1.1 What are the main trends/significant developments in the project finance market in your jurisdiction?
The government and the Hungarian National Bank (Magyar Nemzeti Bank – MNB) have introduced massive fiscal and monetary measures, growth loan and bond programmes since 2019, for the purpose of reviving the economy and increasing liquidity in the Hungarian market. There have been other initiatives to enhance the ability of banks to expand the financing of green investments. Financing of renewable (solar) energy projects and real estate – especially warehouses and industrial developments – remained the main focus of the Hungarian banks. Regarding photovoltaic projects, a major recent development was the transition from a feed-in tariff (KÁT) system, which was a more calculable and reliable system for financiers, to METÁR, which is more competitive and provides a tender-based price subsidy to investors in case of larger-scale projects. This generated a rush for KÁT licensing before its closure and a considerable financing need for such projects in the banking market.
1.2 What are the most significant project financings that have taken place in your jurisdiction in recent years?
Amongst the larger photovoltaic power plant developments, it is worth mentioning the financing provided by Bank of China for the construction and operation of a 100 MW photovoltaic power plant in Hungary. Another significant project was the Kopaszi Gát complex in Budapest, comprising several residential, office, retail and leisure components, which was financed in various phases by several Hungarian and regional banks.
2.1 Is it possible to give asset security by means of a general security agreement or is an agreement required in relation to each type of asset? Briefly, what is the procedure?
It is practically impossible under Hungarian law to give asset security by means of a general security agreement covering all assets of a relevant company, for various reasons (including legal and practical obstacles and difficulties, as well as various filing requirements of the different authorities). Therefore, usually separate security agreements are entered into, establishing security interests in respect of the following types of asset:
- mortgage over real estate (e.g. land plots where the project is developed);
- pledge/charge over quotas/shares or security deposit over shares of companies (which hold the licences necessary for the project, or any substantial asset);
- pledge/charge over unregistered movable assets as a specified group (over existing and future assets, similar to a floating charge) (e.g. inventory or the whole of the (unregistered) assets owned by a company);
- particularly described and identifiable movable assets (similar to a fixed charge) (e.g. vehicles);
- pledge/charge over rights and receivables (including intellectual property rights, if applicable) (e.g. intercompany loans, insurance, receivables from schemes or trademarks necessary for the project); and
- pledge and/or security deposit over bank accounts (where the company's revenue is managed).
Furthermore, in order to create valid and fully perfected security interests, the relevant security interests must be registered in public registers (e.g. land registry, company registry, Credit Collateral Registry).
2.2 Can security be taken over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground)? Briefly, what is the procedure?
Yes, it is possible to take security over real property (land), plant, machinery and equipment.
Security over real properties is usually established in the form of a mortgage. Plants and, in some cases, pipelines usually form part of, from a legal perspective, the underlying real property (land) where those assets are located and, as such, security over such types of assets may be covered by the security that is otherwise established over the real property (land), as applicable. There is also a possibility to establish a call option established for security purposes over real properties (instead of, or in tandem with, a mortgage). In addition, it is possible to register a prohibition of alienation and encumbrance (i.e. negative pledge) over real properties securing the mortgage/call option. All of these security interests are established under a security agreement and must be registered in the land registry.
Security may be taken over machinery and equipment as well. Typically, security over movable assets that do not form part of a real property, is established in the form of pledge/charge covering a specified group of assets. However, such description may cover essentially all existing and future unregistered movable assets owned by the project company from time to time. The security is established under a security agreement and must be registered in the Credit Collateral Registry (in Hungarian: Hitelbiztosítéki Nyilvántartás).
2.3 Can security be taken over receivables where the chargor is free to collect the receivables in the absence of a default and the debtors are not notified of the security? Briefly, what is the procedure?
Yes, security can be taken over receivables where the chargor is free to collect the receivables in the absence of a default and the debtors are not notified of the security.
Typically, security over receivables is established in the form of pledge/charge covering a specified group of receivables. However, such description may cover essentially all existing and future receivables of the project company from time to time. There is also a possibility to establish a security assignment over receivables (instead of, or in tandem with, a pledge/charge). The security is established under a security agreement and must be registered in the Credit Collateral Registry.
