Iván Sólyom (Lakatos, Köves és Társai Ügyvédi Iroda) authored this publication

Hungary has currently two separate FDI regimes in force.

The first regime, the so-called "General FDI Regime," which was introduced on January 1, 2019 to basically implement EU Regulation no. 2019/452, has a relatively narrow scope regarding the sectors covered (national security, public utility services, certain financial services).

The second FDI regime in effect is the "New FDI Regime," which has been adopted due to, and in connection with, the COVID-19 pandemic. Compared to the General FDI Regime, the New FDI Regime covers a wider number of sectors and activities. It, however, also contains significant exceptions (such as the exception for indirect transactions), which are commonly used in practice to avoid the need for FDI screening.

The basic concept of Hungarian FDI screening is that transactions which fall under either the General or the New FDI Regime require both notification to and acknowledgement by the competent minister as a precondition to the implementation of the deal. The competent ministers are (i) the Minister leading the Prime Minister's Cabinet Office for the General FDI Regime and (ii) the Minister of the Economic Development under the New FDI Regime.

Although the New and the General FDI Regimes are regulated in separate pieces of legislation, which do not refer to each other, the subject matter (FDI screening) is similar, and so their main logic is the same, focusing on the origin of the investor and the activities of the Hungarian target companies. However, despite their similarities, there are major differences between the two regimes (e.g., the "foreign investor" definitions in the two regimes do not match, different exemption rules apply, etc.). As the similarities and differences between them make the Hungarian FDI screening system complex and often confusing, we set out the applicable rules separately in the sections below where needed.

Recent updates

The most recent legislative developments concerning the Hungarian FDI systems is that the Hungarian legislator has adopted an emergency Government Decree under no. 561/2022, which decree slightly extended the scope of the notifiable transactions under the New FDI regime. The new rules are effective as of December 24, 2022 and reflected in our summary above. Another material development, that the final date of the interim extension to the General FDI Regime's scope (i.e., investments by EU/EEA or Swiss entities are also caught as referred above) remains to be effective until June 1, 2023 at the date of this summary.

Who files

In case of both regimes, the foreign investor shall make the FDI notification to the competent minister. However, the foreign investor definitions of the regimes differ.

General FDI Regime

Under the General FDI Regime, any natural person or legal entity qualifies as a foreign investor if it is (i) a citizen of/registered in a country outside of the EU, EEA or Switzerland or (ii) a legal entity registered in the EU, EEA or Switzerland but controlled by a non-EU/EEA/Swiss person/entity (EU entity controlled by a non-EU investor). According to COVID-19-related interim measures to the General FDI Regime, any natural person or legal entity citizen of/registered in a Member State of the EU/EEA or Switzerland is also considered as a foreign investor until June 1, 2023.

New FDI Regime

According to the New FDI Regime foreign investors are those (natural or legal) persons or organisations which are (i) citizens of/registered in a country which is outside of the EU, EEA or Switzerland; or (ii) legal entities registered in the EU, EEA or Switzerland, if they are under the majority control of (natural or legal) persons or organisations citizens of/registered in a country which is outside of the EU, EEA or Switzerland (EU entity controlled by non-EU investor). The New FDI Regime also applies to EU/EEA/Swiss investors (natural and legal persons) if they acquire majority control and the investment exceeds approx. EUR 880,000 (i.e. HUF 350,000,000 as set out in the New FDI Regime).

Types of deals reviewed

Covered transaction types under the General FDI Regime are:

• A foreign investor establishes a new Hungarian company or acquires an existing Hungarian company (solely or together with other foreign investor(s)) equity exceeding 25 percent (for privately held companies) or 10 percent (in publicly listed companies); or acquires a "dominant influence" in such company
• Foreign investor(s) acquire(s) equity of less than 25 percent in a privately held company registered in Hungary, but the total equity held by foreign investor(s) exceeds 25 percent as a result
• A foreign investor registers a branch office in Hungary for the purpose of carrying out listed strategic activities
• A foreign investor acquires a right to operate or use infrastructure or assets that are indispensable for carrying out listed strategic activities or
• A company registered in Hungary in which foreign investor(s) hold equity equivalent to that in (1) or (2) above takes up a listed strategic activity

Covered transaction types under the New FDI Regime are:

• Acquisition of ownership interest
• Capital increase
• Mergers, demergers, transformations to another company form
• Issuance of bonds that are convertible or convert to equity or provide preferential subscription rights
• Establishing usufruct¹ right over equity provided that, as a result of such transaction, the foreign investor would acquire
• Majority control (by way of ownership, voting rights, appointing management or otherwise) if the investment reaches or exceeds HUF 350 million (approx. €880,000) or
• At least 5 percent ownership interest (or 3 percent ownership interest in case of public companies), if the investment reaches or exceeds HUF 350 million (approx. EUR 880,000) or
• An ownership interest reaching 10 percent, 20 percent or 50 percent in a strategic company or any level of interest which, if computed together with any other foreign investors' interest, exceeds 25 percent

In addition, irrespective of ownership thresholds or transaction sizes, the transfer of using/operational rights of infrastructures and assets that are "indispensable for the operation of strategic companies" (including the pledging of these assets and infrastructures) require both notification to and acknowledgement by the competent minister.

Please note that in relation to transactions caught by the New FDI Regime, indirect acquisitions and higher level intragroup restructurings fall outside its scope provided that there is no direct ownership change in relation to the Hungarian target company.

Scope of the review

General FDI Regime

The minister reviews whether the triggering event "harms Hungary's security interests," which is not defined in the relevant laws and thus gives a broad framework for discretion to the competent minister.

