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Lex Mundi Global Foreign Investment Restrictions Guide

Hungary

(Europe)

Contributors

Updated 03 Mar 2024
Please provide a short summary of the Foreign Investment Restrictions adopted by your jurisdiction.

Currently, there are multiple and multifold FDI regimes in force in Hungary.

The rules applicable to the screening of foreign investments are twofold given that the regulatory framework is provided by the relevant European Union regulation within which Member States may establish their own national regulations. The general legal framework of the regulation regarding the restriction of foreign investments is established by Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (“Regulation”). The Regulation provides for the EU-level rules of the screening mechanisms of foreign investments, among others it establishes the provisions applicable to the cooperation between the EU Member States and the European Commission and prescribes an annual reporting obligation for the Member States. According to the Regulation, Member States of the European Union may maintain, amend or adopt mechanisms to screen foreign direct investments in their territory on the grounds of security or public order.

In Hungary, 2 different sets of restrictive regulations were implemented in 2018 and 2022 respectively:

  1. In 2018, the general rules applicable to foreign investments were set forth by the Act LVII of 2018 on the control of foreign investments violating the security interests of Hungary (“Act 2018”) and Governmental Decree 246/2018 (XII. 17.) on the implementation of Act LVII of 2018 on the control of foreign investments violating the security interests of Hungary (“Decree 2018”). These sets of rules have been amended multiple times since their adoption. We refer to these rules hereinafter jointly as Standard Rules.
  2. However, with regard to the armed conflict taking place in the territory of Ukraine and the state of emergency declared, a new set of restrictive rules was implemented in 2022. These rules are set forth by Governmental Decree no. 561/2022 (XII. 23.) on the dissenting application of certain provisions necessary for the economic protection of Hungarian companies during the state of emergency (“Decree 2022”). We refer to these rules hereinafter as Emergency Rules. Furthermore, it shall be noted that with regard to the COVID-19 pandemic, certain special rules were also implemented in 2020 by Act LVIII of 2020 on transitional arrangements in connection with the termination of the state of emergency and on the epidemiological preparedness, however, these provisions are currently superseded by the provisions of Decree2022 at least until May 23, 2024. Therefore, only the provisions of Decree 2022 are hereby examined in detail.

The Standard Rules and the Emergency Rules use different terminology, definitions, regulatory logic and form a system of 2 parallel but separate regimes.

Both the Standard Rules and the Emergency Rules repeatedly refer to the definitions of majority influence and determining influence under Act V of 2013 on Civil Code (“Civil Code”) in order to determine whether a mandatory filing shall be made prior to the closing of the transaction (if all other criteria are met also). These terms are defined by Sec. 8:2 Civil Code as follows (emphasis ours):

(1) Majority influence means a relationship where a natural or legal person (holder of the influence) controls over 50% of the voting rights in a legal person, or in which it has a determining influence.

(2) The holder of an influence is deemed to have determining influence on a legal person if it is a member of or shareholder in that company and:

  1. a) it has the right to appoint and recall the majority of the executive officers or supervisory board members of the legal person; or
  2. b) other members of or shareholders in that legal person are committed to vote identically the holder of the influence, or they exercise their voting rights through the holder of the influence based on an agreement concluded with the holder of the influence, provided that together they control more than half of the votes.

(3) Majority influence is also deemed to exist if the entitlements referred to in Subsections (1)-(2) are ensured indirectly to the holder of the influence.

(4) Indirect control on a legal person means a relationship where a person is able to exercise influence on a legal person that has voting right in that legal person (intermediary legal person). The scope of indirect control means the percentage of control held by the intermediary legal person that correspond to the percentage of control the holder of the influence has in the intermediary legal person. If the holder of the influence controls more than half of the votes in the intermediary legal person, the control the intermediary legal person has in the legal person shall be taken into account in its entirety as indirect control held by the holder of the influence.

(5) The direct and indirect ownership interest and voting rights of close relatives shall be counted together.

STANDARD RULES

The Standard Rules focus on the acquisition of ownership by a foreign investor in an economic entity registered in Hungary with activities specified by law, either (i) directly or indirectly ownership share beyond 25% - in the case of public limited companies, ownership share beyond 10% - or (ii) determining influence as specified in the Civil Code and prescribes a mandatory notification obligation to the minister responsible for the civilian national security services. The notification obligation also applies to the foundation of a branch office planned to be active in these specified fields.

