Category: Hungary

The Budapest office of Schoenherr has advised Doosan on its EUR 210 million investment in its copper foil production base in Tatabanya, Hungary, for the construction of another factory on the location. 

Doosan is a South Korean supplier in the electric vehicle industry, and according to Schoenherr, the new investment will increase the annual capacity for copper foil for electric vehicle batteries at the factory by 150%. The factory is schedule to open sometime in 2021. The site was acquired by Doosan in 2018.

Schoenherr’s team was led by Attorney Laszlo Krupl, working with Associate Adrian Menczelesz.

 

Varga Mihály, Minister of Finance submitted the autumn tax changes package to the Hungarian Parliament, including the proposed changes for VAT in 2021. The draft contains detailed implementing rules for the EU e-commerce package and related administrative requirements, as well as several additional changes to the Hungarian VAT Act, as follows:

Modernising VAT for cross-border e-commerce

As the next step of adapting to the e-commerce, Mini One Stop Shop (MOSS) concept will be turned into a VAT One Stop Shop (OSS) and extended to three main fields:

• non-Union scheme for supplies of telecommunications, broadcasting and electronic services by taxable persons not established in the EU will be extended to all types of cross-border services to final consumers (B2C) in the EU;
• Union scheme will also apply to all types of B2C intra-EU supplies of services well as to intra-EU distance sales of goods (and certain related domestic sales by e-marketplaces);
• import scheme will be created covering distance sales of goods imported from non-EU to customers in the EU up to an item value of EUR 150, and the exemption up to EUR 22 is demolished.

Additionally, businesses operating electronic interfaces such as marketplaces or platforms will, in certain situations, be deemed for VAT purposes as intermediaries: to be the supplier of goods sold to customers in the EU by companies using the marketplace or platform. Consequently, they will be subject to VAT reporting and payment obligation on those sales.

The extension of the MOSS and the special provisions concerning the obligations of electronic interfaces will enter into force on 1 July 2021, but the registration should be available as of 1 April 2021.

Hungarian features

• VAT return to be drafted by the tax authority from July 2021 – based on the data provided by the taxpayers via online invoice data reporting, the tax authority will prepare a draft VAT return on behalf of each taxpayer in Hungary. The draft should be available earliest at the 12^th of the month following the VAT period, it will only contain the payable and deductible amounts and will be still subject to active participation (changes/modifications) by the taxpayer, especially with regard to the right of deduction.
• Bad debt relief will be extended to sales to final customers (B2C) as well if general criteria are met.
• Invoicing exemption – the current regulation makes the exemption from invoicing in the case of transactions performed for non-taxpayers partly conditional upon the payment method (by listing the payment methods that assume the simultaneous presence of sellers and buyers). Given that there has been significant development of e-commerce, payment and invoicing methods, these condition is abolished as of 2021. Furthermore, taxpayers complying with the OSS system might also be exempted from issuing an invoice (unless the customer requests an invoice).
• Temporary employment agency services will be no longer subject to domestic reverse charge unless related to building or construction services.

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

Cybersecurity is becoming increasingly important, especially in the automotive industry, which is reinventing itself. Connected cars, autonomous systems, electric cars and personal mobility systems all rely heavily on software. Today’s car has about 300 million lines of software code (compared to an average PC operating system’s 40 million) which makes it vulnerable to various cyberattacks. No unified regulatory framework or even technical standards currently exist.

1. Where can the new requirements be found?

The United Nations Economic Commission for Europe issued 

• a proposal on uniform provisions concerning the approval of vehicles with regards to cyber security and cyber security management systems on 23 June 2020;
• a proposal on uniform provisions concerning the approval of vehicles with regards to software updates and software update management systems on 31 March 2020 (and its proposal for amendments on 10 July 2020). 

They have not yet been adopted as UN Vehicle Regulations. If accepted as UN Vehicle Regulations, they might come into effect directly in the EU, because EU Regulation no. 2019/2144 might well refer to them when defining the requirements for protection from cyberattacks for the automotive industry. Therefore, the exact content of the new cybersecurity regulatory framework cannot be defined yet; however, the main characteristics can be anticipated.