In order to create a valid and fully perfected security interest, the parties are required to register the security interest over receivables in the Credit Collateral Registry; however, it is not a pre-condition for the valid creation of the security to notify the debtors of the creation of the security interest, i.e. silent pledge/silent assignment is possible. Nonetheless, once the debtor has been notified of the creation of the security interest, the security beneficiary receives a somewhat better security position.
2.4 Can security be taken over cash deposited in bank accounts? Briefly, what is the procedure?
Yes, security can be taken over cash deposited in bank accounts.
Typically, security over bank accounts is established in the form of pledge/charge covering a specified group of bank accounts (accounts receivable). However, such description may cover essentially all existing and future Hungarian bank accounts of the project company from time to time. There is also a possibility to establish a security deposit over the bank accounts. However, in the event that the accounts are held with a bank other than the beneficiary of the security deposit, the parties need to enter into a tripartite agreement involving the relevant bank as well (which sometimes poses practical difficulties, since certain Hungarian banks are often reluctant to enter into such agreements). A security deposit over bank accounts grants more robust rights to the depositee than normal pledges/charges (e.g. the depositor cannot dispose of the accounts without the consent of the depositee, the depositee may directly satisfy its claims from the cash deposited on the accounts, and the depositor is entitled to its preferred position in the liquidation for a certain period of time).
On top of the bilateral pledge/charge over bank accounts agreement and tripartite security deposit agreement (in the case of a third-party account bank), the pledge/charge over the bank account must be registered in the Credit Collateral Registry and the security deposit is perfected through the blocking of the relevant accounts by the account bank in favour of the depositee.
2.5 Can security be taken over shares in companies incorporated in your jurisdiction? Are the shares in certificated form? Briefly, what is the procedure?
Yes. In Hungary, project companies are usually incorporated in the form of a limited liability company or private company limited by shares. There is no certificated form for quotas, and shares are usually issued in the form of dematerialised securities.
Security over quotas/shares is usually established in the form of a pledge/charge. There is also the possibility to establish a call option established for security purposes over quotas/shares (instead of, or in tandem with, a pledge).
In addition to entry into the pledge/charge agreement, the pledge/charge over the shares must be registered in the Credit Collateral Registry and the pledge over quotas must be registered in the company registry.
2.6 What are the notarisation, registration, stamp duty and other fees (whether related to property value or otherwise) in relation to security over different types of assets (in particular, shares, real estate, receivables and chattels)?
The registration fees and stamp duties relating to registration of security interests are not substantial. For instance, the filing fee for a mortgage is HUF 12,600 per mortgaged property, the filing fee for a quota pledge is an aggregate fee and stamp duty of HUF 18,000, and the registration fee for a pledge in the Credit Collateral Registry is HUF 7,000.
Although it is not a mandatory requirement to create valid and enforceable security, security documents governed by Hungarian law are usually entered into in the form of a notarial deed, since it can potentially facilitate and speed up enforcement processes. Notarial fees must be paid to the notary public. The amount of notarial fees payable depends on various circumstances and factors (e.g. secured amount; length of the documentation; complexity; language of documentation; and number of originals requested) based on a complex calculation method set out by law. As an example of straightforward security documentation, this would be in English and entail one Hungarian company, a full security package and a credit agreement of less than 300 pages altogether; the notarial fees are usually in the range of EUR 10,000 to 12,000.
2.7 Do the filing, notification or registration requirements in relation to security over different types of assets involve a significant amount of time or expense?
In general, filing, notification and registration do not involve significant expense (please see our response above regarding fees and stamp duties).
Security interests to be registered in the Credit Collateral Registry (e.g. bank account pledges, receivables pledges, asset pledges) are registered quickly, i.e. often the notary public doing the notarisation of the finance documents registers the relevant security interests on the signing date of the finance document or the day after. The Court of Registration has a 15-day deadline to register the quota pledges in the company registry (assuming that complete documentation has been filed). The official deadline of the registration of mortgages in the land registry is 60 days (assuming that complete documentation has been filed) but the applicants may request fast-track procedures by paying a minor fee which may potentially shorten the procedure (however, there is no obligation on the land registry to do so).
