Lakatos Koves & Partners has advised European logistics and semi-industrial real estate developer VGP on the construction of the new VGP Park Gyor Beta, in Gyor, Hungary.
According to LKT, the park – VGP’s second in Gyor – is located in the city’s industrial area, almost 4 kilometers from the M1 highway connecting Budapest and neighboring capitals Vienna and Bratislava.
LKT’s team included Partner Attila Ungar and Attorneys Tamas Balogh and Kata Molnar.
Act Ban & Karika reported that it is advising Peri Kft, a Hungarian construction company with a net sales revenue of over HUF 6 billion, on a variety of legal matters.
Peri Kft is a Hungarian member of the German Peri group, a supplier of formwork and scaffolding systems, civil engineering solutions, and 3D construction printing.
According to Act Ban & Karika, “our law firm helps Peri Kft in all of their legal issues including debt management, employment law cases, data protection, and contract law.”
Act Ban & Karika’s team is led by Managing Partner Marton Karika and Associate Peter Weidinger.
Provaris has advised Hackrate on the development of an “ethical hacking services” offer for clients.
Provaris describes Hackrate as “one of the first CEE bug bounty and ethical hacking platforms, which help companies manage cybersecurity risks by managing bug bounty programs.” According to the firm, Provaris “provided legal support in the development of the legal framework for Hackrate to offer ethical hacking services for program sponsors e.g., corporations, banks and other multinationals who wish to mitigate their cybersecurity threats and vulnerabilities and participate in bug bounty programs as sponsors.”
According to Provaris, a “bug bounty program” is an offer by program sponsors to provide recognition and compensation to individuals who report software bugs, especially pertaining to “security exploits and vulnerabilities.”
The Provaris team included Partners Adam Liber and Tamas Bereczki and Associate Krisztian Szilagyi.
On 1 March 2021 a new Act on Labour Inspection, Employment Services and Grants will enter into force in Hungary, which replaces the “old” Act on Labour Inspection from 1996. While the new Act contains similar rules, there are some novelties too. Below we summarise the most important ones.
Concept of the new regulation
The purpose of the act is to broaden the enforcement powers of supervisory authorities, whose name will also be changed to “employment supervisory authority”. The name change suggests that they will have the power to examine any employment/labour-related legal relationship.
The main purpose of these authorities will be to enhance the transparency of the economy by combatting undeclared work and ensuring the enforcement of basic labour law rules (minimum requirements) in employment relationships.
Under the new act, authorities will primarily monitor employers’ compliance with the minimum requirements. These are not defined by law, but presumably include mandatory documentation and legal statements, statutory working hours, rest periods, wages and the issuance of certificates, etc. The authorities will also have the power to monitor the use of employment-related subsidies and grants.
Employment supervisory authorities will have general power to perform labour inspections, and will retain their right to inspect without permission or initial notification. The detailed rules of their power are expected to be determined by further implementation decrees.
Most important novelties
Limitation period: With certain exceptions, the authorities may not sanction infringements committed more than a year before the supervision, i.e. the limitation period has been shortened from the previous three years. This has in fact been the authorities’ practice for some time.
Obligation to fine: In some cases specified by government decrees the employment supervisory authority will be obliged to impose labour fines and will have no discretion to apply softer measures (i.e. warnings, orders for payment to employees, etc.).
Establish the existence and nature of the legal relationship: If the employer has not complied with the obligation to properly notify the employees or set out appropriate contractual documentation, the authority may establish the existence of the employment relationship based on the facts taking into account the general full-time working hours, from the 30th day from the beginning of the infringement.
Broadened powers to establish factual background: During the inspection the authority is entitled to:
Summary
Despite the innovations, the new act also leaves some question marks, as it is fairly generic and does not contain detailed rules in many aspects. It does not include reference to the inspection directive issued annually by the minister responsible for labour inspection, which was generally a good indicator of the focus points for investigations.
The absence of regulation on fines is also worthy of criticism. The mandatory cases where fines are imposed and the exact amount of the fine will now be regulated in a lower level regulation.
By Daniel Gera, Counsel, and Akos Kovacs, Associate, Schoenherr
Products imported from and exported to the UK became subject to customs duties as the UK withdrew from the European Union on 1 February 2020 and also left the EU customs union on 1 January 2021.
The UK’s departure from the EU also means that it is considered a non-EU country (“third country”) as of 1 January 2021. On the other hand, Northern Ireland is an exception, since EU customs and VAT will continue to apply in this country.
