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NEW ACT ON THE CIVIL CODE – Corporate law in the new Civil Code

17/Mar/2014

1. Preliminary observations

The corporate law related provisions became part of the new Civil Code

One of the most important innovations affects the position of the corporate law related provisions: these rules are no longer regulated in a separate act, and have been incorporated into the new Civil Code. The legislator has decided to introduce the monist system, as opposed to the dualist system that had been used so far, that meant having a separate act on corporate law. It also entails that the Civil Code is no longer a “subsidiary act” for the corporate dispositions.

On the other hand, the Civil Code naturally does not include various dispositions affecting the business associations in their daily operations, such as corporate registration, capital market, accounting and labour law related dispositions.

(Lack of) substantial changes

Before we review the changes described below, let us highlight that the regulation of company law has not changed in a real, substantial manner; a large difference cannot be detected between Act IV of 2006 on business associations (hereinafter the “Act on business associations”) and the Third Book (“The legal person”) of the new Civil Code.

2. General dispositions applicable business associations

The dispositive legislation as a principle

One of the most important company law related changes is a conceptual one: the Third Book of the new Code is based on the principle of dispositive legislation. The Act on business associations (currently in effect) follows the principle of cogency, meaning that, as a rule, the parties can only derogate from the provisions concerned, if the law itself allows them to do so.

By comparison, according to the concept of the new Civil Code, the derogation from its dispositions by the members and founders of the legal person is only forbidden (a) if the derogation is prohibited by the law (and there are not so many dispositions in the new Civil Code that would exclude these kinds of derogations, only for example the prohibition of excluding the members from the profits and losses); or (b) if the derogation violates the apparent interests of the creditors or employees of the legal persons, it seriously infringes the minority rights of the members, or it obstructs the supervision of their legal functioning.

The principle of dispositive legislation allows much greater freedom for the members of the business associations; this freedom, however, does not go so far as to allow the establishment of new types of business associations not included in the new Civil Code.

Other general dispositions

Ø The Third Book does not include the dispositions concerning non-profit associations. Owing to the principle of dispositive legislation, all business associations are entitled to opt for non-profit operation.

Ø The new Civil Code declares that, as a contribution in kind, the members are also entitled to assign a claim to the company, if it was acknowledged by the debtor, or if it is based on a judicial decision. However, the member’s commitment to work, to personal cooperation or performance cannot be regarded as a contribution in kind.

Ø The business association may also decide not to register its place of business or its branch office, neither in the articles of association, nor in the register of companies.

Ø The executive officers need to have either an employment contract, or an engagement contract; the appointment in the articles of association is no longer sufficient.

Ø In order to ensure the independence of the statutory auditor, the auditor cannot provide for the business associations any kind of services and cannot develop any kind of cooperation with the management that would jeopardize its independence.

3. General partnership and limited partnership related dispositions

The legal person

It is also a significant innovation that from the entry into force of the new Civil Code, every business association is qualified as a legal person. Even though the general partnerships and the limited partnerships are not considered at the moment as legal persons, under the name of their association, they may acquire every right and obligation that the legal person is entitled to. Therefore this change has no practical significance and does not require the amendment of the articles of association. (The distinction between the legal person and the business associations without legal personality had historical reasons.)

“Managing Director”

The terminology becomes more unified, since (similarly to the limited liability companies) the new Code prescribes the term of “managing director” for the general partnerships and limited partnerships as well, as opposed to the previous term “business manager”.

General partnerships – obligatory order during the judicial execution proceedings

The most important problem of the general partnerships remains the enforcement of the absolute and joint responsibility of the members. As a new rule, the members may be sued along with the partnership; the court can only order the execution of the damning verdict against the members, if the execution against the partnership itself was ineffectual.

As a consequence, although the members can be sued jointly with the partnership in one single process, if the court decides against them, the new Civil Code introduces an obligatory order during the enforcement process.

Limited partnerships – the status of the limited partner

The most relevant rule of the limited partnerships is that (as a principle) the limited partners cannot be executive officers. Compared with the new rule, as for now, the Act on business associations allows even the articles of association to appoint limited partners as executive officers.

4. Limited liability company related dispositions

3.000.000 HUF as the minimal amount of equity capital

Ø The first and maybe most important change is that the new Civil Code restores the minimal registered capital of HUF 3 000 000. This is rather an economic than a dogmatical decision: considering the present financial circumstances HUF 3 000 000 (which is substantially higher than the HUF 500 000 now in effect) will hopefully ensure a more serious, responsible and financially stable system for the establishment and also for the operation of the corporations.