2.8 Are any regulatory or similar consents required with respect to the creation of security over real property (land), plant, machinery and equipment (e.g. pipeline, whether underground or overground), etc.?
Unless the relevant asset is owned by the state or local municipalities or is subject to special legal regimes, no regulatory or similar consents are required with respect to the creation of security, other than the foreign direct investment (FDI) regime in certain cases (please see section 6 below).
3. Security Trustee
3.1 Regardless of whether your jurisdiction recognises the concept of a “trust”, will it recognise the role of a security trustee or agent and allow the security trustee or agent (rather than each lender acting separately) to enforce the security and to apply the proceeds from the security to the claims of all the lenders?
Hungarian law recognises (and local market practice uses) a security agent regime under the concept of the Hungarian law equivalent known as the pledgee agent (in Hungarian: zálogjogosulti bizományos). The pledgee agent acts in its own name, taking, holding, managing and enforcing the pledge for and on behalf of the changing group of underlying lenders as secured parties.
3.2 If a security trust is not recognised in your jurisdiction, is an alternative mechanism available (such as a parallel debt or joint and several creditor status) to achieve the effect referred to above which would allow one party (either the security trustee or the facility agent) to enforce claims on behalf of all the lenders so that individual lenders do not need to enforce their security separately?
This is not applicable (please see question 3.1 above).
4. Enforcement of Security
4.1 Are there any significant restrictions which may impact the timing and value of enforcement, such as (a) a requirement for a public auction or the availability of court blocking procedures to other creditors/the company (or its trustee in bankruptcy/liquidator), or (b) (in respect of regulated assets) regulatory consents?
The security holder may enforce the security interest by private enforcement or by judicial enforcement. The security holder can choose and is entitled to switch from one enforcement method to another, at its sole discretion.
Private enforcement (which is generally more favourable to the security holder than a judicial enforcement procedure) includes enforcement through the sale of the secured asset by the security holder (via public auction or public tender), or acquisition of ownership interest of the secured asset by the security holder.
The security holder can acquire the ownership interest of the charged asset in a public sale, or if it is traded on the stock exchange. However, acquisition of ownership interest cannot be earlier than the commencement of the right to enforce the security.
If the private enforcement is not successful, or otherwise the security holder so decides, the security is enforceable through a judicial enforcement procedure. However, such procedure is more time-consuming and costly than the private enforcement procedure. The technical part of the enforcement procedure and the sale of the asset over which the mortgage/pledge was established is organised by an enforcement officer through a public auction.
The possibility of judicial appeal is also available through a court enforcement procedure and private enforcement.
Enforcement over agricultural land may suffer additional delay, as the security provider cannot acquire disposal rights for enforcement. There are also limitations on who can acquire land.
4.2 Do restrictions apply to foreign investors or creditors in the event of foreclosure on the project and related companies?
No such restrictions apply.
5. Bankruptcy and Restructuring Proceedings
5.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the security?
Insolvency proceedings are mainly governed by Act XLIX of 1991 on Bankruptcy Proceedings and Liquidation Proceedings (the Bankruptcy Act). Hungarian law differentiates between liquidation proceedings (the aim of which is the liquidate the debtor and satisfy creditors' claims) and bankruptcy proceedings (the aim of which is to try to restore the solvency of the debtor).
From the starting date of the bankruptcy proceedings (i.e. the day when the corresponding notification is posted in the Company Gazette (Cégközlöny) in accordance with Section 28 of the Bankruptcy Act) until the end of the applicable moratorium period, no security may be enforced by creditors (with the exception of certain securities, such as security deposits granted for credit institutions authorised to operate within the European Economic Area (EEA)).
Similarly, in the case of liquidation proceedings, no security may be enforced outside of the liquidation proceedings (with the exception of certain securities for a limited period of time, such as security deposits which may be enforced for three months from the starting date of the liquidation proceedings). It is the liquidator who is authorised to sell the assets of the company, including all of its pledged properties, and to distribute the proceeds of such sale to the pledgees/mortgagees within the framework of the liquidation proceedings.
