Which transactions are subject to the FDI restrictions in Hungary? What are the exceptions to regimes? In the next part of our series of articles, we will address these topics, discussed separately the General and Temporary Regime.
Smartlegal Schmidt&Partners reports from Hungary:
1 WHAT TRANSACTIONS ARE COVERED BY THE GENERAL REGIME?
1.1 Acquisition of ownership or influence
It shall be reported if a Foreign Investor intends to acquire more than a 25% interest (10 % in the case of public limited companies) directly or indirectly in an existing or yet to be established Hungarian company pursuing the activities covered by the scope of the General Regime; or to acquire controlling influence in such company.
In addition, the acquisition is subject to notification if the acquisition results that the combined share of Foreign Investors exceeds 25% of a Hungarian company pursuing an activity covered by General Regime (except public limited companies).
1.2 Establishment of a branch office
Branch offices, for the purpose of pursuing the activities covered by the General Regime, can only be established with the prior approval of the Hungarian Government.
1.3 Acquisition of operating right
Foreign Investors can acquire only the right to use or operate the infrastructure, equipment, and facilities indispensable for the pursuit of the activities specified in General Regime with the prior approval of the Hungarian Government.
1.4 Taking up new activity
Companies, controlled by Foreign Investors, can only start an activity covered by the General Regime after the prior approval of the Hungarian Government.
2 WHAT TRANSACTIONS ARE COVERED BY THE TEMPORARY REGIME?
2.1 Two-step process to identify the covered transactions
Transactions under the Transitional Regime can be identified in a two-step process. First, there are specific types of transactions (e.g. transfer of shares) which may be subject to the transitional regime if one of the following conditions is met:
- the transaction in question is carried out by a third country investor; or
- the value of the transaction is over HUF 350.000.000 (appr. EUR 898.580)
- the transactions concerns operating right.
Based on the above, we first describe the transaction types, then, we outline the alternative conditions.
2.2 First step: Identifying the transaction types
Under the Temporary Regime, only the strategic company shall be subjected to the screening procedure.
In case of a strategic company, the following transactions may be subjected to the Temporary Regime, if one of the conditions mentioned in 2.3. are met:
- the transfer, free of charge or for consideration, of all or part of the ownership interest in a strategic company, by means of any transfer of ownership, including providing in-kind contribution,
- an increase in the capital of a strategic company,
- transformation, merger, or division of a strategic company,
- the issue by a strategic company of convertible bonds, bonds with subscription rights, or exchangeable bonds,
- the creation of a usufructuary right in shares of a strategic company.
2.3 Second step: Identifying the foreign investor or the value of the transactions
2.3.1 Acquisition by third country investor without threshold
The notification obligation shall apply if
- a third country foreign investor acquires a 10%, 20% or 50% share in a strategic company as a result of the acquisition of ownership, the acquisition of the ownership of the bond or the acquisition of the beneficial interest, or
- the combined shareholding of the Foreign Investors in the strategic company exceeds 25% (except of a public limited company) through the acquisition of ownership of share, the ownership of the bond or the right of usufruct in a strategic company by a third country foreign investor.
2.3.2 Transactions over HUF 350.000.000
If the total value of the transaction mentioned above is equal to or exceeds HUF 350 million and because of the transactions
- an EU, EEA, Swiss investor or an EU/EEA/Swiss investor majority owned by a third country company acquires, directly or indirectly, a controlling shareholding, mentioned above, in the strategic company or a bond or usufructuary right which provide majority control in a strategic company;
- a third country investor acquires, directly or indirectly, a shareholding of at least 5% in the strategic company and a shareholding of at least 3% in any public limited company,
the transaction in question is subject to the Temporary Regime.
2.4 Special case: Operating rights
Finally, notification procedure shall be also required in the case of the transfer, assignment of the right to use or operate infrastructure, equipment and assets essential for the pursuit of the activity in the Sectors protected under the Temporary Regime or the provision of such assets as security, if the operating right is acquired by a Foreign Investor or a legal person or entity in which the Foreign Investor directly or indirectly holds a majority interest within the meaning of the Hungarian Civil Code.
3 EXCEPTIONS
The Temporary Regime shall not be applied to the transaction if a transaction mentioned above entered directly in respect of a foreign legal person or other entity, simultaneously gives rise indirectly to the cases mentioned in 1 and 2 sections in respect of a subordinate Hungarian affiliate of the foreign legal person or other entity, which is a strategic company.
The article was written by dr. Péter Korózs.
SMARTLEGAL is a team of agile business & litigation lawyers in Budapest, Hungary, helping international corporate clients and individual entrepreneurs doing business in Hungary. For more information please visit our website at Smartlegal.hu