Category: Hungary

The Hungarian government introduced a state of emergency in March and took several extraordinary measures to mitigate the economic consequences of the coronavirus crisis. These measures heavily affected the Hungarian economy and legal system. Since the Hungarian government revoked the state of emergency, it is time to summarize the relevant legal background.

Healthcare emergency

Act No. LVIII of 2020 introduces fundamental changes to the legal framework applicable to the measures aimed at the protection against epidemics. In compliance with its authorities set forth in the Constitution, at the time of the outbreak of Covid-19 in Hungary, the government declared a state of danger for a period of fifteen days. In the framework of the state of danger, the government was entitled to adopt, without the involvement of the Parliament, extraordinary measures. Following the fifteen days’ period expired, the Parliament declared the extension of the state of danger, thus entitling the government to continue exercising extraordinary powers in order to address the effects of the pandemic beyond the fifteen days’ deadline.

Act No. LVIII of 2020 introduced the concept of healthcare emergency, that was formerly unknown to the Hungarian legal system. Healthcare emergency may be declared by the government upon the recommendation of the national chief medical officer, provided that an epidemic emergency situation occurs. The concept of epidemic emergency includes diseases that are characterised by WHO as pandemics, or unexpected cases where the capacities of the healthcare system is overloaded. The duration of the healthcare emergency is six months. However, if the government deems it reasonable, the government may extend the duration of emergency for an unlimited period.

Based on the above, the government may, within its own discretion, declare and maintain a healthcare emergency without any parliamentarian approval or control. In case a healthcare emergency is declared, the government is entitled to take a wide range of extraordinary measures in order to terminate the state of emergency. Among others, the government may limit or prohibit domestic and international personal and goods traffic, the visiting of various institutions, may introduce social distancing provisions and special rules applicable to education activities, and may introduce exemptions and facilitating measures in connection with public procurement procedures. In addition to the measures specified in detail in Act No. LVIII of 2020, the government may be granted additional decision making powers by way of other acts adopted by the Parliament. Thus, it cannot be excluded that the powers of the government will be further strengthened in the future in case a healthcare emergency situation occurs, e.g. amid a potential second wave of Covid-19.

How financings are affected

The Hungarian government introduced one of its most significant measure in March, when a moratorium has been introduced for all retail and corporate financings. Under the moratorium, capital, interest and fee payment obligations for all loan, credit and financial leasing agreements have been suspended in both the retail and corporate sectors. Despite the end of the state of emergency, the moratorium will continue until 31 December 2019.

Along with the moratorium, the annual percentage rate of unsecured consumer loans concluded from 19 March onwards has been limited. The annual percentage rate of such loans shall be the maximum base rate of the central bank plus 5 per cent. The limitation to the annual percentage rate also remains applicable until 31 December.

Avoiding physical contact

On order to reduce the number of physical contacts, the government decided to amend the rules applicable to contactless payments. Thus, in case of contactless card payments, the limit for strong customer authentication (i.e. PIN entry) is raised from HUF 5,000 (approx. EUR 14) to HUF 15,000 (approx. EUR 42). This increased limit remains applicable until the end of the year.

Relief under lease agreements

Since the pandemic had an enormous negative impact on several industries, the government decided to provide them with relief.  The government prohibited lessors to terminate lease agreements concluded with tenants, who are providing touristic, catering, leisure, gamble, film industry, performing artist, event planning and sport services. This restriction is applicable until 30 June.  Also, rental fees could not be increased by landlords regardless their contractual rights to do so, but this restriction has been removed with the revocation of the state of emergency.

Procedures concerning insolvent debtors

Enforcement actions, like auctions, onsite enforcement procedures, evictions etc., were halted during the pandemic period. After 1 July, such procedures can be initiated and/or will be continued.

Under the measures, liquidation procedures may be initiated only if (i) the debtor did not perform it’s payment obligations 75 days after the ordinary deadline (i.e. the deadline set forth by the lender in its payment notification), and (ii) the debt is equal to or above HUF 400,000 (approx. EUR 1,100; the general rule: HUF 200,000, approx. EUR 550). These extraordinary rules remain applicable until the end of the year.

Civil and administrative litigations

Since the courts opened their doors, the question arises: what happens to the court cases which stopped or were guided to paper-base?

The temporary rules addresses the above question and the answers distinguish on the basis whether a certain procedural action did or did not happen until 1 June 2020.