5.2 Are there any preference periods, clawback rights or other preferential creditors' rights (e.g. tax debts, employees' claims) with respect to the security?
Claims secured by a pledge/mortgage and registered within the applicable 40-day deadline enjoy priority over the mandatory order of payment (as set out by law). After the deduction of certain costs as provided under the Bankruptcy Act (including taxes and fees of the liquidator (up to a specified threshold)), all sales proceeds of pledged assets are exclusively used for the satisfaction of claims secured by the pledge/mortgage. Claims that remain outstanding following the application of the above rules fall under the mandatory order of payment.
Creditors and liquidators are entitled to challenge certain contracts of the debtor within: (i) 90 days of being aware of the liquidation proceedings; or (ii) one year of the commencement date of the liquidation proceedings (whichever is earlier). They may challenge contracts which:
- have resulted in the reduction of the debtor's assets and have been entered into no more than five years before the submission date of the liquidation request, provided that the debtor's intention was to jeopardise the interests of creditors and the other party knew or should have known about the debtor's intention;
- (i) aim to transfer the assets of the debtor without consideration; (ii) create obligations on the account of the debtor's assets without consideration; or (iii) grant a significant benefit to a third party at a significantly discounted price, in each case where such contracts have been entered into no more than three years before the submission date of the liquidation request;
- give a preference to a particular creditor, including amending an existing agreement to the benefit of the creditor, or granting collateral to an unsecured lender, provided that it was entered into within 90 days before the submission date of the liquidation request; and
- were made for the purpose of transfer of ownership by way of guarantee, or the assignment of a right or claim by way of a guarantee or exercising a call option established for security purposes, where the beneficiary exercised such acquired right by failing to fulfil its obligation to settle with the debtor, or did so incorrectly, and/or failed to pay the amount remaining after the secured claim was satisfied, provided that such contracts have been entered into within three years before the submission date of the liquidation request.
The legal consequence of a successful challenge is that the underlying contract(s) will become unenforceable.
The liquidators may also reclaim amounts paid by the company in liquidation pursuant to performed contractual obligations or terminate any contracts that create a debt owed by the company (save for certain limited exceptions). Any service can be reclaimed (within the deadlines applicable to the challenge of contracts noted above) if: (i) it was performed by the debtor no more than 60 days before the date on which the request for liquidation proceedings is received by the court; and (ii) such service did not fall within the scope of the debtor's ordinary course of business and granted an unjustifiable preference to a particular creditor. Prepayment of a debt may be considered as giving preference or privileges to a creditor.
5.3 Are there any entities that are excluded from bankruptcy proceedings and, if so, what is the applicable legislation?
In general, certain entities set out by law (in particular, entities in the financial sector such as financial institutions, investment firms or insurance firms) shall be liquidated in accordance with specific exemptions applicable to the insolvency proceedings of such entities or under the applicable sectoral liquidation regime (e.g. the Hungarian Banking Act with respect to financial institutions).
5.4 Are there any processes other than court proceedings that are available to a creditor to seize the assets of the project company in an enforcement?
Direct enforcement of notarised security documents by way of the notary is the most time- and cost-efficient way of enforcing security documents entered into by way of a notarial deed. The notary endorses an enforcement clause on the notarised document and, thereby, such document becomes directly enforceable (i.e. without the involvement of lengthy court proceedings). Therefore, the current local market practice is to notarise security documents in order to benefit from such facilitated enforcement option.
5.5 Are there any processes other than formal insolvency proceedings that are available to a project company to achieve a restructuring of its debts and/or cramdown of dissenting creditors?
Outside formal insolvency procedures, a new temporary pre-insolvency “reorganisation procedure” will become available from July 2022 in Hungary.
The purpose of the reorganisation procedure is to give a company under the threat of insolvency the opportunity – with the assistance of a court-appointed reorganisation expert – to develop and implement a restructuring plan to reorganise its financial indebtedness.