Ø As a result, the registered capital under HUF 3 000 000 has to be increased by March 15, 2016.

Other changes affecting the equity capital

Ø The declaration of the members concerning the appreciation of the contribution in kind will not be obligatory any more.

Ø It is no longer necessary that the capital contributions provided by the members be divisible by ten-thousand with no remainder, and it does not need to be expressed in HUF.

Private limited companiy related dispositions

Minimal share capital unchanged

As opposed to the minimal capital rule of the limited liability companies, the minimal share capital remains HUF 5 000 000 for the private companies limited by shares, and HUF 20 000 000 for the public companies limited by shares.

Entering to the stock exchange

The public companies limited by shares have to be listed in the stock exchange. Therefore, it is not possible to establish a public limited company by shares any more, only the private companies limited by shares can change their form of operation by entering the stock exchange, while those companies that are not listed in the stock exchange cannot operate as public limited companies any more.

New types of shares

In addition to the already existing types of shares, the shareholders are entitled to create new types of shares that are not listed in the new Civil Code.

5. Other organizations

Foundation

The most essential change concerning the regulation of foundations is that the new Civil Code restored the institution of the private foundations by not requiring the general interest as an objective any more. Naturally new foundations intending the public interest can still be established, but this regulation will also open up possibilities for family or other types of private foundations. However, the interdiction of the establishment of a foundation for economic goals remains unchanged.

Co-operative

The new Civil Code contains only the general rules on co-operatives. This shortage will necessitate individual acts, taking also into consideration the fact that the new code does not even regulate the shares of co-operatives.

The newsletter contains general information. Therefore, its content may not be regarded as professional advice or comprehensive information for decision-making.

Should you have any further question, we remain at your disposal.

THE MOST IMPORTANT CHANGES IN LIGHT OF THE NEW CIVIL CODE

23/May/2013

The history of the new Civil Code

To summarise the history of the new Civil Code: in 1998, the commission for civil codification (lead by academic Lajos Vékás since 1999) was given the task of preparing the new Civil Code. The concept was elaborated by the beginning of 2002 and was followed by the preparation of the draft code itself. In 2007 the drafting work was taken over by the Ministry of Justice. The Parliament started the debate on the code in the autumn of 2008, and first adopted it in September 2009. In April 2010, however, just a few days before of the entry into force of the first two Books, the Constitutional Court declared unconstitutional and annulled the Act on the entry into force of the new Civil Code, stating that the prescribed “preparation period” was extremely short. The code was subsequently repealed by the Parliament. The drafting of the new code resumed, once again led by Lajos Vékás, and the Parliament amended several dispositions of the proposal submitted in July 2012.

The structure of the new Civil Code

The new Civil Code of 2013 contains several significant changes compared to the previous Civil Code, adopted in 1959, and subsequently amended over a hundred times. The new Civil Code preserved about half of the text in effect of the previous Civil Code and corrected about a quarter of it, while almost the same amount of the text changed substantially or was completely replaced. In the new Civil Code of eight Books and almost sixteen hundred articles, corporate and family law dispositions, which are currently separately regulated, have also been inserted.

The Books of the new Civil Code are the following:

First Book: Introductory provisions; Second Book: The individual as a subject in law; Third Book: The legal person; Fourth Book: Family law; Fifth Book: Property law; Sixth Book: Contracts and obligations; Seventh Book: Law of inheritance; Eighth Book: Final provisions.

INTRODUCTORY AND FINAL PROVISIONS (First and Eighth Books)

Introductory provisions

Similarly to the First chapter of the previous Civil Code, the First Book of the new Civil Code contains the „Introductory provisions”. Reserving a separate chapter for the general, basic rules effecting the overall regulation is a tradition in Hungarian civil law. At the same time, the Introductory Provisions might be of considerable practical importance.

As a preliminary remark it may be stated that the First Book of the new Civil Code on the Introductory Provisions is significantly more concise than the relevant chapter of the previous Civil Code (currently in effect). The following provisions are placed in the First Book of the new Civil Code (which is only six articles in length): 1:1. § „The scope of the Act”, 1:2. § „The interpretation principle”, 1:3. § „The principle of good faith and honesty”, 1:4. § „The principle of reasonable conduct. Chargeability”, 1:5. § „The prohibition of the abuse of the law”, and finally 1:6. § „Judicial review”.

