How does the Hungarian Government assess the approval or prohibition of foreign direct investment in Hungary? What are the possible consequences of the Hungarian Government’s decisions on the foreign direct investment? In the 5^th part of our series of articles, we address these questions. 

Smartlegal Schmidt&Partners reports from Hungary:

  

1           GOVERNMENT’S ASSESSMENT PURSUANT TO THE GENERAL REGIME

Based on the notification of the Foreign Investor regarding its direct investment in Hungary, the Hungarian Government will examine whether the acquisition of ownership or operating rights by the Foreign Investor or the newly started activity violates Hungary’s security interests.

The Government shall, in general, conduct his assessment within 60 days as from the submission. In justified cases, the 60 days deadline can be extended by another 60-day period.

If there is no risk concerning Hungary’ security interests, the Government will acknowledge receipt of the notification in writing, or if there is a risk, the Government prohibits the transaction.

2           GOVERNMENT’S ASSESSMENT PURSUANT TO THE TEMPORARY REGIME

2.1       In general

The Government shall, immediately upon receipt of the notification, assess whether

1. the notification complies with the formal conditions,
2. there is a risk of violation to or endangerment of the interests of the state, public security or public order of Hungary, or the possibility of such violation or endangerment, in particular regarding the security of the supply of basic social needs,
3. the Foreign Investor is controlled, directly or indirectly, by a government of a state other than a Member State of the European Union, including public bodies or the armed forces, whether through its ownership structure or through substantial financing,
4. the Foreign Investor has been involved in activities that threaten security or public order in any Member State of the European Union; or
5. there is a serious risk that the Foreign Investor will engage in activities considered a criminal offence.

The Government shall adopt a decision within 30 days as from the submission of the notification. In justified cases, the deadline can be extended by a 15-day period.

2.2       Special Provision – Hungarian State’s Right of First Refusal regarding solar power stations

In January 2024, a new provision was added to the Temporary Regime. If the sale and purchase transaction under the Temporary Regime is concluded in respect of a strategic company with a solar power plant activity as its main or additional activity, the Hungarian State shall have a right of first refusal, prior to any other claimant.

The Hungarian State shall exercise its right of first refusal through the Hungarian National Asset Management Limited Liability Company within a time limit of 60 working days from the date of the notification of the Hungarian Government.

The Hungarian Government sends the documentation obtained in the application to the Minister of Energy, who examines the transaction to determine whether the exercise of the right of first refusal is justified and replies within 15 working days.

If the Hungarian Government receives a proposal to exercise the right of first refusal, the Hungarian Government shall terminate the procedure relating to the notification, or if the Minister of Energy does not wish to exercise the right of first refusal, the Hungarian Government shall decide on the merits of the notification.

The above provisions do not apply to household-scale small power plants.

3        POSSIBLE CONSEQUENCES UNDER THE GENERAL AND TEMPORARY REGIME

In case of an acquisition of ownership or influence subject to the General Regime, an application for registration in the share register of a Hungarian company can be submitted upon receipt of the acknowledgement of the Government.

Unless otherwise provided by law in relation to the activities subject to notification under the General Regime, the contract for an operating right shall enter into force on the date of acknowledgement of the Government.

If it is revealed during the inspection that the Foreign Investor has not fulfilled its obligations under the General Regime, the Hungarian Government will impose a fine, and

1. acknowledges the notification in writing if there are no grounds for prohibiting the transaction; or
2. if there are grounds for prohibiting the transaction, prohibits it.

If the Hungarian Government prohibits the transaction, the Foreign Investor is granted a maximum of 3 months to sell its shareholding in the Hungarian company, to terminate its influence, to close the branch or to change its scope of activity. The Hungarian State has a right of first refusal in case of the sale.

No official inspection or proceedings to establish an infringement may be initiated in respect of failure to notify under the General Regime if 18 months have lapsed from the date on which the body entitled to audit becomes aware of the following circumstances:

1. the acquisition of ownership or the right to operate,
2. the finalisation of a decision to be taken in proceedings for the authorisation of an activity subject to the notification requirement under the General Regime, or
3. the registration of the new activity in the register of companies.

Moreover, there is an objective time limit, according to which 5 years from the circumstances above, no proceedings against the Foreign Investor can be initiated.

Similar rules apply to the Temporary Regime, but the time limit is slightly different, i.e. after 6 months from the date of becoming aware of the circumstances above, but no later than 5 years no official inspection, or proceedings against the Foreign Investor may be initiated.

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