In case of customs administration relating to the UK, an Economic Operators’ Registration and Identification number (EORI number) must be requested from the Hungarian tax authority. The EORI number is issued by the Member State where the legal entity intending to carry out customs activities is established, or, in the case of third-country nationals, by the first EU Member State where it carries out an activity subject to customs. Furthermore, all products must have a customs declaration (as this is a requirement from third countries), for which the Hungarian tax authority carries out the customs procedure on the basis of the goods manifest.
By Gabriella Galik, Partner, KCG Partners Law Firm
The hot practice for CMS in Hungary is Dispute Resolution, and Zsolt Okanyi, Partner and Head of Dispute Resolution both for Hungary and globally at CMS, explains that his team’s current workload is primarily driven by the COVID-19 crisis.
“A number of arbitrations – some at the ICC, some local – that are primarily linked to infrastructure construction are keeping us busy,” Okanyi says, pointing to “one involving the reconstruction of railways, and another one related to the construction of gas pipelines,” as examples. Delays in construction were caused by the pandemic, giving rise to disputes over penalties.
Another type of work relates to internal investigations – the number of which has seen quite an increase according, Okanyi reports, noting that his team is currently dealing with more than five such projects.
Finally, Okanyi says, his team is dealing with a “huge Italian portfolio held by a large insurance company in Hungary that has generated over 100 cases.”
“We’ve seen a correlation between crises and an increase in our disputes-related workload in 2009-2010 as well,” Okanyi says, adding: “When economic distress appears, the number of transactions declines while disputes soar, most often resulting from a drop in the flexibility of parties involved.” Manufacturers, for example, had to deal with production forecasts being thrown off by the pandemic, and Okanyi describes one CMS client – a car parts manufacturer – who was caught between having placed raw material orders while seeing his own orders from car manufacturers canceled.
And the slow-down in the courts has caused quite a pile-up of work as well, according to Okanyi. “Like in many countries, court hearings ceased in March, April, and May of last year. Later on, there were two solutions implemented – one where hearings would take place through submitting documents to the courts only, and a second, once courts reached the needed level of IT preparedness, where hearings were being held online.” Both added to the workload. “The first solution meant that, as opposed to a two-hour hearing where I could put everything forward, a full day was spent on drafting the needed documentation. The second registered a lot of delays and waiting times to have everyone log in for the hearings – again, more time spent on this.”
The cancellation of court hearings during the several months’ lockdown last spring caused a considerable backlog as well, Okanyi reports, delaying both ongoing cases and new filings, leading to “an extremely high number of court hearings at the moment.”
On the investigations side of things, Okanyi explains that, during such crises, people are “fearing for their existence and their way of life,” which, unfortunately, means that some will more easily cross previously clear lines, and “end up bringing home the pencil from the company’s cupboard.”
Looking into the future, Okanyi says that he expects difficulties related to the Covid-19 crisis to “continue to trickle down until fall, when we hope for a return to normality in how disputes are handled.” Still, he says, that “will not impact the origins I mentioned with both companies and individuals remaining existentially distressed, so I expect both the increase in disputes and number of internal investigations to continue.”
Every spring DLA Piper publishes its annual M&A intelligence report. This past spring, we could only speculate on the effects of the pandemic as COVID-19 had just hit Europe. Informed by our experience of the past few months, we have recently published our updated M&A Global Report. Below we highlight a couple of trends that are impacting CEE.
General
COVID-19 has affected businesses in many different ways. The vast majority of deals have been adversely affected (usually by being delayed or postponed), causing a significant slowdown. However, in certain rare cases the pandemic has actually accelerated deals. The recently announced consolidation in the Hungarian banking sector is a prime example.
Conditional Deals
Most of us predicted in spring that the number of conditions to closing would increase. Parties involved in deals chose the opposite: they have tended to opt for deal certainty, and where possible, have chosen simultaneous signing and closing. Where there is split signing and closing, new types of conditions appeared, with the introduction of new/extended foreign investment screening regimes being the most obvious. These often catch intra-EU transactions as well – a somewhat unexpected development. Given that approval conditions are often vaguely worded in the makeshift laws, the new screening procedures often cause delays in transactions (and sometimes even incentivize parties to try to find a transaction structure where screening can be lawfully avoided).
Active Sectors: IT, Food and Beverages
The pandemic has required all businesses to adopt to new requirements, with home office/flexible working becoming the norm in several segments. Web-driven sales/distribution have also been on a constant rise. It’s no surprise that technology has been our most active sector. We have also seen increased activity in the food and beverages sector. Recently we have seen growing investor interest in the private healthcare segment – most likely as a reaction to the struggle of national healthcare systems with capacity constraints.