2. Which vehicles and manufacturers are affected?

The new rules apply to passenger vehicles, transportation vehicles and trailers and to systems, components and separate technical units designed and constructed for them. Based on the EU Regulation’s wording, the rules apply to the above vehicles’ Original Equipment Manufacturers (OEMs). 

However, suppliers seem to be affected as well, since according to the UN proposals, OEMs are explicitly obliged to collect and verify the required information throughout their supply chains. Suppliers are obliged to provide information to the competent authority so that it can check compliance.

3. What is required by the new regulations?

The UN proposals contain very few specific technical requirements. They require OEMs to ensure that cybersecurity and software updates are reviewed during design, production and postproduction phases using specific management systems: a cybersecurity management system (CSMS) and a software update management system (SUMS). 

4. What happens in case of non-compliance?

After 6 July 2022, no type approval will be issued without a CSMS and a SUMS. 

After 7 July 2024, no vehicles will be registered and no components will be permitted on the market if they do not comply with the new cybersecurity rules. 

5. To Dos

Both OEMs and their suppliers (Tier 1, Tier 2, etc.) in the automotive sector must be up to date on the status of the new regulations and changes to their content. This is a good opportunity to check/implement processes and to communicate with each other in order to ensure compliance throughout the supplier chain. 

By Zoltan Nadasdy, Partner, and Eszter Sieber-Fazakas, Senior Associate, Noerr

The European Court of Justice has just put an end to an uncertainty that has weighed heavily on the pockets of property developers for years. Not only did it confirm that the VAT on what are known as “public purpose” investments can be deducted, but also that the obligatory transfer of ownership of such investments does not give rise to a VAT liability even if the investment is essential for the developer’s own economic activity.

The problem of how to treat the VAT liability on what are known as “public purpose” investments has remained unresolved for years. The background to this is that there are a large number of developments where the developer is forced, sometimes for its own well-considered reasons but usually due to state or municipal requirements, to implement “public purpose” investments alongside the main development.

An example of this is where the investor can only get planning permission to develop a new residential site if he also agrees to construct a nearby road intersection, playground or drainage ditch, or when he has to build a new motorway junction because of the industrial complex he’s working on. What these developments have in common is that they are clearly necessary for meeting increased household or industrial demands resulting from the primary investment, but are still of a public purpose in that they generally pass into state or municipal ownership once completed, and can later be used by “anyone”.

In Hungary, a ruling passed as far back as 2008 made it clear that VAT on the costs of such investments can be deductible even if the investment must subsequently be transferred to the municipality or the state free of charge.

In relation to the transfer of the investment, however, some very adverse rulings were passed. It appeared from these that even if the input VAT were be deductible, the free transfer was still subject to VAT. This was due to the rule that a product or service supplied free of charge is subject to VAT even if the related VAT was deductible.

The ECJ steps in

This unfortunate practice can be expected to change radically in the wake of a  ruling of the ECJ a few days ago stating that under certain conditions there is no need to pay VAT on such public purpose investments, while the input VAT is still deductible.

In the specific case, the extension of a road belonging to a municipality was essential for the operation of a limestone quarry in two respects. Firstly, because if the extension were not implemented, the construction permit for the limestone quarry would lose its validity. And secondly, because the machines needed for the quarry could not have used the existing road given its previous width.

The operator of the quarry thus extended the road at its own cost, but transferred the road to the municipality free of charge and also allowed anyone else to use it for free.

The ECJ was the first to rule that, in practical and legal terms, the taxable quarrying activity could not have taken place if the road had not been widened. For this reason, it considered that there was a necessary (to use its language) “direct and immediate link” between the widening of the road and the taxable activity of the company, so that the VAT incurred in relation to this could be deducted.

However, what was really new about the case was that, quite independently of the above, the ECJ also did not consider that the subsequent free transfer of the road would give rise to a VAT liability.

It concluded that the road and the works carried out on it are so closely linked with the company’s taxable activity that it could not be regarded in that sense as having been removed by the business from its own scope of activity. And this was despite the fact that, in legal terms, the road had become the property of the municipality, and the fact that the road could be used by anyone (for free).