In the framework of such reorganisation procedure, a moratorium can be ordered for a maximum of 90 days (which can be extended by a maximum of 60 days); this is similar to a moratorium ordered in bankruptcy proceedings (i.e., as a general rule, security interests cannot be enforced).
5.6 Please briefly describe the liabilities of directors (if any) for continuing to trade whilst a company is in financial difficulties in your jurisdiction.
Directors can still continue managing the company and trading despite financial difficulties. However, from the moment when the company is under the threat of insolvency, the directors must take into account the interests of the creditors of the company. If such principle is violated and, as a result, the company's assets are decreased or there are unsettled creditor claims, the directors may be held liable for these damages/claims in the framework of the Bankruptcy Act.
6. Foreign Investment and Ownership Restrictions
6.1 Are there any restrictions, controls, fees and/or taxes on foreign ownership of a project company?
Currently, there are two main foreign investment control regimes in Hungary.
Act LVII of 2018 on Controlling Foreign Investments Violating Hungary's Security Interests was introduced in 2018 and covers those investments where a non-European (i.e. outside of the European Union (EU), EEA and Switzerland) company intends to invest in Hungary in specific sectors (e.g. energy, military industry, finance, communication, IT security). Based on temporary measures introduced in relation to the COVID-19 pandemic, Act XCIX of 2021 on Temporary Measures Related to the “State of Danger” sets out that investors domiciled in the EU, the EEA or Switzerland shall also be considered foreign investors under this control regime. This temporary measure shall be applicable until the end of the “state of danger” (currently extended until 1 June 2022) plus a period of 12 months. The relevant activities are further detailed by Government Decree no. 246/2018 (XII.17). Investors are obliged to notify the Minister of the Interior about the proposed transaction. The detailed procedural rules are set out in Act LVII of 2018 and Government Decree no. 246/2018.
Due to the COVID-19 pandemic, Act LVIII of 2020, which entered into force on 18 June 2020 (and is applicable for an indefinite period), introduced a set of new rules with respect to the control by the Minister for Innovation and Technology over the acquisition of an interest in “strategic companies” (as defined by Act LVIII of 2020) that have a registered seat in Hungary by (i) “foreign investors” (as defined by Act LVIII of 2020), and (ii) investors domiciled in the EU, the EEA or Switzerland in certain cases. In the case of acquisition of an interest in strategic companies by “foreign investors”, the transaction must be notified to the Minister for Innovation and Technology, who shall subsequently also formally acknowledge the notification before the given transaction can be completed. The detailed procedural rules are set out in Act LVIII of 2020, while the relevant activity codes are listed in Government Decree no. 289/2020 (VI. 17). Certain temporary measures were introduced in relation to this foreign investment control regime by Act XCIX of 2021 on Temporary Measures Related to the State of Danger, which further broadened the scope of “public interest” as well as the definition of “strategic companies”.
Other than the above, there are no specific restrictions on foreign investment in Hungarian companies. Regarding taxation, the same rules are applicable if a Hungarian company is acquired by a domestic or foreign entity.
6.2 Are there any bilateral investment treaties (or other international treaties) that would provide protection from such restrictions?
Hungary has bilateral investment treaties (BITs) in force with 42 countries; furthermore, it is a Member State of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention). BITs with Hungary usually regulate issues that are generally common in BITs, such as fair and equitable treatment, limits on expropriation and dispute resolution, which does not cover the above restrictions. Therefore, the BITs and the ICSID Convention do not provide protection from the investment control rules detailed above.
6.3 What laws exist regarding the nationalisation or expropriation of project companies and assets? Are any forms of investment specially protected?
In Hungary, the basic rules of expropriation are regulated in the Hungarian Constitution and in Act V of 2013 on the Civil Code. Expropriation shall only be permitted:
- in exceptional cases;
- when such action is in the public interest;
- in such cases and in the manner stipulated by an act; and
- under terms of full, unconditional and immediate compensation.
Furthermore, only real estate may be expropriated and other assets, companies, etc. cannot. The detailed rules of expropriation, such as the possible public interest objectives, the detailed rules of compensation and other procedural rules, are regulated by Act CXXIII of 2007 on Expropriation.