For instance, if the court has gathered all the statements necessary to close the initial / prepatory phase of civil litigations, this phase may be closed without a hearing. Otherwise – i.e. in case the parties did not submit all their statements until 1 June – the courts schedule hearings. The court may hold hearings in substantially pending cases, both in case of civil and administrative litigations.

What happens to litigations on the brinks of closure? If the court has warned the parties about adjourning the case until 1 June and the parties made their respective statements, the court renders its judgment without a hearing.

Regarding remedy and judicial review procedures in civil litigations, courts do not hold hearings if the parties were warned so until 1 June. The parties however, may request the court to schedule a hearing.

The temporary rules still contain that in case justified by epidemiological measures, hearings may take place by audiovisuals (e.g. Skype). The rule also remained that the court may exclude the public from a hearing in case it is necessary to fulfil epidemiological measures.

We can already see that the courts opened their doors and have started to schedule hearings again. We can also see that courts have implemented their own safety rules concerning e.g. keeping distance, using hand sanitizers or how long can someone wait on the court’s corridors prior to or in between hearings.

Data Protection

During the state of emergency, the personal data of people infected or likely to be contaminated with coronavirus had a primary importance to the state agencies for the sake of tracking the virus and preventing further infections. In the course of data processing activities, those agencies must have complied with the effective data protection laws. However, during state of emergency the administrative deadline in connection with the request of the rights of data subjects were suspended in such cases when the purpose of the data processing was the prevention, understanding, detection and the prevention of the further spread of the coronavirus. If the data controller has not informed the data subject concerned on the fact of the suspension, it must perform this obligation now, without delay. With regards to these requests, the administrative deadline has commenced on 18 June 2020.

The police had a significant role in the prevention of the spread of the coronavirus. Accordingly, the Government delegated epidemiological tasks (e.g. monitoring the compliance with the rules of epidemiological surveillance, separation, registration of the person concerned) in Government Decree 291/2020. (VI.17.) to the police, which necessarily imply personal data processing activities. For the sake of the effective performance of the epidemiological tasks, based on the request of the police, people exposed to epidemics and people with whom he/she had been in contact with, must transfer his/her personal and health data, telephone number and email address of the person the police is concerned about.

By Gergely Szaloki, Local Partner, Virag Palguta, Associate, Alexandra Bognar, Attorney at Law, Daniel Varga, Attorney at Law, and Dorottya Gindl, Attorney at Law, Schoenherr

The Hungarian Government promulgated a decree (229/2020) entered into force on 1 June 2020, amending the decrees on certain procedural measures in force during an emergency (74/2020.) and on certain penitentiary rules in connection with the declaration of a state of emergency (90/2020.). The amendment regulates civil court proceedings for a transitional period, since on 26 May 2020 two bills related to the termination of the state of emergency were submitted to the Parliament, which define rules of court proceedings for a longer period in the future. As a result, the rules of this decree will only be used until the two bills mentioned above are accepted by the Parliament.

According to the decree, the courts reopened on 1 June and the provisions of the Code of Civil Procedure (both the older and the newer version) are to be applied again with certain differences. If justified by epidemiological measures, hearings can also be held by means of an electronic communications network or other means capable of transmitting electronic images and sound. This may be the case if the party to be heard in person at the trial is under house quarantine, but this rule may also apply in the event of an exacerbation of the epidemic risk, possibly in the event of a second wave. The court will then be able hold a hearing as a “videoconference”.

The court may exclude the public from the hearing also in the case if this measure ensures that the epidemiological safety is complied with in the courtroom. As a general rule, there is still no place for a procedural act to take place in an area that is subject to an epidemiological safety measure (i.e. quarantine).

A party acting without a legal representative will continue to have the privilege of being able to bring an action without the use of a standardized form and will receive detailed education from the court in the event of any deficiencies. Special transitional rules apply to pending cases in which proceedings were conducted under the epidemiological rules in force between 31 March 2020 and 1 June 2020.

The above rules mean that civil court proceedings will return to their previous normal with some transitional rules that allow courts to adapt to the risk of the pandemic as necessary. It is worth to point out that the number of remote hearings in domestic courts increased by almost 60% in one month. While 834 remote hearing were held in February 2020, in March there were 1314. The number of judges using the system also increased from 287 to 350. The nationwide remote hearing system has a total of 184 endpoints, meaning there is at least one meeting room equipped with telecommunication devices in all districts, courts, tribunals and in the Supreme Court as well. Not only does this system play a significant role in the smooth conduct of procedures during the coronavirus pandemic, but it also will be able to aid the courts in the future.

