The 195th, 195th and 201th of the 2020 issue of the Hungarian Gazette have published several Government measures related to the epidemiological situation. The most important are the following.

1. On the temporary reintroduction of border control

The Hungarian Government, pursuant to the 407/2020. (VIII. 30.) Government Decree considering the existence of a serious threat to public order and internal security in Hungary, temporarily reintroduced border control at the entire internal border pursuant to Article 2 (1) of Regulation (EU) 2016/399 of the European Parliament and of the Council of 9 March 2016 on the Union Code on the rules governing the movement of persons across borders.

The Government Decree has entered into force on 1 September 2020 and shall expire on 1 October 2020.

2. Travel restrictions during the epidemiological preparedness period

The 408/2020 (VIII.30.) Government Decree on travel restrictions during the epidemiological preparedness period deals with the most important restrictions in the following breakdown.

• As a general rule, the scope of the Government Decree covers non-official border crossings with a private passport and other travel documents. For the application of the Government Decree, it is subject to the same treatment as a Hungarian citizen
• who is entitled to permanent residence in Hungary and a family member, if he / she proves this right with a document, or
• who has a valid residence permit issued by the Immigration Authority for a period exceeding 90 days, entitling him/her to stay in the territory of Hungary, and presents the relevant document upon entry,
• who is a competitor or sports professional of a Hungarian sports organization according to the Sports Act, if he/she enters the territory of Hungary after participating in an international sports event held abroad,
• who is a person participating in an international sports event held abroad by an invitation or delegation issued by a Hungarian sports organization – issued by name – if he/she enters the territory of Hungary after participating in an international sports event held abroad.

The scope of the Decree does not cover (i) border crossing in freight traffic, (ii)  crossing the border with an official passport pursuant to 6 / A. § (2) Act XII of 1998 on travel abroad, and (iii) a person who, upon entry into Hungary, credibly proves that he or she has already suffered COVID-19 (infection) within 6 months prior to the date of application for crossing the border.

For the purposes of this Decree, crossing the border for official purposes is the crossing the border for an official purposes with private passport or other travel documents.

• According to the rules for the entry of Hungarian citizens into Hungary, a Hungarian citizen arriving from abroad or a family member of a Hungarian citizen who does not have Hungarian citizenship (hereinafter together: Hungarian citizen) may undergo a medical examination when entering Hungary (save for any exceptions, set out in an Act or Government Decree) which he/she is obliged to tolerate. If, in the case of a Hungarian citizen, the medical examination reveals a suspicion of infection, he/she shall be placed in quarantine designated by the competent epidemiological authority or, if – it does not pose an epidemiological risk – in official home quarantine.
• If, in the case of a Hungarian citizen, the medical examination does not establish a suspicion of infection, and
• the Hungarian citizen has a permanent residence or place of residence in Hungary, under official house quarantine for 14 days,
• the Hungarian citizen not living abroad does not have a permanent residence or place of residence in Hungary, for 14 days in quarantine designated by the competent epidemiological authority,
• the Hungarian citizen living abroad does not have a residence or stay in Hungary, will be placed in quarantine designated by the competent epidemiological authority or official home quarantine for 14 days.
• At the request of a quarantined person as described above, the competent epidemiological authority may allow the quarantined person to take part in a SARS-CoV-2 PCR test twice within 5 days, at least 48 hours apart, during which, if the tests confirm that the virus was not detectable in the body of the quarantined person at the time of the inspection, the competent epidemiological authority shall grant an exemption from the provision requiring quarantine.

The Decree allows the first test to be carried out in the territory of a Schengen country, and the United States or Canada and the result can be certified by a document in Hungarian or English.

To the best of our knowledge, the costs of carrying out the tests are not supported by the Government, they must be borne by those concerned.

• As a general rule, non-Hungarian citizens may not enter the territory of Hungary in passenger traffic (save for the exceptions, specified by Act or Government Decree). The competent police authority may grant an exemption from this strict provision on request. The police authority may grant exception and allow entry if the applicant proves that the purpose of entry is:

1. a) participation in a procedural act related to court or official proceedings in Hungary, certified by a document issued by the given institution,
2. b) participation in health care with a referral from a health care institution or other appropriate certificate,
3. c) fulfilment of the obligation to study or examine on the basis of the student or pupil status, if this is approved by a certificate issued by the educational institution,
4. d) travel in passenger transport concerning work performed in connection with a transport activity, the purpose of which is to reach the starting point of the transport (place of commencement of work) or to return home in passenger traffic after such work, if evidenced by a certificate issued by the employer,
5. e) participation in family events (marriage, christening, funeral),
6. f) care of a relative pursuant to Act V of 2013 on the Civil Code,
7. g) participation in a sporting, cultural or spiritual event of major international importance, or
8. h) an equitable reason other than points (a) to (g).