7. Government Approvals/Restrictions
7.1 What are the relevant government agencies or departments with authority over projects in the typical project sectors?
There are regulatory bodies that are typically involved in the projects of the given sector, such as the Hungarian Energy and Public Utility Regulatory Authority, the National Media And Infocommunications Authority and the MNB (as the regulator of the Hungarian financial and insurance sector).
7.2 Must any of the financing or project documents be registered or filed with any government authority or otherwise comply with legal formalities to be valid or enforceable?
Apart from the formalities and registration obligations detailed in section 2 and the possibility of the application of the Hungarian FDI notification obligation detailed in section 6, no further formalities are applicable.
7.3 Does ownership of land, natural resources or a pipeline, or undertaking the business of ownership or operation of such assets, require a licence (and if so, can such a licence be held by a foreign entity)?
As a general rule, mineral raw materials are state-owned and the exploration (use) of mineral raw materials is subject to licence or permit. Generally, there are no foreign ownership restrictions in the Hungarian energy sector. However, FDI regimes (as detailed in section 6) apply to the acquisition by foreign investors of an interest in companies operating in certain energy sectors. Agricultural lands cannot be acquired by companies (foreign or domestic).
7.4 Are there any royalties, restrictions, fees and/or taxes payable on the extraction or export of natural resources?
In exchange for exploiting any mineral raw material, the Hungarian state shall be entitled to a mining royalty. The monetary amount of the mining royalty is expressed as a percentage of the value of exploited mineral resources specified in the Hungarian Mining Act or the concession contract. Business entities in Hungary are subject to various taxes (such as local business taxes and corporate income taxes, etc.). The transmission of electricity and natural gas are subject to system usage fees.
7.5 Are there any restrictions, controls, fees and/or taxes on foreign currency exchange?
There are certain reporting and control obligations in connection with foreign currency exchange; apart from that, as a general rule, there are no restrictions on currency transfers or exchanges.
7.6 Are there any restrictions, controls, fees and/or taxes on the remittance and repatriation of investment returns or loan payments to parties in other jurisdictions?
As a general rule, there are no restrictions on the remittance and repatriation of investment returns or loan payments.
7.7 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
All Hungarian project companies shall have at least one Hungarian bank account (either in HUF or other foreign currency). Apart from that, project companies may freely establish and maintain onshore and/or offshore accounts.
7.8 Is there any restriction (under corporate law, exchange control, other law or binding governmental practice or binding contract) on the payment of dividends from a project company to its parent company where the parent is incorporated in your jurisdiction or abroad?
As a general rule, no dividend payment may be initiated in the following cases: (i) if the company's own equity is below its registered capital; (ii) if the company's own equity would drop below its registered capital due to such distribution; or (iii) if the distribution would jeopardise the company's solvency. Apart from such general provisions, there are no such restrictions applicable to Hungarian or foreign based companies. However, dividend payments may be further limited by the company's constitutional documents, the shareholders' agreement (if any) and the financing agreements.
7.9 Are there any material environmental, health and safety laws or regulations that would impact upon a project financing and which governmental authorities administer those laws or regulations?
Environmental, health and safety laws always have an impact on project financing, especially in case of greenfield and early-phase investments. Such laws are generally administered by the government authorities, not by a separate government agency.
7.10 Is there any specific legal/statutory framework for procurement by project companies?
Public procurements (i.e. for the purchase of goods and services and for construction works) are strictly regulated by the Public Procurement Act. Procurement of private projects, in principle, is not regulated by the law, but financing agreements may contain limitations or restrictions in this regard.
8. Foreign Insurance
8.1 Are there any restrictions, controls, fees and/or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
There are financial regulatory/licensing restrictions, i.e. passporting or setting up a branch or subsidiary would be necessary to offer insurance services in the territory of Hungary.
8.2 Are insurance policies over project assets payable to foreign (secured) creditors?
Usually insurance proceeds are pledged in favour of creditors, and the application of such proceeds is regulated in the facility agreement.
9. Foreign Employee Restrictions
9.1 Are there any restrictions on foreign workers, technicians, engineers or executives being employed by a project company?