Scope

The most important (substantive) change regarding the scope of the new Civil Code results from its monist approach (i.e. the approach favouring the unity of the legal system). As a consequence of the abovementioned monist approach, several private law areas that, up to this point, were regulated outside of the Civil Code (for example family law or provisions on legal persons) became part of the new Code.

Chargeability

In civil law relations, following a reasonable conduct that can be expected under the circumstances is still the principle. In this context the most important change is that whilst according to the previous Civil Code the reasonable conduct under the circumstances was the minimum requirement for the duty of care (i.e. the previous Civil Code could only define more stringent requirements by derogation), the new Civil Code may specify either more stringent or more lenient requirements in this respect.

Abuse of the law

In order to end the confusing conceptual overlap between the unreasonable exercise of rights and the abuse of law, the new Civil Code takes over only parts of the text of the previous Code on the prohibition of the abuse of law.

Judicial review

There is no longer any reference to arbitration within the Introductory Provisions. However, this omission does not signal that the Code would be opposed to arbitration. (The reason for omitting these provisions is precisely that arbitration as an alternative way of dispute resolution has now become so widely accepted that it is unnecessary to regulate it in detail in the new Civil Code.)

Final provisions

The Final Provisions have been placed in the Eight Book of the new Civil Code and concern the following subjects: (1) Definitions; (2) Entry into force and transitional provisions and (3) Compliance with the law of the European Union. We have to underline that the transitional provisions will be determined by a separate act.

THE INDIVIDUAL AS A SUBJECT IN LAW (Second Book)

Conceptual change

First of all, let us note that when mentioning individual rights, the new Civil Code uses the expression of individual rights which was used in pre-war Hungarian private law, as opposed to the expression of the previous Civil Code, inherent rights.

The limitation of capacity

In the future, the court can no longer limit capacity in general, only in respect of certain categories of activities and for a definite period. When placing someone under guardianship, it is a new requirement to examine the person’s personal circumstances, familial and social relations. (Therefore the court does not only have to examine if the person is capable of properly handling his/her affairs, but also if his/her environment and family can offer sufficient help.)

New legal institutions

In connection with legal capacity, there are several new legal institutions ( even though the first proposal contained more):

The possibility of appointing a „supporter” was included as a result of the international cooperation between legal organisations of the handicapped.

By making a „preliminary legal statement” persons are entitled to make provisions for the event of their becoming incapacitated. The nature and purpose of the preliminary legal statement is similar to those of the testament, but its content and form also allows settling in advance eventual disputes, as well as property law related and other issues.

Injury fee

One of the most important novelties of the Second Book of the new Civil Code that may also affect the everyday functioning of companies is the introduction of the injury fee. It will replace the “non-material damages” of the previous Civil Code awarded for offending someone’s individual rights (in parallel, provisions related to the “non-material damages” will expire). The person violating any of the below mentioned individual rights, may also be obliged to pay an injury fee as a new sanction.

The individual rights that not only benefit human beings, but also legal persons, if it is consistent with the nature of the protection, are in particular: (1) the right to the prohibition of discrimination, (2) right to integrity and good reputation, (3) the right to personal data, and (4) the right to business secrets including know-how.

It has to be emphasized that the injury fee is due only as a result of the injury itself; the victim does not have to prove having suffered financial or other disadvantages. The injury fee must be determined as a flat fee by the court, while taking into consideration the seriousness of the infringement, the degree of chargeability and the effect of the infringement on the victim and his/her environment.

As for the practical importance of the injury fee: the new Labour Code provides that the Civil Code also applies in a subsidiary manner to employment relationships, in the absence of specific labour law related provisions. As a result, the application of the injury fee might also be relevant in employment relationships, especially in relation to the injury of good reputation caused by the employee or the employer in connection with the employment relationship, the violation of data protection rights, the violation of business secrets, or the violation of the prohibition of discrimination.

FAMILY LAW (Fourth Book)

The common-law marriage

When adopting the new Civil Code, the fiercest debates were generated around family law related provisions, especially those concerning the civil partnerships. Finally the Parliament decided to remove from the family law section the provisions concerning the definition of the civil partnerships, as well as the financial relations between the partners, which became part of the contractual regulations. At the same time a civil partnership will still create family law effects, but only if it exists for at least one year and the partners have a child together.

In addition, the new Civil Code does not include the registered same-sex civil partnership, which is regulated in a separate Act.

Marriage and divorce

After the couple has announced their intent to get married, one month will still have to pass until the marriage can be concluded, although the original proposal would have made it possible for couples to unite without the abovementioned “waiting period”.

