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

Hungary still has its former FDI regulation structure, which means that it has two separate FDI regimes in force. The first regime, the so-called "General FDI Regime" focuses on a narrower scope and covers only sectors closely related to national security and public utility services, while the second FDI regime, the "New FDI Regime" covers a much wider part of the economy and affects more deals in general.

Although the New and the General FDI Regimes are regulated in separate pieces of legislation, 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.

Summary of major changes in 2023/2024

• As of June 1, 2023, the General Regime is not applicable to investors who are registered in the EU, EEA or Switzerland, and has no majority owners and beneficial owners from outside the EU, EEA or Switzerland
• In case of investments where the value reaches or exceeds HUF 350 million (€930,000), the triggering amount of acquired ownership interest under the New Regime has been reduced to 5 percent, and to 3 percent for publicly listed companies in case of non-EU/non-EEA investors
• The lowest limit of the general triggering ownership interest amount under the New FDI Regime has also been reduced and now notification shall be made regardless of the transaction value if the ownership amount acquired by the foreign investor reaches 10 percent
• The personal scope of the New FDI Regime has narrowed in some respects, as in certain transaction types only such entities/persons shall make notification who are from outside the EU, EEA or Switzerland—this means that entities who are from the EU, EEA or Switzerland shall not make a notification in these cases, even if their owners are from outside these regions
• The financial sector, including companies providing financial intermediation services, insurance, reinsurance and pension funds are now covered under the New Regime
• FDI notifications under the New FDI regime are reviewed and acknowledged by the Minister of National Economy
• the Hungarian State has been granted with a new pre-emption right in case of transactions affecting companies active in power generation with solar power plants

Who files?

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

Under the General FDI Regime, any natural person or legal entity qualifies as a foreign investor if it is: a citizen of or registered in a country outside of the EU, EEA or Switzerland; or a legal entity registered in the EU, EEA or Switzerland but controlled by a non-EU/EEA/Swiss person or entity.

According to the New FDI Regime, foreign investors are those natural or legal persons or organizations that are citizens of or registered in a country which is outside of the EU, EEA or Switzerland; or legal entities registered in the EU, EEA or Switzerland, if they are under the majority control of natural or legal persons or organizations that are citizens of or registered in a country that is outside of the EU, EEA or Switzerland.

The New FDI Regime also applies to EU/EEA/Swiss investors—both natural and legal persons—if they acquire majority control and the investment exceeds HUF 350 million.

Types of deals reviewed

Under the General FDI Regime, a number of transaction types are covered.

The deal will be reviewed if a foreign investor establishes a new Hungarian company or acquires more than 25 percent ownership interest in an existing Hungarian privately held company (or 10 per- cent in publicly listed companies), or acquires a "dominant influence" in such a company.

The regime also applies when a foreign investor acquires equity of less than 25 percent in a privately held company registered in Hungary, but the total equity held by foreign investors exceeds 25 percent as a result.

Transactions will also be reviewed where a company registered in Hungary in which foreign investors hold equity equivalent to that set out above takes up a listed strategic activity.

Other covered transactions include where a foreign investor registers a branch office in Hungary for the purpose of carrying out listed strategic activities, or where a foreign investor acquires a right to operate or use infrastructure or assets that are indispensable for carrying out listed strategic activities.

The New Regime covers transactions involving the acquisition of ownership interest; capital increase; mergers, demergers, or transformations to another company form; issuance of bonds that are convertible or convert to equity or provide preferential subscription rights; and establishing a "usufruct" right over equity, in other words a right to enjoy the use of and benefits from equity, absent or in lieu of ownership.

The above applies provided that, as a result of such transaction, the foreign investor would acquire majority control (ownership, voting rights, appointing management or otherwise) if the investment reaches or exceeds HUF 350 million; or in case of non-EU/non-EEA investors at least 5 percent ownership interest (or 3 per cent ownership interest in publicly listed companies), if the investment reaches or exceeds HUF 350 million; 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 or 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.

In relation to transactions caught by the New FDI Regime, indirect acquisitions and higher-level intragroup restructurings fall outside its scope.

Scope of the review

Under the General FDI Regime, the competent 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, for example 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.

Under the New FDI Regime, the competent minister evaluates 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 society, in accordance with the relevant articles of the Treaty on the Functioning of the EU, which invoke, among others, public policy, public security or public health issues.

The minister also evaluates 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; and whether there is substantial risk that the applicant will commit any crime or illegal activity.

Under the New FDI Regime a new pre-emption right has been introduced for the Hungarian State relating to such transactions that affect companies active in power generation with solar power plants. The relevant rules for such cases contain that if the target of a potential transaction is a Hungarian company being active in power generation with solar power plants, then the FDI notification shall include an additional notification to the Minister of National Economy noting that the pre-emption rights of the Hungarian State may apply to the transaction. If the Minister of National Economy also concludes that the transaction is subject to the pre-emption right of the State, then its ministry informs the minister responsible for energy policy about the transaction, who can decide on exercising the pre-emption right within 15 business days from receiving such information. If the minister responsible for energy policy decides to exercise the pre-emption right, then the original transaction shall be concluded by and between the seller and the Hungarian State and the Minister of National Economy will not decide on the FDI notification. If the Hungarian State does not exercise its pre-emption right, then the Minister of National Economy will decide on the acknowledgement of the FDI notification in accordance with the general rules.

Review process timeline

In the 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 both signing the contract, in the event of equity acquisitions and operation right acquisitions; and 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.

According to the New Regime, the foreign investor shall make a notification to the Minister of National Economy 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.

In case of target companies active in power generation with solar power plants, the Hungarian State can exercise its pre-emption right within 60 business days and the Minister of National Economy has also 60 business days (extendable by 15 calendar days) to decide on the notification, which deadlines are counted from the Ministry's notification to the notifying party on the existence of the pre-emption right of the Hungarian State.

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.

How foreign investors can protect themselves

Conducting an FDI analysis at the initial stages of the intended transaction is critical if the contemplated transaction touches on Hungarian companies or assets. In certain cases where FDI screening may be 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 should 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 shows 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 (and maybe use) before making such a notification.

These include 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. Alternatively, 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.

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.

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