Restrictions to protect the construction industry
Tax & Legal Alert | PwC Hungary | 19 July 2021
The Hungarian Government has issued several regulations which have a significant impact both on the construction industry and on the sector extracting base materials used in the construction sector.
Export restrictions
The Government has introduced export restrictions on the sale and delivery of construction materials to abroad from Hungary which are considered strategically important for the security of supply of the construction industry. The regulation sets out which building materials are considered to have strategic importance. Examples of such raw materials are gravel, crushed stone used in road construction and concreting, as well as several iron and steel products that are essential for the construction industry.
The restriction on these construction materials is implemented through a notification system and the establishment of a pre-emption right and purchase option after notification. In this context, it will only be possible in future to sell strategically important materials outside the country or to transfer them from the country for any other reason, if it has been notified in advance to the Minister for Innovation and Technology ("ITM") and the ITM has acknowledged receipt of the notification.
The notification to ITM will be followed by a 10-working day long investigation – potentially involving several ministries – in order to establish whether the export of the shipment would significantly impede or render impossible the establishment, operation, maintenance or development of critical infrastructure and thereby endangers public supply or pose a risk to security of supply in the construction industry.
If the export does not achieve such effects, the ITM will acknowledge it and it will be possible to transfer it abroad. However, if it is established that the export will have the above result, the Hungarian State will exercise its right of pre-emption or its option to purchase. If the Hungarian State is unable to agree on the price with the owner of the building material, the State acquires ownership by paying the current market value. If the market participant is not satisfied with the purchase price received, the opportunity is given to take legal actions, however, this procedure does not suspend the exercise of the right of pre-emption or option to purchase.
It should be highlighted that, when examining whether the obligation exists, the scope of the materials concerned is defined by the legislation based on tariff headings. On the one hand, this means that not all types of building materials are subject to the obligation. On the other hand, products which are not used in the construction industry but in other industries (e.g. automotive, machinery, manufacturing) may also be classified in these headings. It is therefore essential that companies check the headings of their products and assess whether they are covered by the obligation.
Mining fee on sales revenue above the market price level
A further measure in the regulation introduces an additional mining fee for companies extracting certain construction raw materials.
The additional tax burden affects market participants carrying out one of the activities defined in the Government Decree as their principal activity (quarrying, mining of gypsum, chalk, gravel, sand and clay, production of cement, lime and gypsum), have a net sales revenue of HUF 3 billion in 2019 and are otherwise liable to pay mining fee (but not a legal entity producing geothermic energy).
Market participants who correspond to these conditions are required to pay profit tax if the extracted raw materials are sold above the prices set out in the Government Decree. In such a case, the 90% additional mining fee must be paid for the “extra” profit from the sale in excess of the price.
Legal consequences of existing contracts
The measures introduced may also have an impact on the performance of contracts already in force and on the implementation of ongoing projects. This is because if the State exercises the right of pre-emption, a domestic seller cannot fulfil its obligations towards its foreign counterparties, which results in a breach of contract.
Moreover, if the ITM gives the necessary approval for the export of the materials, the delivery times will still be extended by at least 10 working days, making it harder to meet the deadlines already set. The common point in the diversity of effects is the failure to perform previously undertaken obligations in accordance with the contract, which can lead to the payment of penalties or damages.
In such a case, the possibility of exemption from liability for breach of contract arises. State acts are beyond the control of market participants and it cannot be expected that they will be prevented, since market participants cannot directly influence the legislator.
The foreseeability of the measures can also be clearly refuted, as the restrictions entered into force the day after they were announced leaving insufficient time for market operators to prepare for the consequences of the export restrictions.
Further interpretation matters
It is unclear how broadly the Minister will interpret the restrictions, as the level and quality of exports that constitute a significant impediment to critical infrastructure are not quantified.
It is assumed that the above categories will be interpreted as broadly as possible in order to keep as many raw materials in the country as possible. The question of interpretation, however, is not only relevant with respect to the quantitative thresholds, but also whether the State will exercise its right pre-emption or its option to purchase in connection with all potential uses of the specified materials and equipment, or only in connection with the use of these in the construction industry.
A broader interpretation is expected here as well, which means that a restriction may occur even if a product falls under one of the relevant tariff headings, but is not intended for construction use.
There is also a question as to whether the obligation also applies to products owned by foreign persons or companies that are only transported to Hungary for contract manufacturing or storage purposes and then transported abroad.
What is certain, however, is that the Government Decree itself states that building materials in transit through the territory of Hungary are not subject to restrictions.
A further issue is that the Government Decree gives the Minister ten working days from receipt of the notification to take a decision and communicate it, but the legislation does not provide for a procedure to be followed if the consultation and feedback from the Ministry is not provided within the prescribed time limit.
If you have any questions regarding the above – or regarding any other form of RDI subsidies – please don’t hesitate to contact one of our expert colleagues below, or your usual PwC contact.
Dániel Kelemen
Email: daniel.kelemen@pwc.com
Balázs Szük
Email: balazs.szuk@pwc.com
Gergő Szimler
Email: gergo.szimler@pwc.com
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