This changes everything

It’s clear that this ECJ decision will have a very significant impact on Hungarian legal practice, and will significantly ease the burdens on a large number of property developers.

The ruling is also interesting in terms of the principles of VAT. The German tax authority argued that if on the one side, VAT deduction is allowed, but on the other, the transfer itself is not deemed a taxable transaction, the final “consumption” of the road remains untaxed. However, according to the ECJ, the extension of the road was essential and, ultimately, has a “direct and immediate link” to the taxable sale of limestone. For this reason, there is no untaxed final consumption, as this tax is ultimately paid on the price of the limestone.

By Tamas Feher, Partner, Jalsovszky

SBGK’s busiest practice over the last few months has been Data Protection, according to Partner Andras Gyorgy, driven by both the COVID-19 pandemic and, more importantly, by fines for GDPR breaches raising awareness among companies.

Although GDPR has been around for a while, according to Gyorgy, some companies are struggling with it, and, he says, “we are now helping our clients better understand the rules.” For example, he says, he has worked on “many legitimate interest assessment cases where we needed to assess the nature of the data processing and determine if the measures implemented by our client are necessary and proportionate, and thus legitimately limit the fundamental rights and freedoms of the individual.” He explains that those assessments are most often tied to data processing in the workplace. “In one of them, a chain of fast food restaurants collected data on the reasons why employees decide to resign from work,” Gyorgy says. “In another, a company wanted to collect various kinds of information about its employees, so that it could meet their needs in a more efficient way.”

The team’s workload is supplemented by “many employers trying to implement different kinds of COVID-19-related health inspections.” Gyorgy points to a case involving a company that wanted to take its employees’ temperatures, obtain PCR and antibody tests, and even launch a mobile platform to screen employees before they came to work.

SBGK’s work on such cases consisted primarily of providing analysis whether the intended measures complied with data protection regulation, and if not, what steps are needed to ensure compliance. Sometimes it also included representing a client before the Hungarian Data Protection Authority over alleged breaches of the law, Gyorgy reports.

“Overall, since the spring, about a third of our work has stemmed from pandemic-caused issues,” Gyorgy says, and he estimates that the remainder likely resulted from, “companies becoming more aware of the importance of GDPR, especially after the Hungarian Data Protection Authority began issuing fines for breaches of the regulation.”

Looking forward, Gyorgy says, “the pandemic-related cases will hopefully die down soon, but regardless of that we will keep busy well into the future.” His optimism, he says, is based not only on the current rise in cases. “Our clients appreciate the quality of our service, so they began referring new clients to us. It is difficult to predict what future will bring, but judging by our track record, this trend will keep on going even without pandemic-related cases.”

During the state of emergency in the spring Gov. Decree no. 227/2020 (“Gov. Decree”) was introduced to require the notification to the Minister of Innovation and Technology (“Minister”) and the acknowledgment by the Minister as a condition to certain foreign investments in Hungarian-based companies. Following the end of the state of emergency subchapter 85 of Act LVIII of 2020 (“Vmtv.”) prescribes the rules applicable to foreign investments which are mostly similar to the rules established by the Gov. Decree.  However, in some matters the Vmtv. prescribes different rules. Now, certain provisions of the Vmtv. have been amended and supplemented by Act CIV of 2020 and the amendments have entered into force on 30 October, 2020.

Definition of the foreign investor

According to the Vmtv., the followings will qualify as a foreign investor:

1. a legal person or other entity – acquiring ownership or control in a business association seated in Hungary and carrying out the activities defined in Section 277(2) of the Vmtv. – registered in Hungary, in another Member State of the European Union, in another Member State of the European Economic Area or in the Swiss Confederation, if they are under the majority control of natural or legal persons or other entities resident or registered in a country which is outside of the European Union, the European Economic Area or the Swiss Confederation,
2. natural or legal persons or other entities resident or registered in a country which is outside of the European Union, the European Economic Area or the Swiss Confederation.