In addition to civil court proceedings, the decree also affects criminal proceedings and law enforcement. All in all, the functioning of the courts and law enforcement have not yet fully returned to their previous normal, but a number of special rules which were issued for the latter period of the pandemic are to be changed or to be abolished. 

By Levente Csengery, Partner, KCG Partners Law Firm

On 28 May 2020, the Hungarian Government adopted amendments to the laws on company liquidation and forced deletion procedures to cushion the impact of the global coronavirus pandemic on the economy.

1. Changes related to liquidation

Liquidation is initiated when a company is unable to meet its financial obligations and pay off its debt. However, in Hungary, the courts do not apply an actual insolvency test before ordering liquidation but check only whether certain criteria have been met.

The criteria examined by the court include, among others, whether the debtor has failed to pay upon an enforceable judgment or an undisputed contractual debt within 20 days after the due date and despite a written warning by the creditor, in which the creditor must have granted an additional payment deadline. As a result, liquidation is often used as a debt collection method.

The new rules concern cases where liquidation is initiated by the creditor based on the fact that the debtor has not contested the debt.

As seen from the above comparison, the new rules were adopted mostly in favour of the debtors, while the only good news for creditors is the shortened grace period the courts may allow.

2. Ex officio company terminations and forced deletion procedures are suspended until 31 October 2020

As of 29 May 2020, all ex officio company termination and forced deletion procedures opened due to serious noncompliance are suspended until 31 October 2020. This is important, because if such procedures are completed by the court deleting the company in question this may lead to various negative consequences including, for example, the piercing of the corporate veil, personal liability of managing directors and the ban on the managing director being reappointed.

Below we summarise the three types of cases affected:

• In Hungary, the court of registration is not merely a registering body but is also responsible for reviewing the companies’ corporate establishment documents and other subsequent shareholders’ resolutions for compliance with relevant laws. The court of registration also has the right to examine the companies’ operations if it learns from an interested party or another court or authority about a reason to conduct a review.
   
• If during such a review the court discovers a serious noncompliance which the company fails to remedy upon notice by the court, the court will declare the company terminated and initiate a forced deletion procedure. However, as of 29 May 2020, the court may not declare any company terminated. Furthermore, forced deletion procedures which were pending on 29 May 2020 are automatically suspended until 31 October 2020. This means that companies which are subject to such a procedure will get a second chance to prove – before 31 October 2020 – that they have remedied the noncompliance and can therefore avoid forced deletion.
   
• If the tax authority has initiated the termination of a company due to the forced deletion of the company’s tax registration number (which occurs as a sanction imposed by the tax authority), and this procedure is already pending on 29 May 2020, the procedure will automatically be suspended until 31 October 2020. If the company has already been declared terminated and the procedure is already in the phase of a forced company deletion procedure, the procedure will also be suspended until 31 October 2020.
   
• If, after 29 May 2020, a forced deletion procedure could be initiated because the company was unable to complete its winding-up within three years, it will get a second chance to complete the winding-up by submitting a deletion request to the court by 31 October 2020 and can therefore avoid forced deletion.

As we can see, liquidation and forced deletion procedures both involve a court process aiming at the termination of the company in question either due to insolvency or some sort of noncompliance. The law-makers’ intention was to offer rules preventing the termination and forced deletion of companies during the pandemic or due to a reason potentially arising from the burdensome situation brough about by the pandemic. The new rules therefore remain in force until the state of emergency is officially withdrawn. While companies on the verge of shutting down cannot be saved by legal measures alone, the new rules still offer some (temporary) room for existence.

By Kinga Hetenyi, Local Partner, and Alexandra Bognar, Attorney at Law, Schoenherr

The Hungarian Government issued a new decree on 25 May 2020 (“Decree”), in which restrictions on certain transactions involving foreign investors are introduced.

The subject of the Decree are certain transactions affecting so-called strategic companies, which require both notification to and acknowledgment by the Minister for Innovation and Technology (the “Minister”) as a precondition to implementing a foreign investment in Hungarian companies.

The Decree defines that foreign investors are (natural or legal) persons who are registered in (i) a country which is outside of the EU, EEA or Switzerland; or (ii) the EU, EEA or Switzerland, if they are under the majority control of (natural or legal) persons registered in a country which is outside of the EU, EEA or Switzerland.

The Decree lists more than 20 business sectors that are considered to be strategically important for the purposes of the restrictions. Any limited liability company or a public / private company limited by shares registered in Hungary, whose registered principal or ancillary activities fall into the list of activities in the selected sectors, is to be considered a “strategic company”. In particular, the following sectors and activities are affected: energy, transportation, tourism, health care, communications, finance industry, food sector and agriculture, information technology and building sector.