• The above application may (i) be submitted only electronically in Hungarian or English, or (ii) submitted by a legal representative or a proxy indicated in a power of attorney included in a private document of full probative value. If the entry takes place at the same time and with the same reason, an authorized representative may submit an application on behalf of several persons, if the authorization of the persons concerned is attached. In the case of crossing the border for the same reason and in the same time, it is sufficient to submit one application for close relatives living in the same household as the applicant.

In order to prove the validity of the application, the original copy of the document certifying the validity of the application must be presented by the person (licensee) exempted from the entry ban upon entering the territory of Hungary at the request of the police officer. If the licensee does not present the original of the document proving the substantiation, or its authenticity is questionable at the time of entry, entry shall be refused.

• The application will be rejected by the police if (i) there is doubt about the purpose of the entry as described above, or (ii) the entry is risky for (a) epidemiological, (b) public security or (c) national security reasons. Ministerial guidelines or official practices regarding these latter phrases are not yet known at the time of writing.
• Upon entering Hungary, the permit applicant may undergo a medical examination, which he or she is obliged to tolerate. Anyone who is suspected of being infected by a medical examination may not enter the territory of Hungary. Any person who is not suspected of being infected during the health inspection shall be placed in quarantine or official home quarantine designated by the competent epidemiological authority for 14 days. From quarantine, the above 2.2.2. exemption may be granted in accordance with the same procedure as set out therein.
• Pursuant to the rules on travel between affiliated companies, a person coming from abroad may enter the territory of Hungary without restriction from the territory of the states specified by the Minister of the Interior if the following conditions are met:

1. a) a director or employee of a domestic company or a company incorporated in one of the states designated by the Minister of the Interior,
2. b) with which another registered company is in a affiliated relationship in at least one of the states specified by the Minister of the Interior responsible for public security[1] pursuant to § 4. Clause 23 of Act LXXXI of 1996 on Corporate Tax and Dividend Tax.

• Pursuant to the 33/2020 (VIII. 30.) Decree of the Ministry of the Interior on the relevant business travel between affiliated companies, in force since 1 September 2020, the Minister of the Interior provided that a person arriving from the territory of any state within the framework of the above-mentioned business trip may enter the territory of Hungary.
• Entry without restriction as described above may take place if the traveller, in addition to the conditions set out in paragraph 2.4 above – confirms the probability of a business trip. A ministerial, legislative resolution or official practice is not yet known at the time of writing this summary, however, according to the more widely used business practice, the purpose of the business trip can be certified by a written and signed invitation letter and/or a declaration setting out the most important elements of the business trip (eg: object/purpose/location of the business activity, planned meeting/operation. date of project visit/tour, number of the decision of the governing body on the project/business (possibly short content), etc.) in Hungarian, signed by the director (s) / board of directors of the company operating in Hungary. It is expedient to confirm the existence of the affiliated relationship between the companies concerned in accordance with § 4. Clause 23 of the Act LXXXI of 1996.
• In case of the frontier workers the Government Decree set forth that citizens of neighbouring states determined by the Minister of Foreign Affairs and Hungarian citizens living there can enter in the territory of Hungary for a period not exceeding 24 hours and within a distance of 30 kilometres from the state border. People being in the territory of Hungary according to above shall stay within the 30 kilometres zone of Hungary from the state border, and shall leave the territory of Hungary in 24 hours after the entry.

Hungarian citizens living in the neighbourhood of the countries determined by the Minister of Foreign Affairs according to above, in the 30 kilometres zone of the territory of Hungary from the state border, can enter from the neighbouring states without any restriction, if the duration of their stay in abroad did not exceed the 24 hours and they did not leave the 30 kilometres zone from the state border in that neighbouring state.

• For travelling with business or economic purpose, the decree contains the following rules:
• If a Hungarian citizen travelling abroad can certify at the time of the entry in the territory in Hungary that he / she comes back from a trip made with a business or economic purpose, the Hungarian citizen can enter the territory of Hungary without any restriction.
• In case a non-Hungarian citizen entering into Hungary can certify, that he / she enters in the territory of the country for business or economic activities, he / she can enter the territory of Hungary without any restriction.

If any doubt arises regarding the certification of the business or economic purpose, then Section 2.3. (the general rules for non-Hungarian citizens to enter into the country) shall prevail.

• Based on the rules concerning to the people travelling through Hungary (persons in transit), a not Hungarian citizen coming from abroad can enter in the territory of Hungary in passenger transportation for transit, if he /she undergoes a medical examination upon entry and the medical examination does not establish a suspicion of infection.
• An additional condition for entry for the above purposes is that a non-Hungarian citizen coming from abroad (i) shall have the entering conditions set out in Schengen Borders Code, (ii) shall certify credibly the purpose of the trip and the aim country of the trip, and that (iii) the entry into the aim country and to this end, entry into the state neighbouring Hungary on the route of the planned trip is ensured.
• The national police chief will determine and publish the road border crossing points for the entry and exit of transit traffic, the route of transit traffic, the resting places and the time frame available for leaving Hungary on the official website of the police. A not Hungarian citizen coming from abroad and entering according the above can only travel on a route determined above during transit through the territory of Hungary and can stop solely for the reason strictly necessary for the passage – i.e.: especially for health or technical reasons – at the resting places determined by the national police chief and shall leave the territory of Hungary within the exact time frame, but within 24 hours at the most. An exception to this is stopping in a technical or medical emergency requiring immediate intervention.
• The Government Decree contains rules also concerning the epidemiological data management. According to these, the competent epidemiological authority registers the people placed in designated quarantine and official home quarantine.