In case of an EU entity controlled by a non-EU investor, a blocking decision can only be made in the case of circumvention, i.e., if it can be established that the EU entity's involvement in the transaction is for the purpose of circumventing the FDI screening rules. This could be the case, in particular, if the EU entity controlled by a non-EU investor does not carry out any actual economic activities or has no real presence in the EU Member States.

New FDI Regime

Under the New FDI Regime, the minister evaluates the following criteria:

• Whether the proposed transaction endangers or threatens to endanger the national interest, public order or public security of Hungary with particular attention to the security of supply relating to the basic needs of the society, in accordance with the relevant articles of the Treaty on the Functioning of the European Union (TFEU Art. 36, 52 (1) and 65 (1), which invoke, among others, public policy, public security or public health issues)
• Whether the foreign investor is directly or indirectly under the control of any administrative agency of any non-EU state (including its ownership structure or financing)
• Whether the foreign investor is or was involved in any activity relating to public security or public order in any other Member State
• Whether there is substantial risk that the applicant will commit any crime or illegal activity

Review process timeline

General FDI Regime

The foreign investor must make a notification to the Minister leading the Prime Minister's Cabinet Office before implementation and within ten days of:

• Signing the contract, in the event of equity acquisitions and operation right acquisitions
• The registration of the newly subscribed strategic activity in the company registry, for strategic activities

The deadline for review by the minister is 60 days (extendable by 60 days) from the date of filing.

New FDI Regime

The foreign investor shall make a notification to the Minister of Economic within ten days from signing the transaction documents. The minister has 30 business days to decide on the transaction, which deadline may be extended by 15 business days.

Based on our experience, the relevant ministries do not always comply with the deadlines set out in relevant laws, therefore substantial delays may occur in certain cases, and there are no effective remedies against such delays.

Outcomes

General FDI Regime

Under the General FDI Regime, the minister either issues a clearance decision or a veto decision, the latter if the triggering event "harms Hungary's security interests." In the case of an EU entity controlled by a non-EU investor, a veto decision can only be made in the case of circumvention, i.e., if it can be established that the EU entity's involvement in the transaction is for the purpose of circumventing the FDI screening rules. This could be the case, in particular, if the EU entity controlled by a non-EU investor does not carry out any actual economic activities or has no real presence in the EU Member States.

A veto decision can be challenged by the foreign investor or by the affected company only on a procedural basis (i.e., if the procedural rules of FDI screening have been materially breached). The only exception is that a veto decision can be challenged on a substantive legal basis concerning the ministry's opinion on whether or not the EU entity controlled by a non-EU investor carries out actual economic activities or has real presence in the EU Member States.

New FDI Regime

If the minister finds that any of the conditions for a veto decision apply (see points (a)-(d) above at "Scope of the review"), it shall issue a decision that forbids the completion of the contemplated transaction; otherwise the Minister shall acknowledge the notification.

The Minister is obliged to set out the reasons for any veto decision. However, in practice, the vagueness of the terms of relevant laws allows the Minister to deliver decisions in a discretionary or arbitrary manner.

The decision of the Minister cannot be appealed, but is subject to a challenge before the Metropolitan Court of Budapest, which has 30 days to deliver its decision.

If the court establishes that the rejecting decision was unlawful, it shall set aside such decision and order the minister to conduct a new review.

As mentioned earlier, unfortunately there is no public register on FDI decisions, therefore the proportion and number of denials or any other information relating to the FDI notifications made are not publicly known.

How foreign investors can protect themselves

Conducting FDI analysis at the initial stages of the intended transaction is critical if the contemplated transaction touches on Hungarian companies/assets. In certain cases where whether FDI screening is needed based on the applicable legal provisions, an informal discussion with the competent ministry or a written request to express their views on the transaction on a no-name basis can be useful. However, it shall be highlighted that the ministries are not keen to provide such opinions and those opinions would be on a non-reliance basis.

If the initial FDI analysis is that an FDI notification is necessary under the General FDI Regime, then the FDI notification is mandatory. However, if the initial FDI analysis indicates that an FDI notification is necessary under the New FDI Regime, there are some exceptions to explore before making such a notification:

• Potential structuring of the transaction to avoid the effects of the New FDI Regime by making the transaction indirect from the Hungarian company's perspective or
• Consider if an adjustment can be made to the registered activities of the target company so as to avoid unnecessary strategic activities. Hungarian targets may sometimes register a broad list of activities, even though the actual activities of the target are narrower and do not include strategic activities

Further, if a filing is necessary, then the process can be expedited if the filings are well prepared, address potential questions, and appropriate communications and advocacy efforts with relevant authorities are undertaken during the process.

Trends in the review process

The scope of the Hungarian FDI Regimes is drafted in a broad way and applicable FDI laws are vague, which makes it very difficult in certain situations to decide whether a transaction is subject to the mandatory screening or not. The ministries' guidance in these situations is that in case of doubt, it is advisable to file the transaction.

As the General FDI Regime focuses on more sensitive areas like national security, FDI screening under that regime usually takes more time and requires more information to be disclosed to the competent minister.

As there is no public register relating to FDI proceedings and FDI decisions under either regime, the number of FDI notifications and the ratio of acknowledged and vetoed transactions are not publicly known. Based on our past experience, the ministries approve most of the notified transactions. However, where natural resources are concerned, the ministry acts with greater scrutiny (for example, one veto decision was due to the fact that the target owned a natural water spring). There is no question that due to the emerging energy crisis and the armed conflict between Russia and Ukraine, companies that are active in the energy sector or that pursue national security-linked activities are and will be treated with much higher scrutiny.

_{1 Meaning a right to enjoy the use of and benefits from equity, absent or in lieu of ownership.}

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