The decision of the Minister cannot be appealed, but may be subject to a challenge before the Metropolitan Court of Budapest, which has 30 days to deliver its decision. If the court establishes that the rejecting decision was unlawful, it will set aside such decision and order the Minister to conduct a new procedure.

The Decree sets out various sanctions in case of non-compliance. Any contract, declaration or corporate resolution which breaches the provisions of the Decree or the negative decision of the Minister must be null and void. In case of the absence of the Minister’s acknowledgment, foreign investors cannot be registered in the members’ list or the shareholder register of the respective company and thus cannot exercise ownership rights. If the Minister establishes that a foreign investor does not comply with the notification / acknowledgement requirement, the Minister may also impose a fine.

The new restrictions are applicable immediately, as of 26 May until 31 December 2020.

By Adrienn Megyesi, Attorney at law, KCG Partners Law Firm

In Hungary, the defense against the epidemic has entered into a phase in which measures set out by the government for reducing or preventing the spread of the epidemic are gradually relaxed. The curfew has been lifted, all stores may open and may be visited by customers under certain conditions. However, the rules for maintaining social distance – keeping a distance of 1.5 meters from one another, wearing mask, scarf or shawl when shopping or traveling by public transport – still apply.

At the same time, companies are considering reopening their sites and offices, or have already started the process. Below, we highlight the most important data privacy considerations and obligations for employers, according to the potential phases of a reopening process.

1. Planning

Due to the uncertainty emerging at various levels caused by the coronavirus epidemic, it is of paramount importance to have a good plan in place to orchestrate the reopening of workplaces. The plan should take into account all of the already known factors and should create “open-ended”, sufficiently flexible rules, which allow for rapid adaptation to the ever changing circumstances. However, such a plan may not be realized, if the necessary information and data are not available to management, if the communication channels are not functioning adequately, if there are no procedures in place for monitoring the implementation of the plans, and if there are no individuals assigned to each task bearing responsibility for the implementation.

• Companies may obtain the necessary information from numerous sources. Provisions of applicable legislation, the guidance of authorities, the business characteristics of each sector, specialties due to the geographical location of the business unit, characteristics relating the size of the business unit, as well as the health status or the willingness to work of the employees may all be counted as relevant information. Nor should it be forgotten that, under the general rules of labor law, employees are required to inform their employer of any circumstances which may affect their employment. However, such information may contain personal data or even special categories of personal data (e.g., health data).
• Stockpiling personal data without legitimate purpose is not permissible even under the current uncertain circumstances. The principle of purpose limitation and data minimization must be applied during planning for reopening. In the course of collecting and processing data, companies may partially or entirely rely on machine related solutions, and they must consider further applicable rules if personal data is also concerned in the process.  
• In line with the principles of privacy by design and privacy by default, data security must be ensured from the planning phase and companies must opt for solutions ensuring a security level proportionate to the risks.
• In line with the applicable laws, besides the enforcement of general rules of labor law and equal opportunity, it is a priority to ensure the protection of the health and safety of the employees. Therefore, in addition to business considerations, compliance with requirementsgoverning health and safety at work should be of key importance to the planning, including the enforcement of data protection rules when choosing specific health and safety related measures.
• All employers must ensure safe and healthy work conditions and that working practices do not create undue risks to employees. The appropriate measures should take into consideration the results of the re-assessment of the risks associated with the changed work conditions, the re-evaluation of workflows and may enable the involvement of occupational safety and health professionals and employees’ representatives.
• Under the relevant government decrees in effect, employers are entitled to take necessary and justified means to monitor the employees’ state of health during the state of emergency and for 30 days after its termination. However, applicable legislation does not define which measures are considered necessary and justified, therefore employers must consider carefully all of the relevant factors on a case by case basis, and they must be able to justify their decision appropriately in line with the principle of accountability.
• When choosing the appropriate measures for achieving the legitimate purpose – i.e. ensuring safe and healthy work conditions – employers must prioritize those measures that do not involve the processing of personal data. Solutions relying on anonymous data also meet this requirement as anonymous or anonymized data that belong to unidentified or unidentifiable persons or persons who cannot or can no longer be identified by these data fall out the scope of data protection rules.
• If achieving the legitimate purpose requires processing personal data, then the employer must favor solutions presenting less risk for the privacy of its employees and visitors.
• Employers are obliged to provide an appropriate legal basis for the lawfulness of the data processing. It is important that, in an employment relationship, the employees’ consent can be relied on only to a very limited extent as an appropriate legal basis, and primarily only where the employee is by no means affected adversely by refusing to consent.
• The Hungarian Data Protection Authority (“DPA”) in its guidance on processing data related to the coronavirus epidemic requires the basic rules of pandemic data processing to be set out in the employer’s pandemic/business continuity action plan, which may cover rules applicable to the reopening of business units as well. It is recommended to record in the pandemic action plan the findings on the prior assessment of, and the measures mitigating, the data protection risks of certain health and safety measures, the responsible personnel and the procedural rules for implementing and monitoring the action plan, furthermore the communication channels which enables the information to flow in a fast, accurate and up-to-date manner between the employer and employees.
• The rules of the pandemic plan should be in line with the employer’s other internal rules, including those applicable to data security.