Foreign investors may only acquire ownership or determining influence in the targeted Hungarian company or find a branch office active in the specified fields after receiving confirmation of the acknowledgement of their notification.

Also, a foreign investor may acquire the right of use or operation of infrastructures, facilities and assets essential for the specified fields of activities after the notification of the minister and the confirmation of the acknowledgement of the notification.

Furthermore, the above notification obligation also applies and the Hungarian company (under the above ownership or determining influence of the foreign investor) shall only begin to practice activities in the specified fields after filing a notification to the minister and upon the confirmation of the acknowledgement of the notification.

The specified fields of activities include strategic manufacturing, utility services, info-communication services, financial services, and insurance services.

EMERGENCY RULES

The Emergency Rules define the circumstances where a foreign investor has a mandatory filing obligation for ministerial acknowledgement for certain transactions concerning a Hungarian target company, including e.g. its acquisition, or establishing a right of usufruct on its shares/quotas.

The notification for the acknowledgement of the transaction shall be made within 10 days after the conclusion of the legal transaction (eg. a contract) aimed at acquiring ownership (or the ownership of bonds or the right of usufruct or operation) in the target company or aimed at acquiring the right of operation of certain infrastructure, equipment, or assets. The notification shall be filed with the minister responsible for the internal economy.

Foreign investors may only acquire ownership (or the ownership of bonds or the right of usufruct or operation) in the targeted Hungarian strategic company active in the specified field after receiving confirmation of the acknowledgement of their notification.

As of 13 January 2024, Sec.10/A Decree 2022 grants the Hungarian State a pre-emption right before any other holder in cases where the sale and purchase transaction – specified in Decree 2022 – has been concluded in respect of a strategic company with the production of electricity registered as the main or other activity of the company related to a solar power plant.

Is your regime focused on economic protectionism, national security, or a combination?

STANDARD RULES

The Standard Rules are focused on national security.

EMERGENCY RULES

The Emergency Rules are focused on a combination of economic protectionalism and national security. The title of Decree 2022 includes the term economic protection but transactions may be prohibited for grounds related to public security and public order as well.

Who is considered a "foreign investor" and are only investments from particular countries covered?

STANDARD RULES

According to Sec.1.1 of Act 2018, the term foreign investor shall mean:

  1. a national of a state outside the European Union, or the European Economic Area or the Swiss Confederation or a legal entity or other organization registered in such a state,
  2. a legal entity registered domestically, or in another Member State of the European Union, or in another member state of the European Economic Area or the Swiss Confederation acquiring ownership or interest in an economic entity registered in Hungary, with activities laid down in Act 2018, if the person with determining influence in the legal entity as specified in the Civil Code is a national of a state outside the European Union, or the European Economic Area or the Swiss Confederation, or a legal entity or other organization registered in such a state;

EMERGENCY RULES

According to Sec.2.2. Decree 2022, a foreign investor generally is:

  1. a legal person or other entity incorporated 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 the person holding a majority influence under the Civil Code in such a legal person or in such entity is a citizen of a state outside the European Union, the European Economic Area and the Swiss Confederation or a legal person or other entity incorporated in such a state (“Type A Foreign Investor”);
  2. (a) a citizen of a state outside of the European Union, the European Economic Area and the Swiss Confederation or (b) a legal person or other entity incorporated in that state (“Type B Foreign Investor”).

In addition to the above, Sec.3.2.a. Decree 2022 extends its scope in case of certain transactions by stating that:

  1. if sectors of strategic importance are concerned by the transaction and
  2. the total value of the transaction equals or exceeds HUF 350 million and
  3. a legal person or other entity incorporated in another Member State of the European Union, in another Member State of the European Economic Area or the Swiss Confederation or a citizen of another Member State of the European Union, or another Member State of the European Economic Area or the Swiss Confederation (“Type C Foreign Investor”)
  4. acquires directly or indirectly majority influence under the Civil Code in the strategic company by acquiring ownership, the ownership of bonds or by acquiring the right of usufruct,

then a filing obligation for ministerial acknowledgment also arises.

What sectors are subject to Foreign Investment Restrictions screening?

