligence measures or data verification obligations.

From 1 February 2022, in case the authority, the prosecutor’s office, the court or the supervisory authority detects a discrepancy between the ultimate beneficial ownership data known to them and the ultimate beneficial ownership data recorded in the register, they state the data known to them in a notification. The service providers must also notify the registry body if they record data other than those stored in the register of ultimate beneficial owners. These notifications reduce the so-called TT index of data providers, which is an indicator of the level of confidence of the data providers’ ultimate beneficial ownership data in the register of ultimate beneficial owners, with a value between 1 and 10. If the value of the TT index due to the notifications of deviations falls below 8 points, the data provider’s ultimate beneficial ownership data is classified as “uncertain”, and if it falls below 6 points, the data provider’s ultimate beneficial ownership data is classified as “unreliable”. However, in case following the information of the registry body, the data provider confirms or modifies its ultimate beneficial ownership data, the registry body will adjust the value of the TT index to 10 points.

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

From 14 February 2022 European patents registered in Hungary became available in the EFPR system. According to the statement of the Hungarian Intellectual Property Office (“HIPO”), by joining to the EFPR system, 34,000 patents registered in Hungary became available and searchable on the site of the EFPR. It is important to have a common platform for the patent registry, as customers do not need to look up national sites and search for similar patents before requesting registration. The system itself is capable of informing the user about countries in which the European patent in question is not protected anymore.

The EFPR (European Federated Patent Register) system was created by the European Patent Office to serve as a common platform for different national intellectual property offices. More than 30 countries joined the system already, making it the largest European platform for patents. The EFPR is the main source of information for European professionals such as patent attorneys, IP consultants and industry representatives.

European patents form an important part of the Hungarian patent system, as well as generate income based on the European Patent Convention. According to the statement of HIPO, in 2021 more than HUF 3 billion (approx. EUR 8 million) were paid to the HIPO as royalties, which is expected to grow with the joining.

By Rita Parkanyi, Partner, KCG Partners Law Firm

The Hungarian economy is performing well, despite all the turmoil Europe finds itself in currently, according to Kinstellar Budapest Managing Partner Kristof Ferenczi.

“The war in Ukraine is affecting everything, and our business is no different,” Ferenczi begins. “We made huge efforts to help all our colleagues in our Kyiv office get out of harm’s way and provide humanitarian support to those in need – that’s been our number one priority and preoccupation lately.”

Also, Ferenczi sees an increased demand for relocations of both businesses and individuals. “We’ve gotten more and more inquiries from companies that have been operating in Ukraine about relocating and over a quarter of a million people have migrated to Hungary already,” he reports. “This is the second-highest number in all of Europe, second only to Poland. In an effort to ease the movement of those fleeing the war, the Hungarian government was among the first ones to lift all obstacles and requirements for entry from Ukraine.”

“Another consequence of the war is the sanctions fallout,” Ferenczi continues. “The sanctions put in place by the US, the UK, and the EU have far-reaching ramifications for all economies in Europe, not just our own. To the extent to which the sanctions will remain in place, this will have an impact on a number of European markets,” he predicts.

Moving away from the war, Ferenczi reports of healthy dynamism on the Hungarian market. “There is a lot of movement in the energy sector and this increased investor interest is accompanied by legislative changes as well,” he says. “There were changes made to the regulatory rules concerning renewables, in particular the tender rules for large renewable energy projects, especially for photovoltaic power plants.” Investor interest is high, which is an indication of a good trend: “investors are all the more mindful of the need to balance the energy impact of their undertakings with other sustainability goals,” Ferenczi adds.

In addition to the energy sector, Ferenczi reports strong activities in the banking sector, “with banks exiting the market, followed by other banks acquiring the left-over assets and general consolidation” on the market. “Also, there is strong activity in the medical services sector – investors are looking for more targets to invest in here as well,” he says.

However, there is also an expectation of a potential wave of restructurings hitting the market before long. “As a consequence of all that has been going on in recent times, we can say that a number of companies will soon be facing a turning point,” Ferenczi concludes.

On 13 March 2022 the Hungarian Parliament approved an amendment to the Corporate Income Tax Act that modified the regulation of investment tax incentives. Based on the amendment, the only requirement to claim the investment tax credit is that the investment should be an initial investment implemented by a small and medium-sized enterprise, or is realized by a large company in the Northern Hungary, Northern Great Plain, South Great Plain, South Transdanubia, Central Transdanubia or Western Transdanubia regions. Mainly the Pest County region will benefit from the amendment, as the tax credit can be claimed after the investment projects realized in the whole region.

Based on to the amendment of the regional support map entered into force as of 2022, the intensity on tax credits on investments, renovations to comply with energy efficiency targets have also been modified. Taxpayers shall be eligible for tax allowance in connection with an investment or renovation to comply with energy efficiency targets upon placing the investment / renovation into operation in the tax year following the year when the investment / renovation was placed into operation and in the following five tax years.

The tax allowance claimed by the taxpayer for any investment / renovation in Budapest may not exceed 30%, while in the Northern Hungary, Northern Great Plain, South Great Plain, South Transdanubia, Central Transdanubia or Western Transdanubia regions, or in the Pest plan-statistical region may not exceed 45% of the eligible costs of the investment at present value, including all state aid requested for the investment / renovation or maximum the HUF equivalent of EUR 15 million.

The new rules entered into force 3 days after its approval, however, due to the changes of the state aid regulation, they will be applied also on those announcements which had been submitted until 31 December 2021 but have not been registered or approved until the amendment entered into force.

By Eszter Kamocsay-Berta, Managing Partner, KCG Partners Law Firm