The Government appoints the police as well as a public health administration (i) to comply with the rules on epidemiological restrictions, (ii) for the purpose of registration of persons subject to epidemiological segregation, epidemiological surveillance, epidemiological closure and epidemiological restrictions, and (iii) for the purpose of registration of persons at risk from public health and epidemiology, and of persons, who have been in contact with such a person and who are therefore at risk from public health and epidemiological point of view.

In case the police asks, the data controller – in order to fulfil the epidemiological authority tasks of the police – forwards to the police immediately and free of charge – with priority compared to its other data transmission obligations – the personal data processed according to Section 5 (3) of Act XLVII 1997 on the processing and protection of health data and personal data related to them.

According to the Act CLIV 1997 on health, or in case of ordering official home quarantine, the competent epidemiological authority forwards the decision about the epidemiological isolation, epidemiological surveillance, epidemiological closure and epidemiological restriction for the police with priority (i.e.: out of turn) in order the police to be able to fulfil its controlling tasks.

The police registers the data determined above in order to control the compliance with the rules of epidemiological control and official home quarantine. No data may be entered in the register, which is not necessary for the controlling of the compliance of the rules of epidemiological control and official home quarantine. The data being in the register shall be deleted at the time of termination of the official home quarantine, epidemiological isolation, epidemiological surveillance, epidemiological closure and end of epidemiological restriction.

• According to transitional provisions and provisions for entry into force
• The following constitutes a safeguard measure in the adaptation of the breach of a safeguard measure infringement determined in Section 239/A (1) of Act II 2012 on infringements

2. the medical examination determined in Section 2.2 above,
3. the presentation of the original copy of the document certifying the validity of the request in Section 2.3.1 above upon entry the territory of Hungary,
4. the medical examination determined in Section 2.3.3 above,
5. presentation of a document confirming that the travel is of business nature in accordance with the rules on travel between affiliated undertakings set out in Section 2.4 above,
6. the territory and time-limits set out in Section 2.5 above concerning the frontier workers,
7. the provisions regarding the transit people set out in Section 2.6

• Government Decree 419/2020 (IX.1.) sets out lighter rules for Visegrad Countries, as follows:
• A Hungarian citizen and a non-Hungarian relative of the Hungarian citizen can get a waiver from quarantine, (i) if they enter in the territory of Hungary from the Czech Republic, Poland, or from Slovakia (ii) and had an accommodation booked in these countries before the publication of the government decree (1 September 2020), (iii) and had one negative SARS-CoV-2 PCR test made once after the arrival.
• A Czech, Polish and Slovakian citizen can get a waiver from quarantine during the entry into Hungary, who certify (i) that he / she has an accommodation booked until 30 September 2020, (ii) which was booked before the government decree entered into force, (iii) and had one negative SARS-CoV-2 PCR test in 5 days prior the entering.

It is important to emphasize that the above rules may change/tighten in the forthcoming period, as a result of other government measures, depending on the latest development of the epidemiological situation.

[1] 23. *  ‘affiliated company’ shall mean:

1. a) *  the taxpayer and the person in which the taxpayer has a majority control – whether directly or indirectly – according to the provisions of the Civil Code;
2. b) the taxpayer and the person that has majority control in the taxpayer – whether directly or indirectly – according to the provisions of the Civil Code;
3. c) *  the taxpayer and another person if a third party has majority control in both the taxpayer and such other person – whether directly or indirectly – according to the provisions of the Civil Code, where any close relative holding a majority control in the taxpayer and the other person shall be recognized as third parties;
4. d) *  a nonresident entrepreneur and its domestic place of business and the business establishments of the nonresident entrepreneur, furthermore, the domestic place of business of a nonresident entrepreneur and the person who maintains the relationship defined under Paragraphs a)-c) with the nonresident entrepreneur;
5. e) *  the taxpayer and its foreign branch, and the taxpayer’s foreign branch and the person who maintains the relationship defined under Paragraphs a)-c) with the taxpayer;
6. f) *  the taxpayer and other person if between them dominating influence is exercised relating to business and financial policy having regard to the equivalence of management;
7. g) *  Paragraphs a)-c) notwithstanding, affiliation shall be considered to exist
8. ga) for the purposes of Point 11, Point 53, Paragraph f) of Subsection (1) of Section 8 and Section 16/A even if the taxpayer holds directly or indirectly a participation in terms of voting rights or capital ownership of 25 per cent or more or is entitled to receive 25 per cent or more of the profits in an entity, with the proviso that for the purposes of these provisions compliance with Paragraph f) shall not be taken into account,
9. gb) for the purposes of Section 16/B even if the taxpayer holds directly or indirectly a participation in terms of voting rights or capital ownership of 50 per cent or more or is entitled to receive 50 per cent or more of the profits in an entity, with the proviso that having regard to participation in terms of voting rights or capital ownership the influence of persons acting in concert shall count together and in the case of taxpayers within a consolidated group of companies for financial accounting purposes Paragraph f) shall be taken into account;