2. Implementation

Subsequent to a planning realized with due care, the employer must implement the plan and must ensure that the rules within are complied with.

• Employers may choose from numerous measures to ensure safe and healthy work conditions and working practices that do not create undue risks to employees. In line with the above detailed principles, the available solutions may not require the processing of personal data (e.g., setting hygiene standards, sanitizing work equipment and offices, providing disinfectants, application of visual signs to maintain social distance and using glass wall for the protection of receptionists), but also, measures may require the processing of personal data provided that proper justification is in place. Such measures may include the following: monitoring the health condition of employees by questionnaires/self-assessment forms, temperature checks on employees and visitors, COVID-19 testing and mobile application alert mechanisms.
• Some measures may present a higher risk for the privacy of employees and visitors, e.g., mobile applications that register and send alerts upon coming in close proximity with an infected person or certain data processing activities applying automated decision-making. In these cases, the employer may be obliged to carry out a data protection impact assessment. Further to this, the employer may be obliged to consult with the data protection authority in advance, if it is required due to the risks of the intended data processing.
• In case the legal basis of the data processing is the legitimate interest of the employer or any third party (e.g., in case of using questionnaires), the employer must perform a legitimate interest balancing test justifying that its interest prevails over the interests, fundamental rights and freedoms of the data subjects.
• The employer is obliged to request the opinion of the works council on the planned measures or internal rules, if such council operates at the employer, 15 days prior to the adoption of the respective decision if the measures or internal rules would affect a larger group of employees.
• In any case, the employer must provide information in advance to both employees and visitors on the rules of the data processing. The principle of accountability requires that the employer should be able to demonstrate the performance of such obligation, therefore the employer should inform the data subjects in writing (including by way of electronic means) and should demand the expressed acknowledgement of such information.
• It is important, that in line with the guidance of the DPA, employers are not entitled to conduct health screenings (e.g., temperature checks, COVID-19 testing). This should be reserved for health care professionals or another person under their professional responsibility (e.g., nurse, designated employee of the human service undertaking with a special obligation of confidentiality). Employers are only entitled to be advised of the results of such screenings. Health screenings are subject to further data protection related requirements.
• Processing special categories of personal data requires increased attention to the security requirements when storing such data.
• As regards the rights of the data subjects, it is important to mention that under Government Decree No. 179/2020 (V. 4.) the exercise of these rights in relation to data processing related to the epidemic is limited and employers may only respond to such requests after the termination of the state of emergency.
• New data processing activities related to the reopening of workplaces must be recorded by the employer in the company’s register of data processing activities.

3. Adaptation

Employers must continuously assess their data processing activities taking into account the  spread of the coronavirus, changes in the legislative environment and other factors affecting their operation in general, and align the pandemic action plan with these changes as necessary. The assessment should cover the examination of those circumstances that required the data processing to be carried out in the first place, or whether there are solutions less intrusive, presenting less risk for the privacy of the data subjects. If the purpose has been achieved and the employer no longer needs the personal data (nor any law prescribes its mandatory retention), the personal data must be erased or anonymized.

By Csaba Vari, Head of Privacy, and Agnes Kadar, Associate, Baker McKenzie

The Government of Hungary has proposed an amendment to Act XLIX of 1991 on bankruptcy and liquidation proceedings (Insolvency Act) aiming to modernise the procedural rules of insolvency proceedings, for example by introducing communication via email and video conferences.

Technical reliefs 

Communication and making legal declarations via email (in compliance with adequate formal requirements) facilitates and speeds up the correspondence between lenders and between lenders and debtors, not only in the current pandemic, but also in general. To communicate via email, the parties must submit their email address to the administrator. Proceedings are modernised further by enabling lenders to hold their meetings by electronic means, where there is no need for the parties to be present together. This leads to big savings of time and money, especially when foreign lenders are involved. The parties must identify themselves in the manner requested by the liquidator. While the technical requirements are broadly defined, it is essential that real-time video and audio communication is ensured during videoconferences. 