STANDARD RULES

According to Sec.1.1 of Act 2018, the sectors that are subject to Foreign Investment Restrictions (“FIR”) screening are the following:

  1. manufacturing of weapons and ammunition as well as of military equipment and devices subject to license,
  2. manufacturing of dual-use products,
  3. manufacturing of intelligence devices and equipment specified in the government decree on the detailed rules of obtaining a licence for military activity and certifying businesses,
  4. provision of financial services specified in the Act on Credit Institutions and Financial Enterprises and from among auxiliary financial services, the operation of a payment system,
  5. services governed by the Act on Electricity,
  6. services governed by the Act on Natural Gas Supply,
  7. services governed by the Act on Water Public Utility Services,
  8. services governed by the Act on Electronic Communications,
  9. the set-up, development and operation of electronic information systems governed by the Act on the Electronic Information Security of State and Local Government Agencies.
  10. insurance and reinsurance activities as defined in Act on Insurance Activities, as well as activities subject to reporting obligations among activities directly related to insurance activities.

Please note that Decree 2018 provides a more detailed level of specification on the restricted activities within these sectors that are subject to FIR screening. (However, as opposed to the rules of the Emergency Rules, the activities are not specified based on NACE codes (in Hungarian the TEÁOR ’08 codes), but such activities are simply named and listed in Decree 2018).

EMERGENCY RULES

The sectors covered by FIR screening under the Emergency Rules are generally listed in Sec.2.3. Decree 2022 providing for the definition of a strategic company. According to this provision, the sectors subject to FIR screening are the following:

  1. sectors of strategic importance specified in Annex 1 of Decree 2022,
  2. energy sector,
  3. transportation sector,
  4. communications sector and
  5. sectors listed in points (a)-(e) of Article 4(1) of the Regulation.

Annex 1 of Decree 2022 defines the sectors of strategic importance by listing their respective NACE codes (in Hungarian the TEÁOR ’08 codes).

What are the relevant thresholds?

STANDARD RULES

According to Sec.2.1.a-b of Act 2018, the relevant thresholds are:

  1. 25% and 10% for ownership levels, and
  2. the determining influence as defined in the Civil Code.

EMERGENCY RULES

The Emergency Rules set forth a threshold of HUF 350 million regarding the total value of the transaction applicable to certain transactions, meaning that the competent minister shall only be notified of the below transactions if its total value equals or exceeds HUF 350 million.

Pursuant to Sec.3.2. Decree 2022, the notification obligation arises, if:

  1. via the transaction, the Type A Foreign Investor / Type C Foreign Investor acquires directly or indirectly majority influence under the Civil Code in the strategic company by acquiring ownership, the ownership of bonds or by acquiring the right of usufruct and the total value of the transaction equals or exceeds HUF 350 million;
  2. via the transaction, the Type B Foreign Investor acquires directly or indirectly an ownership share of at least 5% - or in the case of publicly operating joint stock companies an ownership share of at least 3% - in a Hungarian strategic company and the total value of the transaction equals or exceeds HUF 350 million.

No total value-related threshold applies if:

  1. sectors of strategic importance are concerned by the transaction and via the transaction, the Type B Foreign Investor achieves an ownership share of 10%, 20% or 50%;
  2. sectors of strategic importance are concerned by the transaction and via the transaction – with the exception of publicly operating joint stock companies - the joint ownership share of foreign investors exceeds 25%

in the strategic company.

Neither applies the total value-related threshold if the acquisition of the right of operation falls under the scope of Decree 2022, namely if the transfer of the infrastructure, equipment and assets necessary for the pursuit of the activity belonging to the sectors specified as sectors of strategic importance, or the transfer of the right to use or operate such infrastructure, equipment or assets or the pledge of such assets (together: “the right of operation”), if the right of operation is acquired by a foreign investor or acquired by a legal person or entity, in which the foreign investor has, directly or indirectly, a majority influence under the Civil Code.

Is notification under Foreign Investment Restriction rules mandatory?

STANDARD RULES

If a transaction falls under the scope of the Standard Rules, yes.

EMERGENCY RULES

If a transaction falls under the scope of the Emergency Rules, yes.

Is the relevant authority's approval required prior to closing?