Definition of the strategic company

Pursuant to the Vmtv., a strategic company is any limited liability company, private limited company or public limited company based in Hungary, registered main activity or ancillary activities are listed in the relevant Gov. Decree [Gov. Decree no. 289/2020] and this activity is

a) pursued in the energy, transport, communications sectors,

b) falls within a sector of strategic importance within the meaning of Article 4 (1) (a) to (e) of the EU Regulation No. 2019/452, excluding financial infrastructure.

Scope of transactions covered by the notification

In connection with the following transactions, the notification to the Minister is required:

1. acquisition of ownership interest in a strategic company,
2. capital increase in a strategic company,
3. merger, demerger and transformation of a strategic company,
4. issuance of bonds which are convertible, or provide subscription rights or convert to equity by a strategic company,
5. establishing usufruct over the share of the quota of a strategic company,
6. the acquisition of the right to operate the infrastructure, equipment and facilities essential for carrying out activities in strategic sectors.

A legal person or other entity established in another Member State of the European Union, another Member State of the European Economic Area or the Swiss Confederation, or a national thereof, shall only be required to notify the Minister about a transaction concerning the acquisition of ownership, bond ownership or usufruct if:

1. the total value of the investment reaches or exceeds HUF 350 million; and
2. the foreign investor acquires, directly or indirectly, a majority control in a strategic company as a result of the transaction. 

In addition to the provisions of the preceding paragraph, a foreign investor shall also notify the Minister if, as a result of the acquisition of ownership, the acquisition of bond ownership or the acquisition of a right of usufruct

1. directly or indirectly acquires a share of at least 10 % in the strategic company and the total value of the investment reaches or exceeds HUF 350 million;
2. acquires a share of 15 %, 20 % or 50 % in a strategic company in a sector of strategic importance;
3. the combined shares of foreign investors in a strategic company belonging to the strategic sector, with the exception of a public limited company, exceeds 25 %.

Exemptions from the notification obligation

Pursuant to Section 277 (5) of the Vmtv., legal transactions that result in a change only in the indirect owner of a strategic company registered in Hungary as a result of legal transactions specified in the Vmtv. are not subject to notification if the direct owner of the strategic company registered in Hungary remains unchanged.

A new exemption from the notification obligation from 30 October, 2020 is that when the transaction concluded with respect to a foreign based legal person or other entity is established between affiliated companies defined by Act C of 2000 on Accounting (“Accounting Act”).

Affiliated companies defined by the Accounting Act are the parent company defined by the Accounting Act and the subsidiary company and jointly controlled entity, which are also defined by the Accounting Act.

Pursuant to the Accounting Act parent company shall mean a company that effectively exercises a dominant influence over another company (hereinafter referred to as “subsidiary company”), either directly or through its subsidiary company, because it meets at least one of the following conditions:

1. based on its ownership percentage in the share capital, it solely controls the majority (in excess of 50 per cent) of the votes of the owners (shareholders), or
2. it solely controls the majority of votes based on agreement with the other owners (shareholders), or
3. in its capacity as an owner (shareholder) of the company, it is entitled to elect or dismiss the majority of executive employees or members of the supervisory board, or
4. based on a contract concluded with the owners (shareholders), or a provision of the instrument of constitution, it exercises dominant supervision and control, irrespective of its percentage in the share capital, voting ratio and the right to elect and dismiss executive employees.

Subsidiary company shall mean the business association over which the parent company defined above exercises a dominant influence.

Jointly controlled entity shall mean a business association in which, on the one hand, the parent company (or the consolidated subsidiary of the parent company), and on the other hand, one (or several) other enterprise(s), have the rights defined in the definition of parent company on an equal basis, with at least 33 per cent voting rights. A jointly controlled entity is managed jointly by the owners.

Content of the notification

The notification shall be submitted within 10 days after the conclusion of the legal transaction, the notification shall be submitted in Hungarian or a certified Hungarian translation shall be submitted. Legal representation shall be mandatory. The notification signed by the foreign investor and affixed with an electronic signature of the legal representative shall be submitted electronically to the Minister.