Regarding divorce, the innovation of the new family law Book is that parents can be obliged to pursue mediation proceedings, in order to facilitate the settlement between the parties. This new provision may play a role in custody disputes between the parents after the divorce has been pronounced. In addition, given the complexity of the property law related legal relationships, the scope of the supplementary matters that the parties have to agree on before they can apply jointly for a divorce will also change.

Other innovations

In addition to the above mentioned changes, it will be easier to rebut the presumption of paternity, if the presumed father, the mother and the father intending to acknowledge the paternity request it together.

The judges will be given a greater margin of appreciation when awarding custody of the child in the case of a separation.

The newsletter contains general information. Therefore, its content may not be regarded as professional advice or comprehensive information for decision-making.

Should you have any further question, we remain at your disposal.

SUMMARY ON TAXATION RELATED CHANGES IN HUNGARY AS OF 1st JANUARY 2013

23/Jan/2013

On October 12, 2012, the Hungarian government presented to the Parliament the proposal No. T/8750 concerning the modification of some tax regulations. The final modifications were accepted recently; the Tax Bill incorporating the above-mentioned modifications (hereinafter the “Bill”) was passed on November 19, 2012 by the Parliament.

CORPORATE INCOME TAX

Losses carried forward

Based on the new rules on losses carried forward, the criteria of the minimum 2 years activity for the possibility of corporate restructuring will not to be taken into consideration, if the successor company ceases to exist without legal successor within 2 years following the restructuring.

Taxation of intangible assets

As the definition of reported intangible assets will be extended to cover cases in which the taxpayer has produced the given intangible asset itself, rather than purchasing it, there will be a greater opportunity to report intangible assets.

Miscellaneous

As for the promotion of development, taxpayers will be obliged to report the end date of the development project for the Minister of National Economy, which will report to the tax authority on a yearly basis.

As from 2012, while calculating liabilities, the amount of receivables is (was) deductible. However, based on the Bill, receivables from supply of goods and providing of services will be qualified as not deductible.

The definition of a controlled foreign corporation (“CFC”) will be extended: if a foreign state applies more tax rates, than the lowest rate will have to reach 10%.

VALUE ADDED TAX

Harmonization of invoicing

The Council Directive 2010/45/EU (“Invoicing Directive”) shall be applied in connection with the amendments in invoicing rules as of January 1, 2013. Amendments in harmony with the „Invoicing Directive” concern the following points:

For intra-Community transactions, invoices will have to be issued by the 15^th day of the month following the month of supply.

The mandatory data content of invoices will be extended. Currently, the invoice only has to show the tax number of the buyer or the user of the service if this party is obliged to pay the tax (i.e. in the case of reverse taxation) also including intra-Community acquisitions of goods. From 1^st January 2013, the tax number of the taxpayer acquiring the goods or services must also be indicated on the invoice in the case of comprehensive transactions if the amount of the recharged VAT reaches or exceeds HUF 2 million in a domestic VAT transaction.

In line with the Invoicing Directive, the application of electronic invoices will be subject to the consent of the party receiving the invoice. The requirement for electronic invoices will be amended so that a qualified electronic signature will have to be placed on electronic invoices instead of an advanced electronic signature and a time-stamp.

Recapitulative report and the compulsory data content of VAT return

In line with the above-mentioned amendments, in case the amount of VAT reaches or exceeds HUF 2 million, a new special recapitulative report shall apply as of 1^st January 2013.

Therefore, taxpayers acquiring goods and services must also indicate the tax number of the supplier of the goods or services, as well as the amount of the VAT recharged if the limit (i.e. HUF 2 million) is achieved as the aggregate amount of invoices accepted in a certain period from the same partner.

The VAT return must include in detail (1) the tax number of the partner; (2) the serial number of the invoice; (3) the tax base and recharged tax indicated on the invoice; and (4) the due date of the invoice or, in the absence of a due date, the date of issuance.

Miscellaneous

As an important simplification, as of 2013, in case of fulfilment of special conditions required, business line sales are to be considered as non-taxable transactions for VAT purposes.

In case of VAT refund for foreigners, it is possible to provide the necessary information and statements in Hungarian, in English, in German or in French as well.

PERSONAL INCOME TAX

Apart from two important changes, the Bill contains only minor amendments concerning personal income taxation.

Supergrossing will cease

As already indicated in the Bill on the Budget for 2013, the tax-base adjustment system (the so called “gross-up” or “supergrossing”) will cease completely as of 2013. Therefore, According to the Bill, as of 2013, personal income tax rate will be 16 % uniformly.