On 31 August, the bond issue of Duna House ended with a significant oversubscription. The largest property brokerage group in Central and Eastern Europe announced in early August that it was participating in the Growth Bond Program of the National Bank of Hungary. Duna House invited Kapolyi Law Firm, a market leader in banking, financing and capital market law, to prepare the legal background for the transaction. The success of the transaction is indicated by the fact that, exceeding expectations, institutional investors bought 10-year bonds with a nominal value of HUF 6.6 billion, which was rated by Scope Ratings.

The portfolio.hu financial and economic news portal also reported on the preparation of the bond issue and the bond auction.

According to a press release published by the National Bank of Hungary on 18 August 2020, the Supervisory Authority called upon the domestic credit and payment institutions to maintain their lending activity in a circular. According to the circular, “the National Bank of Hungary expects that the assessment of debtors’ creditworthiness will not deteriorate due to the moratorium alone, and will therefore not be excluded from lending”.

On the 17^th of June 2020 an Act on the cessation of the emergency and the destiny of regulations made during this period[1] (Mixing-Act) was published according to which it has now been recorded at the statutory level that for the validity of specific transactions in strategic companies (by virtue of contract, unilateral declaration or a resolution permitting: transfer of ownership free of charge or for consideration; capital increase; transformation, merger and division of the company; the issue of bonds to be converted, bonds holding subscription right or convertible bonds; establishment of usufruct rights in shares, business quota) it is required to notify the Minister for the Economy (the Minister), and the Minister must acknowledge it.

The Mixing-Act is supplemented by Government Decree (VI. 17.) 289/2020 on the definition of the scope of activity necessary for the economic protection of companies established in Hungary (TEÁOR Decree).

The legislator has made several clarifying changes in the Mixing-Act compared to the previous regulation, however, the regulation will continue to apply until 31 December 2020. Let’s see what the most important changes are!

A new definition has been added, according to which the state interest is the public interest related to the security and operation of networks and equipment, as well as the continuity of supply, which is not regulated either by sectoral law of the European Union or by national law. The concept bears significance in the proceeding of the Minister[2], and although it has already been included in the regulations, the Government Decree did not clarify what was meant by it by the legislator. Another change is that the financial sector has been excluded from the scope of activities of the so-called strategic companies (both from the text of the Mixing-Act and from the table of the TEÁOR Decree). The determination of the value of the investment has become the basic condition of the notification obligation: only the notification of legal transactions reaching or exceeding HUF 350 million is mandatory. Citizens of the EU and another EEA member state or of Switzerland who acquire more than 50% of the votes or acquire majority control in the strategic company are also obliged to make a declaration for their investments reaching or exceeding HUF 350 million, however legal transactions involving the whole groups of companies present in more than one country are not subject to notification. Finally, although the numbers have decreased, the deadline for the Minister’s investigation has hardly changed: he has now 30 working days instead of the previous 45 days.

Taking into account of the changes in legislation notification (and taking note of it) is required for the above defined legal transactions of strategic companies if the following conditions are also met:

• the value of the investment reaches or exceeds HUF 350 million
• a foreign investor – as defined below – or a legal person or entity established in a Member State of the European Union (EU) or a Member State of the European Economic Area (EEA) or the Swiss Confederation (Switzerland) or the citizens thereof by acquiring ownership, ownership of a bond, a right of usufruct, directly or indirectly acquires more than 50% of the votes in the strategic company or acquires majority control; meaning that a dominant influence takes effect according to the provisions of Section 8:2 of the Civil Code. (Majority control includes, but is not limited to, the right to appoint or remove the majority of the executive officers and members of the supervisory board of the company concerned; the case where other shareholders vote together with the holder of the influence by agreement or where other shareholders vote through the holder of the influence, provided that the proportion of voting shares exceeds 50%. The majority control may be exercised not only directly but also indirectly.)
• any foreign investor acquires, directly or indirectly, at least a participation of 10% in the strategic company through the acquisition of ownership, ownership of a bond or usufruct right;
• any foreign investor acquires a participation of 15%, 20% or 50% in the strategic company (regardless of the value of the investment) by acquiring ownership, ownership of a bond or usufruct right;
• the combined shareholding of any foreign investors in the strategic company would exceed 25% through the acquisition of ownership, ownership of a bond or usufruct right, except for public limited companies;
• any foreign investor directly or indirectly acquires the right of operation in respect of the activity belonging to the sectors of the strategic companies – i.e.: the transfer of the infrastructure, equipment, assets, transfer of the right to use or operate thereof necessary for the continuation of the activity or the provision thereof as security takes place.