The notification shall contain:

a) if the foreign investor is a natural person:

natural identification data and address data,

nationality, and

contact details for electronic communication or communication by mail,

b) if the foreign investor is a legal person or other entity:

name, seat and the Hungarian branch’s address (if any),

the designation of the state performing the tasks relating to official registration,

contact details for electronic communication or communication by mail, and

c) data of the legal representative.

The following shall be attached to the notification in an electronic form:

a) detailed description of the transaction,

b) detailed description of the transaction aimed at acquiring ownership, acquiring ownership of a bond, acquiring a right to usufruct, acquiring a right to operate and of the relevant and substantial circumstances therefor,

c) documents created in connection with the transaction and serving as the basis of the transaction.

The Minister’s decision

The Minister shall send a written notice in an electronic form of the receipt of the notification without delay, but no later than within 8 days of receipt.

The Minister examines whether any of the circumstances set out in the Vmtv., due to which the acquisition of a share may be refused, exists, such as violating or endangering the state interest, public security, public order of Hungary in the case of acquisition by a foreign investor.

No later than within 30 working days of the receipt of the notification, the Minister

a) shall confirm the acknowledgement of the notification, or

b) shall prohibit acquiring ownership, acquiring ownership of a bond, acquiring a right to usufruct, acquiring a right to operate.

The Minister shall provide reasons for a prohibiting decision. The notifier may challenge the prohibiting decision in a non-contentious administrative proceeding.

Timing and EU rules

The notification obligation applies to Transactions concluded until 30 June, 2021.

The fulfilment of the notification obligation is monitored by the Minister; in the event of non-compliance with the notification obligation, the notifier may be subject to an administrative fine of the amount specified in the Vmtv.

An application for registration in the register of shareholders or register of members of a strategic company may be submitted only after acquiring the confirmation of the acknowledgement.

A contract, uniliteral declaration or adopted resolution,

1. which is in violation of the provisions of subchapter 85 of the Vmtv. or
2. in respect of which the Minister has issued a prohibition decision shall be null and void.

In March 2019, the EU adopted Regulation No. 2019/452 on establishing a framework for the screening of foreign direct investments into the Union (“Regulation”). Under the Regulation, EU member states might uphold their existing screening mechanisms for foreign direct investments and they might introduce new mechanisms as well. The Regulation only establishes the main requirements of the screening mechanisms, e.g. the rules and the procedures shall be transparent and there shall be no discrimination among foreign investors. The Regulation shall be applied from 11 October, 2020.

Member states had to notify the European Commission of their existing screening mechanisms by 10 May, 2019. Member states shall also notify the Commission about their newly adopted screening mechanisms and about the amendment of the existing mechanisms as well. 

The first screening mechanism for foreign investments has been introduced in Hungary by Act LVII of 2018 on Controlling Foreign Investments Violating Hungary’s Security Interests and by Gov. Decree No. 246/2018. (XII. 17.) on the execution of Act LVII of 2018, which entered into force on 1 January, 2019. The Act lists those activities, which are restricted for foreign investors, e.g. the manufacture of arms and ammunition and the manufacture of military equipment subject to authorization; or services covered by the Act on Electricity.

For the time being Act LVII of 2018 on Controlling Foreign Investments Violating Hungary’s Security Interests; Gov. Decree No. 246/2018. (XII. 17.) on the execution of Act LVII of 2018 and the Vmtv. regulates the screening mechanisms for foreign investments in Hungary.

By Peter Berethalmi, Managing Partner, and Zora Lehoczki, Associate, Nagy és Trócsányi

Lakatos Koves & Partners has advised Innobyte on the sale of a majority stake in the company and its Innoware subsidiary to IT company 4iG. Following the approval of the Hungarian Competition Office, the transaction closed in October. Kertesz and Partners reportedly advised 4iG on the deal.

According to LKT, “Innobyte specializes in contact center services, business intelligence, test automation, AI development, and database solutions. It is active in telecommunications, the automotive industry, healthcare, agro-informatics, public administration, financial and banking sector IT, and church digitization.”

LKT’s team included Counsel Adam Mattyus.

LKT did not reply to inquiries about the matter.