The adjusted tax base exceeding HUF 2.424 million will be eliminated; the modification will only have favourable effect on the incomes over HUF 202,000 per month, because gross-up has been applied over this threshold in 2012.

Insurance policies related personal income tax rules

The other important amendment concerns the almost complete transformation of the insurance policies related personal income tax rules; tax liability of business insurances will dramatically change. As of 2013, risk insurance paid by a payee will exclusively be tax-exempted (in respect of risk insurance, policy shall mean a personal policy – i.e., life, accident or sickness policy – that does not have a sum assured or a surrender value).

However, savings type insurances (that do not qualify as risk policies), where money can be withdrawn without a risk materializing or where the insurance company pays back the premiums plus a return when the policy expires, will be taxed, in contrast with the current rules.

Miscellaneous

The determination of tax assessment and the payment of tax on dividends received from foreign companies will be extended until the date of the tax return.

The scope of the family tax credit will be extended and – according to the general rules – the concerned provisions also shall apply to foreign nationals from outside the European Union.

DUTY

Transfer duty

Based on the Bill, the current double rate system, applied for the acquisition of residential property (2% up to a market value of HUF 4 million and 4% above the threshold) will cease and there will be a single, 4% levy rate.

Duty on inheritance and gifts

The Bill simplifies the current system of transfer duties: inheritance and gift duties will no longer have a progressive rate. According to the proposed amendment, the general rate of both inheritance and gift duties will be 18% next year. The rate will be 9% for immovable property.

The exemption from inheritance duty will be extended to the spouse of the deceased without regard to value. (Currently, exemption is granted only to the direct lineal relatives of the deceased, i.e., children and parents).

Procedural duties

Some of the procedural duties will be increased, as follows:

Enterprises applying for payment facilities or tax relief from the tax authority will have to pay HUF 10,000 (currently HUF 3,000).

The duty on liquidation procedures will be increased to HUF 80,000 (currently HUF 50,000) and to HUF 50,000 for bankruptcy procedures (currently HUF 30,000).

Registration in the register of liquidators will attract a duty of HUF 8,000 (currently duty free).

Young people purchasing their first immovable properties

The proposed changes are also favourable to young people purchasing their first residential properties. In the future, first time buyers under the age of 35 will receive an allowance from the transfer tax liability if the purchase price of the residential property is less than HUF 15 million. In this case the current allowance will be 50% of the tax liability. (Currently, the threshold value is HUF 8 million.)

LOCAL TAXES

Built-up of a national register

The Bill defines the built-up of a national register, also publicly available, that would contain information in connection with local tax rates, as well as tax allowances applied by the local municipalities. Based on the data provided by municipalities, taxpayers will be able to request information from this national register, to be set up by the Hungarian State Treasury.

Accounting in foreign currency

As for the tax declaration obligation of taxpayers keeping their books in a currency other than the Hungarian Forint, similarly to corporate income tax, the data of the declaration shall be converted by using the Hungarian National Bank’s exchange rate valid as of the last day of the tax year.

FLAT TAX OF SMALL ENTERPRISES and SMALL BUSINESS’ TAX

As the Parliament already approved the proposal introducing the above-mentioned two new taxes, aiming at the easement of small businesses’ operations, let us also summarize to you in the chart herein below the main characteristics of (1) the Flat Tax of Small Enterprises (“KATA”) and (2) the Small Business’ Tax (“KIVA”), which the concerned taxpayers can choose as of 2013.

Flat Tax of Small Enterprises

Taxpayers subject to the taxes

Companies with yearly revenue not exceeding HUF 6 million (i.e. private entrepreneurs, individual companies, limited partnerships or unlimited liability companies with only individuals as members).

Amount of the taxes

HUF 50,000 per month for taxpayers reported as full-time engaged person. HUF 25,000 for taxpayers with non-full-time engagement. (If the taxpayer enterprise’s yearly revenue exceeds HUF 6 million, the part of the income above the threshold is taxable by 40%.)

Declaration, payment

Payable by the 12^th day of the following month. Taxpayers have to keep analytical records on their revenues and are obliged to report them by February 25^th in the following year.