Nationals of EU/EEA Member States are not subject to any restrictions in terms of being employed in Hungary. Third-country nationals (i.e. non-Hungarian and non-EU/EEA nationals) are generally required to have a residence permit and work permit to be employed in Hungary. However, as part of the authorisation process, the competent authority generally checks whether there is a suitable Hungarian or EEA national workforce available for the given job, and does not issue the third-country national's work permit if there is a qualified Hungarian or EEA-national jobseeker for the job in question. However, this rule does not apply to the project company's key personnel.
10. Equipment Import Restrictions
10.1 Are there any restrictions, controls, fees and/or taxes on importing project equipment or equipment used by construction contractors?
Due to the internal market of the EU, goods can freely circulate between EU Member States, generally without the application of any restrictions. Trade between Hungary and third countries (i.e. non-EU countries) is regulated by the EU, and therefore importing goods from outside the EU is mainly subject to restrictions prescribed by EU law.
10.2 If so, what import duties are payable and are exceptions available?
The amount of duties payable mainly depends on the classification of the equipment concerned and the country of origin. Goods are classified by TARIC (Integrated Tariff of the European Union) Code.
11. Force Majeure
11.1 Are force majeure exclusions available and enforceable?
Force majeure is not expressly defined in Hungarian law; however, the courts recognise the concept and it is applied in practice.
12. Corrupt Practices
12.1 Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects sector)? What are the applicable civil or criminal penalties?
Yes, the Hungarian Criminal Code generally prohibits corrupt business practices and bribery. Hungary is also a signatory to a number of European and international anti-corruption conventions.
Hungarian law takes a rather wide approach when it comes to establishing what is deemed a “bribe”. Any unlawful advantage, whether monetary or moral in nature, can be considered a bribe if such advantage is given by way of the bribed person violating his/her obligations; therefore, any facilitation (no lower threshold exists) can be considered bribery under the Criminal Code. The Criminal Code punishes both the providing/offering side and the receiving/requesting side. Any attempt at bribery is also punishable and Hungarian officials have a reporting obligation if they become aware of any such attempt.
There are no separate rules applicable to the project sector; however, the bribery of official persons (members of government, governmental agencies, law enforcement, judicial bodies, etc.) is a separate, more serious crime under Hungarian law. Bribery is a crime that is punishable by imprisonment; the sentence depends on the actual form of bribery and the seriousness of the case.
In Hungary, no facilitation payment is allowed by law and there are no separate rules for lobbying.
13. Applicable Law
13.1 What law typically governs project agreements?
Depending on the composition of the bank consortium and/or the sponsors, project agreements can be governed by domestic or foreign law (English law or sometimes German law) but mandatory provisions of Hungarian law shall be applicable.
13.2 What law typically governs financing agreements?
Typically, Hungarian law, but in the case of larger financings with foreign banks participating, English law is preferred.
13.3 What matters are typically governed by domestic law?
Security, corporate and real estate matters are usually governed by domestic law.
14. Jurisdiction and Waiver of Immunity
14.1 Is a party's submission to a foreign jurisdiction and waiver of immunity legally binding and enforceable?
Based on the general rule regulated by Hungarian international private law, submission to a foreign jurisdiction will be binding and enforceable, since parties are free to choose the governing law of their relationships and can agree to submit any disputes to the courts of a foreign jurisdiction. However, certain exceptions do exist under international and bilateral treaties, EU and local regulations.
The Hungarian state, public bodies exercising state authority and persons acting on behalf of the state have immunity as a general rule. Regardless of the subject of the proceedings, the state does not have immunity if it has expressly renounced it, in proceedings initiated by the state itself, or in which it has intervened or entered an appearance, or with regard to a counterclaim presented in an action opened by the state. Furthermore, there are several cases where the state does not have immunity by law based on the subject of the proceedings; for example, if the subject is a right or obligation arising from a civil law contract to which the state is a party.
15. International Arbitration
15.1 Are contractual provisions requiring submission of disputes to international arbitration and arbitral awards recognised by local courts?
