New Notification obligation of foreign investors acting in certain strategic industries

Tax & Legal Alert | Issue 603 | 16 November 2018

Hungary’s Act LVII of 2018 on foreign investments that violate Hungary’s security interests (“Act”) enters into force as of 1 January 2019. The act imposes a preliminary notification obligation on foreign investors who intend to conduct activities in certain strategic industries. The competent minister may either acknowledge or reject such reports, and may also prohibit an investment on the grounds that it would violate Hungary’s security interests.

1. Who qualifies as a foreign investor under the act?

Foreign investor means any citizen or legal person or other organization registered in any state outside of the European Union, the European Economic Area or Switzerland. Pursuant to the Act, an affected (natural or legal) person qualifies as a foreign investor if such a legal person, already registered in Hungary or any other member state of the EU or the EEA or Switzerland, intends to acquire interest in a Hungarian company in which the foreign citizen or legal person or other organization has a controlling interest.

2. Which activities of foreign investors are subject to the notification obligation?

Pursuant to the Act, a foreign investor may only acquire, directly or indirectly, a controlling interest defined in the Hungarian Civil Code or an ownership stake exceeding 25% in a company registered in Hungary and conducting activities in certain strategic industries, or in the case of a public company limited by shares an ownership stake exceeding 10%, if the competent minister has received and confirmed the receipt of the report. The notification obligation is also applicable to the establishment of a foreign investor’s branch office.

Acquisition of the right of use or right of operation (right of operation) of infrastructure, equipment or assets required for the conduct of activities in the strategic industries is also subject to the notification obligation.

3. Which activities are subject to the notification obligation?

The act qualifies the below scope of activities as activities subject to the notification obligation. A separate government decree will define specific activities within each scope:

a) manufacture of weapons and ammunition as well as the manufacture of military devices and equipment that are subject to license;

b) manufacture of dual use goods and products;

c) manufacture of intelligence devices and equipment specified in the government decree on the detailed rules of obtaining a license for a military activity and certifying businesses;

d) provision of financial services defined in the Act on Credit Institutions and Financial Enterprises and from the supplementary financial services, the operation of a payment system;

e) services subject to the Act on Electricity;

f) services subject to the Act on Natural Gas Supply;

g) services subject to the Act on Water Public Utility Service;

h) services subject to the Act on Electronic Communications;

i) set-up, development, and operation of electronic information systems subject to the Act on Electronic Information Security of Central and Local Government Agencies.

4. When may the minister render a prohibiting decision?

The minister either acknowledges the report or prohibits the affected investment. The minister’s written acknowledgment is a prerequisite for

       i. the foreign investor to be eligible for being registered in the members’ list or shareholders’ list of the company having its seat in Hungary, which company conducts activities in the specified strategic industries, or as an owner of such a company, in the company register;

       ii. the competent supervisory authority to issue the license required for the acquisition of ownership or conducting the activity, and

       iii. the agreement concluded by the foreign investor for the acquisition of the right of operation to enter into force.

Pursuant to the Act, the minister renders a prohibiting decision if the investment “violates Hungary’s security interests”. The Act however does not provide for the criteria on the basis of which the minister declares the violation of security interests.

Nevertheless, it is a significant rule of guarantee that the minister’s decision may be appealed before a court.

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As of 1 January 2019, Hungarian investments of natural and legal persons residing outside of the EU, EEA or Switzerland in certain strategic industries will be under tighter administrative control. Preparation of such investments will require a detailed legal assessment evaluating all the circumstances of the affected investment. It will be also necessary to take the notification obligation into consideration when the relevant contracts and agreements are drafted.

Risk assessment as well as the application of the new regulation necessitates thorough knowledge of the related government decree that, pursuant to the Act, the Hungarian Government shall prepare and issue; however, the Act does not prescribe any deadline for the Hungarian Government to fulfill this obligation.

(Closed at: 14 November 2018)

The above material are for general information purposes and does not qualify as legal advice relating to a specific case.

Should you have any questions in relation to the above, please contact your regular contact person or dr. Dániel Kelemen (daniel.kelemen@hu.pwclegal.com) and dr. Péter Zalai (peter.zalai@hu.pwclegal.com), attorneys of our law firm.

Credits: dr. Kornél Matits trainee lawyer.