Promoting settlements

An important practical change is that the debtor cannot amend its reorganisation plan if it is not supported by at least a quarter of the lenders. This rule aims to incentivise debtors to provide lenders with a feasible reorganisation plan and not drag out the procedure. In addition, concluding a settlement in a liquidation proceeding will be easier for lenders since they can vote on the terms of the settlement in writing, unless the debtor specifically asks to hold a settlement meeting.

Reliefs concerning deadlines

In liquidation proceedings, lenders or the liquidator may challenge certain of the debtor’s transactions as set forth by the Insolvency Act (such as fraudulent, preferential or undervalued transactions). Pursuant to the current rules, deadlines to challenge these transactions commence only after the lender or the liquidator become aware of such a transaction, but there is an absolute deadline after which the transaction can no longer be challenged. The proposal enables lenders or the liquidator to challenge these transactions after the absolute deadline has elapsed if they only become aware of such a transaction later.

Further relief concerning deadlines is that the duration of the bankruptcy protection under which the debtor has a payment moratorium increases from 120 to 180 days. In addition, the deadline to hold a settlement meeting increases from 60 to 90 days.

Business organisations with strategic importance

In this respect, the amendment brings two important changes. On the one hand, the scope of strategically important business organisations will be broadened to cover water management, public utility management and service providers, public health, transportation, communications, industrial security, research and development, infrastructure development or infrastructure management companies. 

On the other hand, in case of the liquidation of strategically important businesses, when selling these companies’ assets the Hungarian state has pre-emption right to buy them through its designated organisation. This new rule fits well into the current regulation.

In summary, the changes introduced by the proposal are progressive and will probably facilitate the proceedings for the parties, especially the rules concerning electronic communication.

By Gergely Szaloki, Partner, Schoenherr

While there were still as many as 60 types of tax in Hungary five years ago, this number was reduced to 54 by the end of last year. This process was interrupted by the recent introduction of crisis taxes. It remains to be seen whether this trend will now be reversed.

While the number of tax types has been reduced over the past five years, the structure of the tax system has remained more or less unchanged. Three major tax types – VAT, social contribution tax, PIT – continue to generate more than half of the tax revenues, of which VAT alone accounts for 30%. Thanks to measures improving the efficiency of tax collection, including the connection of invoicing programmes to the tax authority, central budget revenue from VAT increased by more than 15% last year to reach a record high.

What’s gone

Last year, we finally said good-bye to our first tax type bearing a woman’s name, “eva”. It’s important to note that this was our first simplified tax type designed to move beyond the usual holy trinity of corporate tax, personal income tax and VAT, by which legislators recognised that it makes sense to impose different taxes on small businesses to those levied on companies with billions in revenue.

The spiritual heritage of “eva” is carried on by the “kata”, “kiva” and, to a smaller extent, the “ekho” tax. In fact, not surprisingly, interest in these types of taxes has markedly increased over the past year; central budget revenue from “kata” rose 27% and revenue from “kiva” climbed 70% from a year earlier. Although revenues from these so-called small taxes represent a small part of the budget for the time being (their combined share is less than 2%), they seem to fulfil their tax policy goal.

What barely exists

An interesting colour patch on the palette of the taxes is the advertising tax. This tax type still exists even though its rate has been temporarily reduced to 0%. Even if this tax type is not generating any revenue for the state coffers at the moment, it’s worth keeping an eye on it: according to old tax wisdom, it’s much easier to increase the rate of an existing tax than to introduce a new one.

And what’s just arrived

Already this year’s crop is the “one and a half” new taxes introduced recently, due to the state of emergency. One of the new taxes is the special retail sector tax returning in a dusted-down robe, which – although it started out as a temporary tax – now looks like it’s here to stay with us for a long time to come. However, our other tax introduced due to the state of emergency, the additional tax imposed on banks, cannot in theory be considered a new type of tax as it only added a new tax bracket to the existing tax. From these two taxes, the government projects a combined revenue of HUF 91 billion, which is roughly the same amount as that expected to be collected from the “kiva” tax during the year.

Which way will the scales tip this year?

The newly introduced retail tax also indicates that it’s unclear how the number of tax types will develop this year. Social security contributions are scheduled to be consolidated from July, which will reduce the number of tax types. This merger is certainly a forward-looking move as it’s based on the recognition that it’s not worth splitting taxes according to the way revenue generated by them is used, provided that their tax base is otherwise identical.