The regulations do not apply to legal transactions in respect of a foreign legal entity or other organization, in respect of the transactions related to its subsidiaries qualifying as strategic company (meaning that the whole group of companies present in more than one country is affected by the transactions defined by law, not just the Hungarian company/companies).

It is important to highlight that for legal persons and entities established in the EU, the EEA or Switzerland, for citizens of EU and EEA member states as well as of Switzerland, notification is only required when acquiring a majority control through specific legal transactions (regardless of the background of their ownership), while for foreign investors notification is compulsorily required for legal transactions specified in the Mixing-Act (acquisition of ownership, acquisition of ownership of a bond, acquisition of usufruct rights or operating rights).

What are strategic companies?

According to the provisions of the Mixing-Act, a strategic company is a

1) limited liability company,

2) private company limited by shares, or

3) public limited company,

with registered office (seat) in Hungary, the main area of activity of which falls within the sectors specified in the Appendix of the TEÁOR-Decree (attached below), or if its ancillary activities fall within the energy, transport, communications sectors and/or within sectors of strategic importance specified in Article 4 (1) (a) to (e)[3] of Regulation (EU) No 2019/452[4], excluding the financial infrastructures.

Who counts as a foreign investor?

Firstly, a legal person or other entity (i.e.: even a domestic entity) when acquiring shareholding or control in a company with registered office (seat) in Hungary performing a specific field of activity at the strategic company, if a person, being a citizen of a state other than a member state of the EU, the EEA and Switzerland or a legal person or other entity established in such a state, disposes on majority control as defined in the Civil Code in the acquiring entity.

Alternatively, a citizen of any state other than those in the EU, the EEA and Switzerland, or a legal person or other entity established in such a state.

Based on the above, the citizens (natural persons) and legal persons or entities of the EU, EEA and Switzerland are not considered to be foreign investors, unless a citizen, legal person or other entity other than those of the EU, EEA and Switzerland has majority control in them. Nevertheless, they are also required to notify if they acquire more than 50% of the votes or acquire majority control in a strategic company through their investment reaching or exceeding HUF 350 million.

Who should submit the notification and when? What are the main provisions for this new procedure?

The notification obligations, which partially has been amended compared to the previous regulation, apply to transactions concluded after the entering into force of the Mixing-Act – 18^th of June 2020 -.The notification with the content provided by the Mixing-Act must be submitted to the Minister within 10 days after the conclusion of the transaction. The notification must be made by the foreign investor or a legal person, other entity established in the EU, the EEA or Switzerland and the citizens thereof (or by the acquiring company and the afore mentioned persons jointly, if the acquisition of the right to operate is involved and it is not acquired by the foreign investor); legal representation is mandatory during the proceedings.

The Minister gives a notice on the receipt of the notification within a maximum of 8 days indicating therein the date of the reception, after which the Minister will have a 30 day period (which may be extended once by 15 days in duly justified cases; furthermore an extension of at least 3, but not more than 10 days may be granted for supplementing documents – or alternatively a 20 day extension for supplementing documents which are not to be submitted by the notifying party) to examine, whether:

• the notification meets the requirements for its content,
• there is a violation or threat of the state interest, public security or public order of Hungary with regard to the legal transaction, or the possibility of their occurrence,
• the transaction complies with Articles 36, 51 (1) and 65 (1) of the Treaty on the Functioning of the European Union,
• the notifying party is not under the control of an administrative body of an EU Member State,
• the notifying party has been involved in an activity in the EU concerning security or public order,
• there is a material risk that the notifying party will engage in illegal or criminal activities.

If on the basis of the investigation, no problematic circumstances arise, the Minister acknowledges the notification in writing. If on the basis of the above investigation problematic circumstances arise, the Minister prohibits the transaction. The Minister is obliged to give reasons for the prohibition. To a limited extent, this may be challenged in administrative non-litigation proceedings on the basis of the violation of essential rules of the procedure and in connection with the transaction’s classification according to the Mixing-Act. The Metropolitan Court will have exclusive jurisdiction in the case and legal representation is mandatory in this proceeding, too.

The notification will not prejudice any relevant reporting or authorization obligations under further legislation.

The Minister will monitor compliance with the notification obligations. If the notifying party fails to meet its obligation to notify, the above-described investigation will be undertaken with the possibility of imposing a fine. The amount of the fine may be up to twice the value of the transaction, and for a natural person acting as foreign investor at least HUF 100,000, while in the case of a legal person or entity acting as foreign investor at least 1% of the net revenue achieved in the last business year of the strategic company involved in the transaction (No reduction may be granted for the payment of a fine). The Minister will also keep records on the notifications on acknowledgments and prohibitions.