Taxes to be replaced (exemptions)

Entrepreneurial personal income tax, entrepreneurial dividends base tax or flat tax, corporate income tax, personal income tax, healthcare contribution, social contribution tax and vocational training contribution

Reporting the choice of the taxes

Between December 1 and December 31^st, 2012

Small Business’ Tax

Taxpayers subject to the taxes

Individual enterprises, unlimited liability companies, limited partnerships, limited liability companies, privately held companies, co-operatives and building societies, forest management associations, bailiff offices, law offices, notary’s offices, foreign companies, and foreign persons with a domestic place of management. (Criteria: (1) the number of employees cannot exceed 25 persons; (2) the income realized is not more than HUF 500 million; (3) the use of the company’s tax ID was not suspended during the previous 2 years; (4) the company’s Balance Sheet date is December 31^th; (5) the value of the total assets for the last financial year was not more than HUF 500 million.)

Amount of the taxes

The tax base shall be determined as the adjusted sum of the company’s cash based profit and the personnel payments. The tax rate is 16% of the tax base.

Declaration, payment

The company has to file its tax return till May 31^th in the year following the tax year in question.

Taxes to be replaced (exemptions)

Corporate income tax, social contribution tax and vocational training contribution.

Reporting the choice of the taxes

Between December 1 and December 20, 2012

ACT ON THE RULES OF TAXATION

Belated appeal

As of 1^st January 2013, the Hungarian Tax Authority will not judge the belated appeals as supervisory measure. Therefore, appeals will automatically be rejected without substantive examination if the appeal was handed in after the deadline or the appellant was not entitled to hand it in.

Tax authority certificates

The execution period for issuing tax authority certificates will be reduced from 8 days to 6 days.

Self-revision fee

According to the Bill, the self-revision fee may not exceed the total amount of default fines that would be assessed for the period between two filing deadlines (if the self-revision does not concern any additional tax liability).

Representation rules

The amendment introduces the institution of the mandatory representation (by an attorney, tax advisor, tax expert or certified tax expert) in the following proceedings: (1) binding ruling procedures; (2) procedures to determine the applicability of a binding ruling procedure; (3) procedures aiming at determining arm’s length prices; as well as (4) those initiated based on a request for a supervisory procedure by the minister responsible for tax matters.

The newsletter contains general information. Therefore, its content may not be regarded as professional advice or comprehensive information for decision-making.

Should you have any further question, we stay at your disposal.

SUMMARY ON LABOUR LAW CHANGES IN HUNGARY AS OF 1ST JULY 2012

26/Jun/2012

The new Hungarian Labour Code, adopted as Act I of 2012 is to enter into force on July 1, 2012. It intends to be a completely new code with a number of new institutions and concepts; in fact, however, it has retained the text of the actual Labour Code in many respects. In what follows, we try to give an overview of the text while highlighting the most important differences from the Labour Code actually in effect.

Trial period
As before, the trial period has to be defined in the employment contract and the upper limit is three months, or six months if a collective agreement so provides. The parties may prolong the trial period within this limit, even though no such prolongation is possible under the current rules.
Accepting part-time work request of the parents until age 3 of the child
A substantial change concerns parents (mothers) returning to work. In these cases, when the parent returns to work after maternity leave, until the 3rd birthday of the child, the employer must accept to employ her (him) part-time (instead of the normal full-time arrangement), if she (he) so requests.

Termination of the employment relationship
The rules on the termination of the employment relationship were also modified. The first change is a terminological one: the former “ordinary termination” is now called “termination”, the former “extraordinary termination” is called “termination with immediate effect”. The three main grounds for (“ordinary”) termination remain the same: the behaviour of the employee, his/her abilities and organisation issues of the employer. (Naturally, mutual consent also remains an option.) Moreover, the parties may agree that the employment contract cannot be terminated (by “ordinary” termination) for one year after its signature.

Protected employees
The new Code provides for more clarity with respect to the termination of some protected employees. Under the current rules, the employment relationship of persons within 5 years of the retirement age can only be terminated in “substantially motivated cases”. Under the new rules, the same age group may be terminated on the grounds of the behaviour of the employee, but only in the case of substantial breach of the employee’s obligations. Additionally, the employment relationship may also be terminated for organisational reasons, but only if there is no suitable job for the employee within the employer’s organisation, or if the employee has been offered a suitable new job, but has declined the offer. Similar rules are in place concerning parents (mothers) returning to work, and disabled employees.

Termination of fixed term contracts
The employer may terminate the employment relationship on the grounds of the abilities of the employee (and also in case of liquidation procedures and the “impossibility” to maintain the employment relationship), without the obligation to pay the employee the equivalent of his salary due until the end of the fixed term (maximum 12 months in any case), as opposed to the current rules which make such payments obligatory. What is more, the employer has the right to “termination with immediate effect”, without any obligation to justify the dismissal. In this case, however, the salary of the employee remains payable until the end of the fixed term, but for a maximum of 12 months. The employee may also terminate a fixed-term employment relationship, but only in exceptional circumstances, when maintaining the employment relationship would be impossible.