Deal Types: Increase in Asset Deals
The vast majority of transactions continue to be structured as share deals, where the buyer acquires all or the majority of the shares of the target. Nevertheless, we have come across a significant increase in minority share deals, too (with investors sometimes contemplating a gradual investment to manage the heightened uncertainty). We have also seen an increase in the proportion of asset sales over the 2019 numbers, although not as much as we anticipated in the spring (this may be explained by the fact that despite the challenging market conditions, target businesses are not (yet) in such a critical situation that would justify buyers taking the usually much more complex asset transaction route).
MAC Clauses
Although global statistics show that there is no material change in the use of Material Adverse Change (MAC) clauses, we have definitely seen that parties spend much more time negotiating over them, including their consequences. Given that several points of the “boilerplate” MAC clauses have become reality in the past few months (from export restrictions to curfew and protests), it’s no wonder that parties are reading these clauses much more closely.
Pricing: Completion Accounts
We predicted that the uncertainty associated with the pandemic would result in a significant shift from the locked box pricing mechanism to completion accounts. Our experience shows that there has been a perceivable increase in the use of completion accounts – it appears that the volatile market circumstances make the use of locked box arrangements too risky for buyers.
Security and Limitation of Sellers’ Liability
Escrow and purchase price retention is still in the minority. However, where an escrow mechanism is used, we see that the amounts are larger and the escrow periods are longer than before. This also seem to be true of the limitations on seller liability: we have seen longer periods, higher caps, and lower thresholds.
The above is, of course, only a middle of the road snapshot of our COVID-19 experience. It would be good, though, if it soon turned out that in fact this was an end of the road experience and things can get back to normal.
By Gabor Molnar, Partner, and Biborka Jojart, Senior Associate, DLA Piper Hungary
This Article was originally published in Issue 7.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
In January 2021, Hungarian lawyer Gergely Juhasz launched Risque Finance Brokers – an independent financial services start-up offering risk management consulting services for the M&A sector.
RFB represents a spin-off from Real Estate Risk Services, a mono-line W&I insurance broker for the CEE Real Estate market that Juhasz co-founded in 2018.
“We at RFB are approaching the transactional markets from a different angle, with a focus on insuring both corporate and real estate M&A transactions as well as advising clients on the management of special corporate and operational risks” Juhasz said, while noting that, while he is exiting Real Estate Risk Services, he will continue to consulting with it on certain ongoing matters.
Prior to establishing RFB, Juhasz worked as a corporate and M&A lawyer for Allen & Overy, Bird & Bird, the Kettani Law firm, and Bitai & Partners. He also worked for AIG in London as a Compliance Officer and as an M&A Insurance Underwriter, and for Renault Credit International as a Legal and Compliance Manager and Member of the Board of Directors for RCI Insurance in Malta.
Hungarian National Tax and Customs Authority regularly publishes the list of major tax defaulters for failing to fulfil their tax obligations in Hungary. The list also contains private data of the defaulters, including, inter alia, information on tax arrears and debts and their home address. In a recent case (L.B. v. Hungary – 36345/16), European Court of Human Rights concluded no violation and confirmed the approach of Hungarian tax authority as justified.
Hungarian tax legislation provides for the publication of personal details of major tax defaulters and major tax evaders (those whose tax arrears and tax debts exceeded HUF 10 million, approximately EUR 30,000). Publication was subject to the condition that the affected persons had failed to fulfil their tax obligations over an extended period of time (180 days).
Hungarian tax authority had published personal data of L.B. in connection with his failure to contribute to public revenue, accordingly, L.B claimed that his right to privacy had been violated and had referred to the general public-shaming effect of appearing on the list.
European Court of Human Rights considered whether this interference (if any) was lawful, followed a legitimate aim and whether it was necessary. In this regards, the Court found that the measures aimed to improve discipline regarding tax payment and thereby followed the legitimate goal of protecting the economic well-being of Hungary. Moreover, the aim of disclosure of the applicant’s data under a list of “major tax evaders” had been to protect the particular interests of third parties.
In light of the above, European Court of Human Rights established that making such information public could not be considered a serious intrusion into the personal sphere. Making his personal data public had been justified by furthering the State’s legitimate interest.