At the same time, in the current crisis situation, it wouldn’t be surprising if the legislator wanted to cover the cost of crisis management with additional new tax types. The longer the state of emergency and the related economic crisis last, the more likely it is that new types of taxes will magically appear on the palette.

By Tamas Feher, Partner, Jalsovszky

The coronavirus pandemic has been affecting both domestic and international trade and commerce around the world. States have reacted with robust mitigation measures, including closing borders, implementing a range of travel bans and engaging a myriad of internal domestic health and wellbeing procedures. These measures are causing unprecedented disruption to the trade, transport, labor market, production and supply chains.

COVID-19 and the construction industry

The impacts of COVID-19 and its mitigation measures on domestic and international trade and commerce is already palpable. Companies globally are being impacted through the labor market, production and their supply chain. The construction industry is heavily influenced worldwide by Chinese-made goods and materials, including everything from structural steel (China is the number one steel producer and exporter) and other building materials (copper, iron ore, zinc, nickel) to cabinet caseworks and fixtures. Next to these standard materials, China is also the largest producer of photovoltaic power since 2015. Finding and establishing alternative supply chains could mean higher material costs and potentially slower project completions. Given the facts that the construction industry heavily relies on human workforce and that China’s manufacturing output is declining, the possible consequence appears that many companies could find themselves either unable to perform their contractual obligations in time or at risk of not being able to do so at all in the future.

Force Majeure in general

Force Major (FM) clauses are included in long-term contracts as a way for the parties to delay or take a break in their performance obligations or to terminate the contract in extreme circumstances, typically extraordinary events beyond human control such as wars, riots, crimes, or natural calamities which would legitimately excuse their performance of the contract. Most  building  contracts have  reasonably  detailed definitions  of  what  will  amount  to  a  FM event. Although the precise terms may vary, the general framework of FM in most construction contracts is similar. However, there are key differences in the treatment and recognition of FM across different jurisdictions.  

Force Majeure in Civil Law Systems

Contrary to English law, where courts do not imply FM in the absence of an express contractual provision, civil law systems have a more developed concept of FM and may, in appropriate circumstances, excuse non-performance of a party based on FM, even in the absence of an express FM clause. In countries with a codified legal system, the civil code generally provides that a party will not be considered to be in breach of contract, and the performance of its contractual obligations will be suspended, if and to the extent that it has been prevented from carrying out those obligations by virtue of an event which was unforeseeable, is not attributable to any of the parties and was unavoidable. It is, therefore, important to consider the potential applicability of FM in the context of the governing law of the contract. Regardless of the law system, it is a mandatory requirement that the unforeseen FM event has to occur after the date of entry into force of the contract.

Force Majeure Certificates Issued in China

On 30 January 2020, the China Council for the Promotion of International Trade (“CCPIT”) announced that it would offer “force majeure certificates” to help affected enterprises minimize losses arising from COVID-19. The expectation was to help them in imminent disputes with foreign counterparties emerging because of the actions being taken then by the Chinese government. By the end of April 2020, more than 7,000 FM certificates covering contracts worth a combined USD 98 billion had been issued. To apply for the certificate, companies must provide legitimate documents such as proof of delays or cancellation of transportation to the agency. CCPIT has clarified that the clause does not excuse a party’s non-performance entirely but only suspends it for the duration of a period. However, there is no guarantee that a government certificate will make any difference, in fact, it might give Chinese companies a false sense of comfort. As to the future, it is likely that parties will continue to rely on FM certificates when invoking FM, and there appears to be some degree of international consensus that, while these certificates will have evidential weight, their issuance will not be determinative of the existence of a FM event.

Unforeseeable event?

Since FM clauses in general require that the event was unforeseeable at the time the contract was entered into, some commentators argue that after previous pandemics (e.g. SARS in 2003 or H1N1 in 2009), it may have been foreseeable that a similar virus could occur again and the parties may not be entitled to relief. It may be interesting to note that Hungarian courts had accepted the H5N1 (bird-flu) epidemic of 2006 as FM, e.g. where the party either could not deliver the animals due to transport restrictions, or simply had to slaughter them out of precaution.

It is important that even if the outbreak of epidemics may not be seen as an unforeseeable event, due to the unprecedented scale of the lockdowns it is likely that the courts will accept that this outbreak does not constitute a foreseeable contingency such that reasonable steps could have been taken by the party affected by it.