STANDARD RULES

According to Sec.5.1. of Act 2018 and Sec.3. of Decree 2018, the foreign investor shall file a notification to the minister on the completion of the legal transaction targeting the acquisition of ownership or the right of operation as well as of the registration of the newly adopted activities in the company registry in writing. The legal transaction aiming at the acquisition of ownership, or the right of operation shall be notified to the minister within 10 days of signing (i) the contract or (ii) the pre-contract or (iii) the agreement on signing these. Furthermore, the registration of a newly adopted activity in the company registry shall be notified to the minister within 10 days of its registration.

EMERGENCY RULES

According to Sec.4.2. Decree 2022, the notification shall be filed within 10 days after the (i) conclusion of the transaction aimed at acquiring ownership; (ii) conclusion of the transaction aimed at acquiring the ownership of the bond; (iii) conclusion of the transaction aimed at acquiring the right of usufruct or the (iv) conclusion of the transaction aimed at acquiring the right of operation. The application for the registration into the company’s list of quota holders or shareholders as well as the motion for the registration of changes can only be filed after the receipt of the minister’s acknowledgment of the transaction.

What was the impact of COVID-19 on your foreign investment regime?

STANDARD RULES

Modifications were introduced, widening the scope of the Standard Rule with the addition of new sectors. Also, the category of foreign investors was – temporarily – expanded to every non-Hungarian person and legal entity.

EMERGENCY RULES

A set of restrictions almost identical to the Emergency Rules were introduced during the COVID-19-related state of emergency in 2020. Therefore, the current regulation is essentially a result of the COVID-19 pandemic and the legislation adopted in relation to it. After the termination of the state of emergency declared due to the global pandemic, Act LVIII of 2020 on transitional arrangements in connection with the termination of the state of emergency and on epidemiological preparedness was adopted. This act contains a set of restrictions very similar to the ones specified by Decree 2022. The strategic sectors are defined by Government Decree no. 289/2020 (VI.17.) on the specification of the fields of activity necessary for the economic protection of Hungarian seated companies. The provisions of the aforementioned act and government decree are currently overruled by the provisions of Decree 2022, however, these will be applicable once again after the termination of the state of emergency due to the armed conflict taking place in the territory of Ukraine.

How active has your agency been in reviewing, delaying, modifying or blocking foreign investments?

STANDARD RULES

There is no publicly available data on the matter.

EMERGENCY RULES

There is no publicly available data on the matter.

On what grounds can enforcers review and block a foreign investment? How active have they been in the past 6 months?

STANDARD RULES

According to Sec.6.3 of Act 2018, the minister shall prohibit the transaction if the acquisition of ownership or the acquisition of the right of operation by the foreign investor or the conduction of newly adopted activities violates Hungary’s security interests.

There is no publicly available data regarding the activity or practice of the minister.

EMERGENCY RULES

Pursuant to Sec.9.1.d. Decree 2022, a prohibition decision can be adopted if certain circumstances exist, namely if (i) the acquisition of ownership actually or potentially violates or endangers the state interest, public security or public order of Hungary or (ii) the foreign investor is directly or indirectly controlled by the government (including public bodies or the armed forces) of a state other than an EU Member State or (iii) the foreign investor has been involved in an EU Member State in an activity that threatens security or public order or (iv) there is a risk that the foreign investor will engage in an activity that constitutes a criminal offense. The notifier shall have the right to file an appeal against the prohibition decision.

There is no publicly available data regarding the activity or practice of the minister.

Do you expect any regulatory developments over the next 6 months?

STANDARD RULES

There is no publicly available data on the matter based on which one could formulate expectations.

EMERGENCY RULES

There is no publicly available data on the matter based on which one could formulate expectations.

We note that Decree 2022 will remain effective until the termination of the state of emergency, the expected date of which under the currently effective legislation is May 26, 2024, however, this deadline can be extended by means of a Government Decree. After the termination of the state of emergency, the provisions of the legislation introduced after the termination of the COVID-19-related state of emergency shall apply to the screening of foreign investments in Hungary. Except for a few provisions, these are almost identical to the provisions of the Decree 2022.

Lex Mundi Global Foreign Investment Restrictions Guide

Hungary

(Europe)

Contributors

Updated 03 Mar 2024