As of 1 September 2020, Hungary closed its borders to non-Hungarian citizens again. The rules abolished the tricolour system of green, yellow and red countries qualifying literally all countries as red. The rules introduced then – by a recent legislative amendment – remain in force until 1 December 2020.

Parallel to the above and following other European countries, as of 4 November 2020, the government introduced new restrictions, including the limited stay at home order between 00:00 and 05:00 and closed all music venues and nightclubs. Bars and restaurants may remain open until 23:00 but everyone should wear masks except for the period of eating and drinking.

In addition, other rules were introduced to make sure social distancing is kept, e.g. although theatres and cinemas may remain open, too but only every three seats could be occupied while seats behind each other may not be occupied either.

What do the restrictions mean? Do they mean that you are not allowed to travel abroad neither for pleasure, nor for business purposes, let alone to the countryside early in the day? The law recognizes a number of exceptions, i.e. the short answer is yes, you are allowed to do these things taking into account the conditions pertaining thereto.

Travel rules in a nutshell

Hungarian citizens may return to Hungary from whichever country but will face 10-day quarantine unless tested negative for Covid-19 twice (PCR test). Non-Hungarian citizens having permanent residence in Hungary and those who are entitled to stay in Hungary for more than 90 days are to be treated the same way as Hungarian citizens.

The same rules apply to professional athletes who are members of Hungarian sports organisations, employees of Hungarian cultural organisations and persons participating in an international sports event held abroad by an invitation or delegation issued by a Hungarian sports organisation, if they enter Hungary after participating in an international sports or cultural event held abroad.

Foreign citizens (not listed above) may generally not enter Hungary. By contrast, the government decree recognises exceptions, for example in the case of commuters from a neighbouring country or in the case of a verifiable reasonable cause (e.g. compulsory court procedures, funerals, weddings or studies, and additional exceptions for those participating in sports or cultural events). In other words: the desire of going on holiday may not be a basis for travel but an important family occasion, official tasks or sports/cultural events may be a valid reason for that. Persons participating at such events must wear face masks, failure to do so may result in severe sanctions and fines.

Business travel

Similar to the restrictions introduced during the first wave of infections, business travels still enjoy a beneficial exception. Who is allowed to enter Hungary in connection with the activities of a company? Only the foreign managing director, other directors or even blue-collar employees?

Employees and representatives of entities having an affiliated company in Hungary may enter Hungary without any further restriction. Upon crossing the borders, the business purpose of the travel (e.g. by presenting an employment contract or invitation letter) must be substantiated. On the other hand, travellers are not expected to present proof of the legal relationship between the respective companies, but ideally such a relationship should be apparent from the documents they are carrying. Consequently, both the directors (managers) and blue-collar workers may enter Hungary upon due verification of the business cause.

The same applies to Hungarian citizens leaving Hungary for business, i.e. they may return to Hungary without any restriction if they prove upon returning that the trip was for business purposes.

Travelling during the night: is it allowed?

Reading the new rules, a further question arises: what should travellers do if they arrive at night or early morning?

The law treats employment and business related travel as a key exception from the rules: for the purpose of work, going to work from home (or a hotel) and vice versa does not infringe the limited stay at home order. It follows that for business purposes not only cross boarder travelling is allowed but is also possible to travel during the permitted hours. This also covers the case where the non-Hungarian manager’s flight arrives late at night, i.e. no restriction and the manager is free to attend to the hotel reserved.

By Daniel Gera, Counsel, and Alexandra Bognar, Attorney at Law, Schoenherr

Handover of pubic investment – creating access roads, utilities, etc. – to the local municipality or to the state for free is required in many cases by law in Hungary. According to the current interpretation of the tax authority and courts in Hungary, such handover triggers VAT payment obligation for the real estate investor (given that VAT was previously deducted in this regard). Since – in most cases – the real estate investor is unable to charge the VAT to the municipality or the state respectively, VAT was practically its loss in such cases.

The latest judgement of the European Court of Justice (ECJ – C-528/19 Mitteldeutsche Hartstein-Industrie AG), however, should overwrite the Hungarian VAT treatment of free of charge public investment transfers.