The party seeking to invoke a force majeure clause in its contract will need to prove that there are no alternative means for performing its obligations, or that it has taken all reasonable steps to avoid the operation of the clause. Increased costs or hindrances such as getting building materials from alternate sources, or hiring different manpower alone will not be sufficient to prevail on a claim of FM. Just because a contract has become more expensive or even uneconomic to perform, that will not constitute FM.

Conclusion

It is clear that this is a historical time from all aspects of life, including the consideration of pandemics as FM in the construction industry. With all the mitigation measures around the world, many cases may serve as precedents for the future and there will definitely be great lessons to be learned for future construction contracts.

By Gabriella Galik, Partner, and Denes Glavatity, Associate, KCG Partners Law Firm

 

On 25 May 2020, the Government of Hungary adopted a new decree on the screening of foreign investments in Hungary (the “Decree“). The new screening regime aims to protect public security, order and health during the COVID-19 pandemic, and introduced a new approval requirement for investments into certain Hungarian companies. The screening will be carried out by the Minister of National Economy (the “Minister“). The Decree entered into force on 26 May 2020 while leaving the earlier FDI screening mechanism unaffected (see our earlier FDI screening article). As a result, two parallel FDI screening mechanisms now apply in Hungary.

The FDI screening regime introduced in 2018 is limited to a much narrower scope of companies and transactions and is overseen by the Minister of the Interior. The new screening instrument will be in force only until 31 December 2020.

Scope of the Decree

Under the Decree, investments by foreign investors acquiring an interest exceeding (i) 10 % and a value of HUF 350m (approx. EUR 1m), (ii) 15 %, 20 % or 50 % irrespective of its value, or (iii) 25 % if acquired by more than one foreign investor, require the approval of the Minister.

A “foreign investor” is (a) a company or organisation domiciled in, or a citizen of, a state outside of the EU, the EEA or Switzerland, or (b) a company or organisation whose majority owner is domiciled in, or a citizen of, a state outside of the EU, the EEA or Switzerland. However, certain acquisitions of a majority interest require the Minister’s approval if the foreign investor is a company or other organisation domiciled in the EU, the EEA or Switzerland.

The Decree applies to investments in companies that have their seat in Hungary and at the same time:

• are limited liability or private limited or public (listed) companies; and
• operate in specified “strategic” sectors such as manufacturing of medicines, medical devices or other chemicals, fuel production, telecommunications, retail and wholesale (including motors and cars), manufacturing of electronical devices, machinery, steel and vehicles, defence industry (e.g. manufacturing and trade of arms and ammunition as well as technologies used for military purposes), power generation and distribution, services connected to the state of emergency, financial services (including insurance, brokering and other services), processing of food (including meat, milk, grains, tobacco, fruits and vegetables), agriculture, transport and storage, construction (including the production of building materials), healthcare, tourism (hospitality and cafeteria services), and others.

Procedural provisions and sanctions

Investments subject to the new regime require approval by the Minister. The application for such approval must be submitted to the Minister within 10 days from the date of execution of the agreement. For routine cases, a review period of 45 days is envisaged, while in more complex cases the authority can extend the review period by an additional 15 days.

The Decree provides for a standstill obligation, which means that foreign investors may be registered as a shareholder in the list of shareholders or the book of shares with the Minister’s approval.

The implementation of an investment requiring the Minister’s approval is null and void without such approval.

In addition, the proposal envisages sanctions for breaching the provisions of the Decree: a fine of up to twice the value of the transaction may be imposed on persons who were obliged to apply for the Minister’s approval.

The above is a simplified summary of the Decree. The Decree regulates the cases in which the Minister’s approval is required in a very complex manner.

By Volker Weiss, Partner, Kinga Hetenyi, Local Partner, and Adrian Menczelesz, Associate, Schoenherr

Erdos | Katona has opened its doors as a transactional boutique in Budapest.

The firm focuses on the work of Partners Gabor Erdos (the former Managing Partner of Deloitte Legal Hungary), Gyorgy Katona (who was, until the June 1st launch of Erdos I Katona, the Managing Partner of Katona Legal), Luca Bokor (the former Head of Banking at Deloitte Legal Hungary), and Balazs Varszeghi (the former Head of Energy at Deloitte Legal Hungary). Erdos I Katona also has, at the moment, three additional senior lawyers, and two junior lawyers.

According to Luca Bokor, “we believe that with this new boutique transaction-focused law firm we will be able to serve our clients more flexibly and effectively and Gyorgy is happy about the opportunity to team up and expand his firm with such recognized practitioners.”