Important legal consequences of the notification obligation

When registering transactions specified in the Mixing-Act in the company register, the application for registration/modification must be accompanied by a private document of full probative value declaring that the company concerned is considered as a strategic company and by the Minister’s notification on acknowledgment. (Registrations made in the absence of these documents or in spite of the Minister’s prohibition will be deleted by the court of registration within the framework of the supervision of the legality of the procedure.)

A contract, unilateral declaration or company resolutions made in violation of the relevant provisions of the Mixing-Act or contrary to a Minister’s prohibition is considered to be null and void.

Engagement of legal counsel

The Regulation sets forth the mandatory legal representation, nevertheless, , in many cases, even during the planning phase of transactions, questions may arise as to whether they are bound by the notification obligations provided by the Decree.

Sectors specified in the TEÁOR-Decree:

Number	Sector	NACE Serial	Subsector
1	Chemical Sector	19	Manufacture of coke and refined petroleum products
		20	Manufacture of chemicals and chemical products
		21	Manufacture of basic pharmaceutical products and pharmaceutical preparations
2	Commercial facilities	45	Wholesale and retail trade and repair of motor vehicles and motorcycles
		47	Retail trade, except of motor vehicles and motorcycles
		46	Wholesale trade except of motor vehicles and motorcycles
3	Communication sector	61	Telecommunications
4	Essential industry sectors (including electronics, mechanical engineering, steel production and manufacture of transport equipment)	26	Manufacture of computer, electronic and optical products
		27	Manufacture of electrical equipment
		28	Manufacture of machinery and equipment n.e.c.
		29	Manufacture of motor vehicles, trailers and semi-trailers
		30	Manufacture of other transport vehicles
		24	Manufacture of basic metals
		25	Manufacture of fabricated metal products
5	Defence industry	25.4	Manufacture of weapons and ammunition
		30.4	Manufacture of military fighting vehicles
6	Dams	42.9.1	Construction of a water projects
7	Energy sector	35	Electricity, gas, steam and air conditioning supply
8	Emergency facilities	84.2.2	Defence activities
		84.2.4	Public order and safety activities
		84.2.5	Fire service activities
9	Food sector and agriculture	10	Manufacture of food products
		11	Manufacture of beverages
		12	Manufacture of tobacco products
		1	Agriculture, forestry and fishing
		2	Forestry and logging
		3	Fishing and aquaculture
10	Government facilities	84	Public administration and defence; compulsory social security
11	Health sector	86	Human health activities
		87	Residential care activities
		88	Social work activities without accommodation
12	Information technology	62	Computer programming, consultancy and related activities
		63	Information service activities
13	Nuclear sector	2446	Processing of nuclear fuel
14	Construction industry	41	Construction of buildings
		42	Civil engineering
		43	Specialised construction activities
15	Water supply and sewerage services	36	Water collection, treatment and supply
		37	Sewage collection and treatment
16	Waste management	38	Sewerage
		39	Remediation activities and other waste management services
17	Building material industry	8.1	Quarrying of stone, sand and clay
		23	Manufacture of other non – metallic mineral products
18	Transport, transportation, logistics	49	Land transport and transport via pipelines
		50	Water transport
		51	Air transport
		52	Warehousing and support activities for transportation
		53	Postal and courier activities
19	Manufacture of medical devices	32.5	Manufacture of medical  and dental instruments and supplies
20	Tourism	55	Accommodation
		56	Food and beverage service activities
21	Administrative and support service activities	782	Temporary employment agency activities

 

^[1] Act LVIII of 2020 on transitional rules related to the cessation of an emergency and epidemiological preparedness.

[2] During the examination of the notification the Minister also examines the damage or endangerment of the Hungarian state interests.

[3] 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

[4] a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;

1. b) critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC)

No 428/2009, including artificial intelligence, robotics, semiconductors, cyber security, aerospace technology, defence technology, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;

1. c) supply of critical inputs, including energy or raw materials, as well as food security;
2. d) access to sensitive information, including personal data, or the ability to control such information; or
3. e) the freedom and pluralism of the media.

 

On the 25^th of May 2020 a Government Decree[1] (Decree) was published according to which for the validity of specific transactions in strategic companies (by virtue of contract, unilateral declaration or a resolution permitting: transfer of ownership free of charge or for consideration; capital increase; transformation, merger and division of the company; the issue of bonds to be converted, bonds holding subscription right or convertible bonds; establishment of usufruct rights in shares, business quota) it is required to notify the Minister for the Economy (the Minister), and the Minister must acknowledge it, if the following conditions are also met:

• a foreign investor – as defined below – or a legal person or entity established in a Member State of the European Union (EU) or a Member State of the European Economic Area (EEA) or the Swiss Confederation (Switzerland) by acquiring ownership, ownership of a bond, a right of usufruct, directly or indirectly acquires more than 50% of the votes in the strategic company or acquires majority control; meaning that a dominant influence takes effect according to the provisions of Section 8:2 of the Civil Code. (Majority control includes, but is not limited to, the right to appoint or remove the majority of the executive officers and members of the supervisory board of the company concerned; the case where other shareholders vote together with the holder of the influence by agreement or where other shareholders vote through the holder of the influence, provided that the proportion of voting shares exceeds 50%. The majority control may be exercised not only directly but also indirectly.)
• any foreign investor acquires, directly or indirectly, at least a participation of 10% in the strategic company through the acquisition of ownership, ownership of a bond or usufruct right and the value of the investment reaches or exceeds HUF 350 million;
• any foreign investor acquires a participation of 15%, 20% or 50% in the strategic company (regardless of the value of the investment) by acquiring ownership, ownership of a bond or usufruct right;
• the combined shareholding of any foreign investors in the strategic company would exceed 25% through the acquisition of ownership, ownership of a bond or usufruct right;
• any foreign investor directly or indirectly acquires the right of operation in respect of the activity belonging to the sectors of the strategic companies – i.e.: the transfer of the infrastructure, equipment, transfer of the right to use or operate the assets necessary for the continuation of the activity or the provision thereof as security takes place.

It is important to highlight that for legal persons and entities established in the EU, the EEA or Switzerland, notification is only required when acquiring a majority control through specific legal transactions (regardless of the background of their ownership), whilw for foreign investors notification is compulsorily required for legal transactions specified in the Decree (acquisition of ownership, acquisition of ownership of a bond, acquisition of usufruct rights or operating rights).

What are strategic companies?

According to the provisions of the Decree, a strategic company is a

1) limited liability company,

2) private company limited by shares, or

3) public limited company,

with registered office (seat) in Hungary, the main area of activity of which falls within the sectors specified in the Appendix of the Decree (attached below), or if its ancillary activities fall within the energy, transport, communications sectors and/or within sectors of strategic importance specified in Article 4 (1) (a) to (e)[2] of Regulation (EU) No 2019/452[3], including the financial, credit and insurance sectors too.

Who counts as a foreign investor?

Firstly, a legal person or other entity (i.e.: even a domestic entity) when acquiring shareholding or control in a company with registered office (seat) in Hungary performing a specific field of activity at the strategic company, if a person, being a citizen of a state other than a member state of the EU, the EEA and Switzerland or a legal person or other entity established in such a state, disposes on majority control as defined in the Civil Code in the acquiring entity.

Alternatively, a citizen of any state other than those in the EU, the EEA and Switzerland, or a legal person or other entity established in such a state.

Based on the above, the citizens (natural persons) and legal persons or entities of the EU, EEA and Switzerland are not considered to be foreign investors, unless a citizen, legal person or other entity other than those of the EU, EEA and Switzerland has majority control in them.

Who should submit the notification and when? What are the main provisions for this newprocedure?

The notification obligations apply to transactions concluded after the entering into force of the Decree – 26^th of May 2020 -. The Decree  is in effect until the 31^st of December 2020.

The notification with the content provided by the Decree must be submitted to the Minister within 10 days after the initiation of the transaction. The notification must be made by the foreign investor (or by the acquiring company and the foreign investor jointly, if the acquisition of the right to operate is involved and it is not acquired by the foreign investor); legal representation is mandatory during the proceedings.

The Minister gives a notice on the receipt of the notification within a maximum of 8 days indicating therein the date of the reception, after which the Minister will have a 45 day period (which may be extended once by 15 days in duly justified cases; furthermore an extension of at least 3, but not more than 10 days may be granted for supplementing documents – or alternatively a 20 day extension for supplementing documents which are not to be submitted by the notifying party) to examine, whether:

• the notification meets the requirements for its content
• the transaction complies with Articles 36, 51 (1) and 65 (1) of the Treaty on the Functioning of the European Union,
• the notifying party is not under the control of an administrative body of an EU Member State,
• the notifying party has been involved in an activity in the EU concerning security or public order,
• there is a material risk that the notifying party will engage in illegal or criminal activities.

If on the basis of the investigation, no problematic circumstances arise, the Minister acknowledges the notification in writing. If on the basis of the above investigation problematic circumstances arise, the Minister prohibits the transaction. The Minister is obliged to give reasons for the prohibition. To a limited extent, this may be challenged in administrative non-litigation proceedings on the basis of the violation of essential rules of the procedure and in connection with the transaction’s classification per the Decree. The Metropolitan Court will have exclusive jurisdiction in the case and legal representation is mandatory in this proceeding, too.

The notification will not prejudice any relevant reporting or authorization obligations under further legislation.

The Minister will monitor compliance with the notification obligations. If a foreign investor fails to meet its obligation to notify, the above-described investigation will be undertaken with the possibility of imposing a fine. The amount of the fine may be up to twice the value of the transaction, and for a natural person acting as foreign investor at least HUF 100,000, while in the case of a legal person or entity acting as foreign investor at least 1% of the net revenue achieved in the last business year of the strategic company involved in the transaction (No reduction may be granted for the payment of a fine). The Minister will also keep records on the notifications on acknowledgments and prohibitions.