By Balint Zsoldos, Head of Tax, KCG Partners Law Firm
First reports under DAC6 were due recently from those who are parties to a cross-border transactions. Concurrently, at the last possible moment, the Hungarian Ministry of Finance published a Guide on certain issues related to the fulfilment of the reporting obligation. It is advisable, in particular, for accountants, consultants, lawyers and banks to carefully study this 38-page document, as any of them could easily fall within the scope of the reporting obligation.
On 25 June 2018, Council Directive (EU) 2018/822 (the sixth amendment to the original Directive on Administrative Cooperation, therefore known as “DAC6”) entered into force, and, in line with OECD requirements, requires tax advisors and other intermediaries, and ultimately taxpayers themselves, to disclose information on cross-border transactions deemed to be potentially aggressive tax planning arrangements. The purpose of the reporting, which has also been labelled by many as “self-indictment”, is to enable tax authorities to become aware in good time of arrangements that implement reallocations of income that are undesirable for the (world) economy.
The reporting obligation is imposed on cross-border arrangements that meet certain characteristics (hallmarks) and criteria as specified in the Directive. The obligation primarily applies to consultants and intermediaries, including, for instance, even accountants who are involved in the implementation of an arrangement that is subject to the reporting obligation. Ultimately, taxpayers themselves are required to disclose information. The first reporting deadline has just expired, and from now on taxpayers will always have 30 days to file a report after they have been able to begin implementing a reportable arrangement or after they have been informed of the reporting obligation by their consultants.
In the eleventh hour, almost concurrently with the first deadline, the Ministry of Finance published a Guide that explains certain provisions concerning the reporting obligation. Below we analyse some provisions of this Guide.
Broad definition of “arrangement”
The key regulatory concept is “arrangement”, which means reportable solutions or transactions. However, this is interpreted very broadly by the Ministry of Finance, as the term may include not only contracts or classic transactions and solutions of which there are written records, but also mere factual situations or changes in them. In an example brought by the Ministry of Finance, when a company’s tax residence is changed by starting to organise management meetings at a place other than the company’s registered office, this could be considered an arrangement.
However, the Ministry of Finance clarifies that the lapse of time or the occurrence of a condition as a result of the lapse of time (e.g. the end of the holding period of a participation) does not in itself constitute an “arrangement”.
Active participants
Only cross-border arrangements are reportable. For an arrangement to be deemed as such, at least two of its participants must be resident in different EU Member States (or in an EU Member State and a non-EU third country). For this reason, it does matter who can be considered as a participant in an arrangement.
On the one hand, the Ministry of Finance makes it clear that everyone who plays an active role in an arrangement is a participant, which does not take much: for example, it is sufficient for a parent company to give its approval as owner to an arrangement involving its subsidiaries. Now, this may even mean that arrangements taking place in a purely domestic context become reportable simply because the parent company is established abroad. On the other hand, however, this suggests that a transaction does not become cross-border merely because, for example, the subject of a purchase and sale transaction between residents is foreign (e.g. an asset located abroad or even a shareholding in a foreign company).
Tax advantage: now it’s here – now it’s gone
One of the most problematic points of the DAC6 regulation is the concept of “tax advantage”. In case of a considerable number of hallmarks the transaction only needs to be reported, if the main advantage (or one of the main advantages) derived from an arrangement is the obtaining of a tax advantage. However, it is not always clear what constitutes a tax advantage or what a tax advantage should be measured against.
According to the Ministry of Finance, it is not necessary for the tax advantage to be realised domestically, or even within the EU. Therefore, a transaction where the tax advantage arises only in a non-EU country may also fall under the reporting obligation. Fortunately, the Ministry of Finance also clarified that, in the Hungarian context, a tax advantage provided by law (e.g. a tax exemption) should not be considered a tax advantage if the underlying transaction achieves the purpose of the given exemption and the transaction is based on real economic and commercial grounds. In simpler terms: if, for example, one avails of the legal option of a more favourable tax scheme for royalties, and adapts one’s actual economic operations accordingly, this alone will not make the transaction reportable.
What should be borne in mind?
The Ministry of Finance seems to have done hard work interpreting the rules, clarifying and thus ultimately simplifying administration for taxpayers in many ways. However, some issues still remain that will need further explanation in actual practice.
In any case, it has once again been shown that every transaction must be examined very carefully in order to determine whether or not it falls within the scope of the reporting obligation. Such an exercise needs to be done, most particularly, if a transaction involves more than one country and if it has been motivated, even if only in part, by tax considerations. From this time on, this will be a serious task for both consultants and their clients.
By Tamas Feher, Partner, Jalsovszky