Notice period and severance payment
The rules on notice periods and severance payment remain identical as to the present length of notice period and amounts of severance payment. However, there is a significant modification: no severance payment is due when the employee is terminated due to his behaviour to the employment relationship or his abilities (excluding health related grounds).

Strengthening the employer’s position in the event of unlawful termination
The reinstatement of the employee is no longer the general remedy to the unlawful termination, it has been replaced by an indemnity payable to the employee. In any event, the compensation for unpaid salary as a result of unlawful termination cannot exceed the value of 12 months’ salary of the employee. Under the current rules, the courts remedy the unlawful termination by reinstating the employee, and thus make the (former) employee entitled to payments from the unlawful termination onwards until the final judgement – which period may be longer than 12 months. Under the new Labour Code, the reinstatement remains an option only in specific serious cases (e.g. discriminatory behaviour of the employer). This provision considerably limits the amounts due in the event of an unlawful termination.
Furthermore, the new Labour Code provides that an employee, who has terminated his own employment contract unlawfully, will have to pay back the salary he received during his notice period. Not handing over the job properly is also considered as unlawful termination.

Working time and rest time
The new Labour Code entirely rewrites the chapter on working time and rest time. The reference period arrangement is maintained, and there are specific provisions on how to proceed if the employment is terminated before a reference period has expired. There is a new notion called “working time accounting period”, which allows employers and employees some flexibility in arranging working time, even if they do not use the somewhat complicated reference period arrangement. It means that the daily / weekly working hours can be performed in a period longer than the actual calendar week.
There is a new section on work performed on Sundays and on national holidays. The rules are quite similar to the ones before, i.e. work on these days is limited to specific circumstances or specific persons, but these (under the new rules) include persons in jobs which provide services to clients abroad and persons working abroad (practically posted workers).
The yearly limit of overtime has been raised to 250 hrs per year, or 300 hrs/year if a collective agreement so provides (it is currently 200 hrs/year, or 300 hrs/year if a collective agreement so provides). It is a new provision that this limit has to be made proportionate for part-time workers or for persons who have started to work during the year.

Annual holidays
Despite the published text of the previous drafts, the annual paid leave of the employee has not been shortened in the new text. The rules on allocating the actual holidays, however, have become more flexible. The employer is only obliged to allocate a maximum of 7 days of holidays according to the wishes to the employee. Moreover, if the parties so agree, the holidays due for a given year may be taken until the end of the next calendar year. Under the current Labour Code, this is only possible in cases of overriding economic interest of the employer, or as a result of a circumstance directly affecting his operations, and in any case the holidays need to be taken until 31 March of the next calendar year (or 30 June if a collective agreement so provides).

Salaries
The new text somewhat simplifies the rules on calculating performance-based salaries and provides that a salary can only be fully performance-based if the parties specifically stipulate this in the employment contract. In such cases, a guaranteed minimum equivalent to at least the half of the minimum wage must be paid to the employee.
The most significant change here concerns the salary supplements, especially those related to shift work, as it was apparent from the previous drafts. There is no more “afternoon shift” and “night shift”, but the Labour Code contains the unified notion of “shift work”, but only for employers who operate at least 80 hours per week. Employees of such companies who work in shifts are entitled to a 30 % supplement for all work performed between 18.00 and 06.00, if the time when they begin to work changes regularly. There is also a supplement for night work of 15 %, but only for employees who do not receive supplements for shift work. To simplify the calculation, the Labour Code contains the possibility for the parties to define a lump sum (or forfeit rate) equivalent to the various supplements.
The government will have the option to define several rates of the minimum wage (for example, for certain profession or for certain regions), as opposed to the single national minimum wage effective today.