The ECJ examined the VAT treatment of public utility transfer in connection with the extension of a public road to a limestone quarry in Germany. In the given case, extension of the municipal road in question was essential, both from a legal and practical point of view, for the operation of the quarry. Therefore, in such circumstances, the ECJ confirmed one hand that input VAT is deductible on costs incurred in connection with public investments. In addition, it established that free transfer of public investment does not necessarily trigger VAT payment obligation for the investor, provided that the investment is used (partly) in connection with its own economic activity.

In light of the above, it is expected that the VAT treatment of such transactions should be reconsidered in Hungary as well. If so, output VAT paid previously on such transfers may be available for refund within the limitation period of 5 years, even back to the last VAT reporting period of 2014.

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

Some experts say that “data is the new oil,” but oil can catch fire easily without proper handling. When you hear concerns about the collection of personal data, you might first associate them with data protection regulations, but competition law can also seriously affect your business. Competition authorities have intervened recently against platforms by using patterns that might be widely applied to other companies. Is this just the beginning? Who is in danger?

The phrase “data is the new oil” is used frequently because data has started to mean power – a meaning that oil used to enjoy. In recent years, personal data has become the most valuable kind of data, which has also led to increasing market power in a new area of economic competition. Increasing market power has also drawn the attention of government agencies, which require special responsibility be taken to ensure that it will not be abused or misused. The main problem here is that there is no clear case law on what these expectations mean in practice.

This problem is being handled in different ways. European privacy regulators have created a new regime, the General Data Protection Regulation, and some experts continue to urge governments to introduce new regulatory powers (see, for instance, the UK’s Competition & Markets Authority). The other alternative is to fit the problem into an existing regime. This latter group of competition authorities concluded that the alleged misuse of powerful data could lead to two key problems: (i) abuse by potentially dominant companies; and (ii) consumer behaviour being falsely influenced, even if the company is not dominant.

From this perspective, it is perhaps not surprising that – similar to privacy challengers – competition authorities also focused on one of the world’s largest databases: Facebook. All over the world, Facebook has been investigated and several times has been found liable. These cases can be considered pilot projects for the future. The two competition authority approaches described above are adequately reflected in these Facebook investigations. The primary ground-breaking abuse-of-dominance decision came from Germany, and the Hungarian authority recently confirmed a consumer-misleading case. These two cases, considered together, help us to foresee a new era with more concrete expectations.

The German competition watchdog banned Facebook for combining user data from various platforms and using them for its advantage. In the authority’s view, Facebook forced consumers to agree to vague data collection from both within and outside its platform (e.g.,  from Instagram, WhatsApp, and third-party sources). Although the decision is under judicial review, so far it seems that the courts will support the watchdog’s position, as Germany’s highest court last month approved the enforcement of the interim decision.

The Hungarian competition authority went further and fined Facebook for misleadingly advertising that “Facebook is free and always will be.”  Contrary to this promise, the authority established, Facebook monetized the user information it had gathered by selling it and displaying targeted commercials. Therefore, the Hungarian body held that Facebook was not, in fact “free,” as users paid for the service with their user data. This action follows the European Commission’s earlier procedure resulting in the addition of more clarification to Facebook’s terms regarding its use of data. The Hungarian competition authority has followed the same pattern consistently, and it has initiated a similar investigation against Viber this year to determine whether it is indeed free of charge.

Given the above, we can easily conclude that if you collect and monetize data – if, for example, you are a FinTech company that collects purchase data and then sells and targets direct advertising out of this information without its consumers’ prior consent, or a drugstore that gives access to free promotions, but requires consumers to complete questionnaires to be used in the future – you might be at risk..

Although it is almost impossible to predict the next steps, we can be sure that competition authorities are among the strictest enforcement bodies with adequate toolkits. In the future, we anticipate that these competition authorities will act even more effectively, levy ever-higher fines, and require adequate preventive steps from the relevant companies in response to these new challenges.

By Dora Petranyi, Partner, and Szabolcs Szendro, Senior Counsel, CMS Budapest

This Article was originally published in Issue 7.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.