Important legal consequences of the notification obligation

Entry in the share register and members’ list is subject to the Minister’s notification on acknowledgement. When registering transactions specified in the Decree in the company register, the application for registration/modification must be accompanied by a private document of full probative value declaring that the company concerned is considered as  a strategic company and by the Minister’s notification on acknowledgment. (Registrations made in the absence of these documents or in spite of the Minister’s prohibition will be deleted by the court of registration within the framework of the supervision of the legality of the procedure.)

A contract, unilateral declaration or company resolutions made in violation of the provisions of the Decree or contrary to a Minister’s prohibition is considered to be null and void.

Engagement of legal counsel

The Regulation sets forth the mandatory legal representation, nevertheless, , in many cases, even during the planning phase of transactions, questions may arise as to whether they are bound by the notification obligations provided by the Decree.

Kapolyi Law Firm, a law firm recognized in the Hungarian capital markets with over two decades of experience fully supports the compliance of the specified legal transactions with the new provisions.

Should you have any further questions related to the notification obligations, please contact our experts.

^[1] Government Decree No. 227/2020 (V 25) on the measures necessary for the economic protection of companies established in Hungary in order to prevent a human epidemic causing a mass illness endangering the safety of life and property and to remedy its consequences

[2] 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

[3] a) critical infrastructure, whether physical or virtual, including energy, transport, water, health, communications, media, data processing or storage, aerospace, defence, electoral or financial infrastructure, and sensitive facilities, as well as land and real estate crucial for the use of such infrastructure;

1. b) critical technologies and dual use items as defined in point 1 of Article 2 of Council Regulation (EC)

No 428/2009, including artificial intelligence, robotics, semiconductors, cyber security, aerospace technology, defence technology, energy storage, quantum and nuclear technologies as well as nanotechnologies and biotechnologies;

1. c) supply of critical inputs, including energy or raw materials, as well as food security;
2. d) access to sensitive information, including personal data, or the ability to control such information; or
3. e) the freedom and pluralism of the media.

Specified sectors

Number	Sector	NACE Serial	Subsector
1	Chemical Sector	19	Manufacture of coke and refined petroleum products
		20	Manufacture of chemicals and chemical products
		21	Manufacture of basic pharmaceutical products and pharmaceutical preparations
2	Commercial facilities	45	Wholesale and retail trade and repair of motor vehicles and motorcycles
		47	Retail trade, except of motor vehicles and motorcycles
		46	Wholesale trade except of motor vehicles and motorcycles
3	Communication sector	61	Telecommunications
4	Essential industry sectors (including electronics, mechanical engineering, steel production and manufacture of transport equipment)	26	Manufacture of computer, electronic and optical products
		27	Manufacture of electrical equipment
		28	Manufacture of machinery and equipment n.e.c.
		29	Manufacture of motor vehicles, trailers and semi-trailers
		30	Manufacture of other transport vehicles
		24	Manufacture of basic metals
5	Defence industry	25.4	Manufacture of weapons and ammunition
		30.4	Manufacture of military fighting vehicles
6	Dams	42.9.1	Construction of a water projects
7	Energy sector	35	Electricity, gas, steam and air conditioning supply
8	Emergency facilities	84.2.2	Defence activities
		84.2.4	Public order and safety activities
		84.2.5	Fire service activities
9	Financial sector	64	Financial service activities, except insurance, pension funding
		65	Insurance, reinsurance and pension funding, except compulsory social security
		66	Activities auxiliary to financial services and insurance activities
10	Food sector and agriculture	10	Manufacture of food products
		11	Manufacture of beverages
		12	Manufacture of tobacco products
		1	Agriculture, forestry and fishing
		2	Forestry and logging
		3	Fishing and aquaculture
11	Government facilities	84	Public administration and defence; compulsory social security
12	Health sector	86	Human health activities
		87	Residential care activities
		88	Social work activities without accommodation
13	Information technology	62	Computer programming, consultancy and related activities
		63	Information service activities
14	Nuclear sector	2446	Processing of nuclear fuel
15	Construction industry	41	Construction of buildings
		42	Civil engineering
		43	Specialised construction activities
16	Water supply and sewerage services	36	Water collection, treatment and supply
		37	Sewage collection and treatment
17	Waste management	38	Sewerage
		39	Remediation activities and other waste management services
18	Building material industry	8.1	Quarrying of stone, sand and clay
		23	Manufacture of other non – metallic mineral products
19	Transport, transportation, logistics	49	Land transport and transport via pipelines
		50	Water transport
		51	Air transport
		52	Warehousing and support activities for transportation
		53	Postal and courier activities
20	Manufacture of medical devices	32.5	Manufacture of medical  and dental instruments and supplies
21	Tourism	55	Accommodation
		56	Food and beverage service activities