Smartlegal Schmidt&Partners reports from Hungary:
What Hungarian regulations restrict or control foreign investors’ direct investment in Hungary? Who is considered an „foreign investor” subject to restrictions and what economic areas are covered by these regulations? In the second part of our series of articles, we address these questions.
1 General Regime
In 2018 Hungary adopted the General Regime, under which the Government may restrict foreign direct investment in Hungary in key sectors in case the national security of Hungary is in danger.[1]
Based on the General Regime[2], which entered into force on 1st January 2019, investors who are considered as foreign, among others, must report their acquisitions in Hungarian companies of a strategic interests or establishments of such branch offices. The values to be protected by the General Regime, are among others, are the national security, public order, foreign policy and foreign economic interests, public health, etc.
Pursuant to the General Regime, the Hungarian Government has a broad range of rights, most importantly, it has the right to prohibit the acquisition or may withdraw the right of the company to pursue certain activity.
2 Temporary Regime
Furthermore, due to the COVID19, the Hungarian lawmaker has adopted the Temporary Regime, as a parallel regime[3], which has a wider scope than the General Regime. Despite the decline of the coronavirus, the Temporary Regime has been practically upheld by reference to the war in Ukraine.
It is noted that the CJEU ruled in the Xella case[4] that the predecessor of the Temporary Regime is contrary to the freedom of establishment laid down in one of treaties forming the EU.[5] The CJEU found that ensuring the security of supply to the construction sector, in particular at the local level, with respect to basic raw materials such as gravel, sand and clay, cannot be considered as a legitimate reason to restrict the freedom of establishment. In light of this decision, the Temporary Regime may be modified in the near future.
3 EU Regulation on screening mechanisms
In connection with the above it may be noted that an EU legislation was adopted in March 2019, which is directly applicable in Hungary. (“EU Regulation”) This Regulation established a framework for the screening of foreign direct investments into the EU[6].
The EU Regulation lays down the basic rules for screening mechanisms, e.g. the principle of transparency and non-discrimination, possibility of recourse against the screening decisions.
Moreover, the EU Regulation also lists certain factors that may be taken into consideration by the Member State when assessing whether a foreign direct investment is likely to affect security or public order.
4 WHO IS A FOREIGN INVESTOR?
4.1 Foreign Investors under the General Regime
“Foreign Investor” means any natural or legal person / other person who is a national of / established in a state outside the European Union, European Economic Area, and Switzerland.
To prevent the General Regime from being circumvented, Hungarian, EU or EEA-based companies, Swiss companies that have interest in a Hungarian-based company subject to the General Regime shall be considered as Foreign Investors, if their controlling shareholder is person mentioned above.
For instance, if a Hungarian company which is owned 51% by a US company shall be considered as “Foreign Investor”.
4.2 Foreign Investors under the Temporary Regime
Regarding the “Foreign Investor” under the Temporary Regime, the provisions mentioned in the General Regime shall be applied, however, different rules shall be applied to third country persons, and to Hungarian, EU/EEA, Swiss companies controlled by a third country person.
We highlight these differences later, when discussing the transactions covered.
5 WHAT SECTORS ARE COVERED?
5.1 Sectors covered under General Regime
The General Regime’s notification obligation applies only to certain priority sectors of the national economy, such as:
- manufacturing of arms, military technology and secret service equipment;
- the production of dual-use products;
- provision of certain gas, water and electricity supply services;
- provision of certain financial services;
- provision of electronic communication services; maintenance of electronic information systems;
- insurance and reinsurance activities.
5.2 Sectors covered under Temporary Regime
The Temporary Regime has a much broader scope, as it shall be applied to, among others, the following sectors:
- manufacture of basic pharmaceutical products;
- in certain industries in information and communication sectors, e.g., telecommunications, programming and broadcasting activities;
- wholesale and retail trade and repair of motor vehicles and motorcycles;
- manufacture of basic metals, fabricated metal products;
- manufacture of machinery and equipment;
- transporting and storage;
- construction of buildings;
- accommodation, food and beverage service activities;
- temporary employment agency activities;
- tertiary education;
- postal and courier activities;
- warehousing and support activities for transportation.
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