Screening of foreign direct investment (FDI) has been present in Hungarian law since 2019 in relation to certain specific investment-related activities. During the COVID-19 pandemic, additional FDI screening legislation was introduced in May 2020. The 2020 regime has had an impact on a significantly wider range of business transactions and, therefore, this summary focuses solely on the 2020 regime (FDI Rules). Given that a real estate asset deal may also fall within the scope of the FDI Rules, assessing the potential application of the FDI Rules has become an important item on the real estate due diligence to-do list. Below you will find a summary of the applicable regime based on our experience to this date.
Strategic companies and strategic sectors
Any Hungarian limited liability company or company limited by shares that pursues its activities in one of the strategic sectors may qualify as a strategic company and, therefore, may be subject to the FDI Rules. While the relevant provisions of the FDI Rules on strategic companies and strategic sectors are quite vague and allow for a broad interpretation, the NACE codes listed in the FDI Rules may serve as points of reference when assessing whether a certain business activity of a company (or an asset deal in a strategic sector/activity) triggers the application of the FDI Rules.
As both the main and the additional business activities of companies must be considered, the mere fact that the main activity of a company is buying/selling or leasing/operating real estate (NACE 6810 or 6820) does not necessarily mean that the entity is not going to qualify as a strategic company. This is due to the fact that all activities of the company (including, in particular, activities registered in the company register, encompassing also the additional activities of such company) must also be considered, and those may also trigger the application of the FDI Rules even if such activities constitute a side business to the main business activity and are practically never pursued. Strategic sectors include, amongst others, retail, warehousing, accommodation, food and beverage services, etc. and cover 19% of the real estate transactions DLA Piper Hungary worked on in 2021. We also note that the FDI Rules apply to both share deals and asset deals; therefore, the review of the activities of a given company and the use of a given piece of real estate have become key elements in the due diligence process.
Acquisitions via share deals
It has become common practice in share deals to assess, as a preliminary transactional question, whether the contemplated transaction structure is covered by the FDI rules, considering mainly (i) the residence of the investor and the entity having majority control over such investor, (ii) the ownership structure existing at the time and the shareholding to be acquired in a strategic company, and (iii) the transaction value (if the latter one should be considered at all).
The key point is to determine whether the target entity qualifies as a strategic company. A target company qualifies as a strategic company if (i) it is registered in Hungary and operates as a limited liability company, a private company limited by shares or a public company limited by shares; and (ii) it carries out, as part of its main or additional business activities, one or more of the business activities set out in the Hungarian FDI Rules as being in strategic sectors.
Acquisitions of real estate via asset deals
The transfer of the title of any infrastructure, equipment and assets that are essential for carrying out activities in certain strategic sectors (as referred to in the definition of ‘strategic company’) may also be subject to the FDI Rules if the acquirer is a foreign investor (as defined by the FDI Rules) or an entity in which a foreign investor has, directly or indirectly, a dominant influence as defined under the Hungarian Civil Code.
The term ‘infrastructure’ is not defined by statutory law, but based on our experience, it is to be interpreted broadly. Therefore, an asset deal involving a piece of real estate required for pursuing an activity in a strategic sector (i.e. hotel building, logistics park, retail park) may also be interpreted as falling within the scope of the FDI Rules, even if none of the companies involved in the transaction qualify as a strategic company. Additionally, it is worth considering whether only a completed piece of real estate, or also ongoing developments may trigger the application of the FDI Rules in cases where the strategic activity concerned will undoubtedly be conducted on the real estate. As a result, the FDI Rules must be analyzed on a case-by-case basis in each asset deal where the target real property may be related to a strategic sector.
FDI reporting rules
If the transaction is subject to the FDI Rules, then the investor/acquirer of the real property is obliged to submit a notification to the Minister of Innovation and Technology and to obtain an acknowledgement from the Minister for the completion of the relevant transaction. The notification must be submitted in writing in Hungarian within 10 days after the conclusion of the relevant agreement or other legal declaration made for the purpose of the transaction. The Minister has 30 business days (which can be extended by 15 days) to acknowledge or reject the notification.
The Minister inspects compliance with the FDI Rules. If during such inspection the Minister comes to the conclusion that there is a breach of the notification obligation, such breach may render the transaction document invalid, and the Minister may also impose a fine on the investor and/or the acquirer of the real property up to an amount of 200% of the transaction value, provided that, in the case of foreign investors which qualify as legal entities, such fine may not be lower than 1% of the net revenue of the strategic company concerned.
While FDI reporting rules may affect preliminary due diligence tasks and also stretch the transaction timeline, so far we have not experienced any issues around real estate investments being approved by the Minister of Innovation and Technology.
By Angela Toth, Senior Associate, DLA Piper