Yes, they are. Rules regarding arbitration are governed by Act LX of 2017 on Arbitration.
15.2 Is your jurisdiction a contracting state to the New York Convention or other prominent dispute resolution conventions?
Yes. Hungary is a party to the New York Convention, which entered into force on 3 June 1962 by Decree-law 25 of 1962, and to the Washington Convention, which entered into force on 1 January 1988 with retroactive effect to 6 March 1987 by Decree-law 27 of 1987.
15.3 Are any types of disputes not arbitrable under local law?
Yes, there are certain types of disputes which are not arbitrable under local law, e.g. marital disputes, disputes in connection with fatherhood and biological origin, termination of parental supervision, termination of adoption, actions for child support, guardianship procedures, claims regarding certain personal rights, disputes relating to consumer contracts, employment and administrative disputes, disputes regarding enforcement procedures, and trespass cases.
15.4 Are any types of disputes subject to mandatory domestic arbitration proceedings?
The Hungarian legal framework does not subject any types of disputes to mandatory domestic arbitration procedures.
16. Change of Law / Political Risk
16.1 Has there been any call for political risk protections such as direct agreements with central government or political risk guarantees?
Concluding direct agreements with the state is common, e.g. in larger infrastructure deals, but we are not aware of any political risk guarantees.
17.1 Are there any requirements to deduct or withhold tax from (a) interest payable on loans made to domestic or foreign lenders, or (b) the proceeds of a claim under a guarantee or the proceeds of enforcing security?
No, if payment is made to a legal entity.
17.2 What tax incentives or other incentives are provided preferentially to foreign investors or creditors? What taxes apply to foreign investments, loans, mortgages or other security documents, either for the purposes of effectiveness or registration?
Hungarian tax residents are taxed on worldwide income, while non-residents are taxed only on Hungarian-source income. The corporate income tax (CIT) rate is only 9%. There is no withholding tax, based on Hungarian domestic law, on any outbound payments (including dividends, interest, royalties and management fees) made to foreign business entities. Capital gains realised by a non-resident shareholder from the sale of shares in a Hungarian company generally are not taxable, but Hungarian taxation at 9% may apply in certain cases regarding the sale of shares in real estate companies. Development tax incentives apply in the form of tax credits for certain investments, depending on the amount of the investment, the industry, and the region within Hungary.
18. Other Matters
18.1 Are there any other material considerations which should be taken into account by either equity investors or lenders when participating in project financings in your jurisdiction?
There are no specific considerations in this regard.
18.2 Are there any legal impositions to project companies issuing bonds or similar capital market instruments? Please briefly describe the local legal and regulatory requirements for the issuance of capital market instruments.
Project companies can issue bonds or similar capital market instruments; there are no legal requirements that apply exclusively to project companies in this regard.
The regulatory requirements for the issuance of capital market instruments are numerous – the Hungarian capital market is heavily regulated and strictly supervised.
Any issuer company seeking the issuance of securities on the Budapest Stock Exchange must comply with Act CXX of 2001 on the Capital Market and the listing rules of the Budapest Stock Exchange.
Project financing may be also carried out by private issuance if an exemption set out in Regulation 2017/1129/EU (the Prospectus Regulation) applies to the issuance. In this case, the prospectus or other offering document is not published but solely disclosed to the investors, and only the Central Bank of Hungary, as the regulator, is notified of the issuance.
19. Islamic Finance
19.1 Explain how Istina'a, Ijarah, Wakala and Murabaha instruments might be used in the structuring of an Islamic project financing in your jurisdiction.
This is not applicable in Hungary.
19.2 In what circumstances may Shari'ah law become the governing law of a contract or a dispute? Have there been any recent notable cases on jurisdictional issues, the applicability of Shari'ah or the conflict of Shari'ah and local law relevant to the finance sector?
We are not aware of any such cases.
19.3 Could the inclusion of an interest payment obligation in a loan agreement affect its validity and/or enforceability in your jurisdiction? If so, what steps could be taken to mitigate this risk?
No validity or enforceability issues could arise.
Originally Published by ICLG - Project Finance
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