Liability for damages
The new Labour Code has reformed the rules on liability. The grounds for exonerating the employer from his liability have been slightly expanded.
The employee is only liable if he has caused damage by breaching his obligations arising from the employment relationship, while not behaving in a manner that is to be expected in the given situation. His liability for damages is limited to 4 months of his “absence fee” (i.e. average salary), or to 8 months’ “absence fee” if a collective agreement so provides. This is a significant increase compared to the current rules, which provide that the liability of the employee is limited to 1.5 times his monthly average salary, unless a collective agreement defines a larger sum, which cannot exceed 6 months’ salary. In the event of gross negligence or wilful conduct, his liability covers the entire amount of the damage.
The new Code further redefines the specific cases of employee liability. A completely new institution is the “guarantee” to be provided by the employee. It means that the employer and employee may agree in a separate contract that the employee provides a “guarantee” equivalent to one months’ base salary as security for any employee liability. This is only an option if the employee (as part of his job description) receives sums of money or valuables, or if he supervises such activities. This guarantee may only be used to indemnify the employer if the liability of the employee is established.

Atypical forms of employment
Another new feature of the Labour Code that it expressly defines some atypical forms of employment. Although even the existing Code regulates fixed term-contracts, temporary agency work and teleworking, this list has been extended in the new Code. It provides express rules on part-time workers working according to the needs of the employer (in unevenly arranged working hours on the basis of a reference period), job-share arrangements, employment contract with more than one employer, outworkers (who work from home on a performance-based salary), simplified employment or seasonal work, employment relationship with a public body, and incapacitated (usually mentally handicapped) employees. The rules on executives /managers have been somewhat simplified.

Non-competition clause
The new Code has maintained the core of rules on the non-competition clause, with the difference that it provides a benchmark for the suitable consideration to be paid in exchange of the employee not taking up an employment that may compete with the employee’s activities. The benchmark is at least 1/3 of the base salary for the period concerned. Currently, the usual consideration (not defined by law) is 50 % of the base salary. The duration of the non-competition obligation has been limited to two years, instead of the current three. In the event of termination with immediate effect by the employee (i.e. due to serious breach of the obligations of the employer), the employee may withdraw from such non-competition clause. Under the current rules, this is only possible if the parties specifically agree on the possibility of withdrawal.
Industrial relations, trade unions, collective agreements
These issues were the most hotly contested questions of the new Labour Code. An important change in this respect concerns the “company agreement”, a kind of agreement that is concluded between the works council and the employer, usually regulating the cooperation between the two. Under the new rules, this agreement may regulate issues normally falling under the scope of a collective agreement, if there is no trade union that is active within the company or if there is no collective agreement within the company.

Dispute resolution, remedies
The new rules expressly provide that for claims of the employer that no not exceed three times the minimum wage, the employer may issue a request for payment, instead of initiating a lawsuit. The rules expressly provide that workers posted to Hungary can also commence proceedings before the Hungarian courts.
Moral rights of the employees
The moral rights, including the freedom of expression of the employees may be restricted if the restriction is absolutely necessary due to reasons directly related to the nature of the employment relationship.
It is a simplification of the data protection rules that the personal data of the employee may be transferred for processing to a third party even without the express consent of the employee, if the transfer is necessary for the fulfilment of the obligations of the employer in relation to the employment relationship (e.g. salary and tax calculations, accounting).
Furthermore, the new Labour Code provides that the employee may only be monitored during the performance of his duties (i.e. not in his free time). If he is to be monitored by a technical device, he needs to be informed of such a fact.

*
The above information is for general purposes and guidance only and does not purport to give professional or legal advice. Should you have any further question in relation to the above, please do not hesitate to contact us.

THE EXTENSION OF REVERSE TAXATION

6/Jun/2012

The reverse taxation concerns the procurement of the following products:

maize, wheat and meslin, barley, rye, oats, triticale, sunflower seed kernels, whether or not broken, rape or rape oil seed, whether or not broken, soya beans, whether or not broken.

As a result of the legislative modification, the taxpayer purchaser of the above listed products shall be required to pay the tax on every transaction in the sales chain. As a consequence of the changes outlined above, the VAT taxpayer shall also have an obligation to make a declaration. The taxpayer may fulfil this obligation in the VAT declaration filed in relation to the given tax period. The obligation to make a declaration in relation to the purchase of the above listed products includes the following data:

the customer’s taxation number; the date of fulfilment of sale of product; the quantity (in kilograms) of the product sold (broke down to custom tariffs); and the calculated tax base rounded to the nearest HUF 1000.

The new legislation will enter into force on 1^st July 2012, and remain applicable for the taxation period extending until 30^th June 2014. Its provisions are first applicable to the transactions fulfilled on or after 1^st July 2012, except for those transactions where:

the purchasing taxpayer would be required to self-assess the payable tax before 1^st July 2012 according to rules relating to the self-assessment of payable tax in the framework of reverse taxation (Art. 60 (1)-(3) of the VAT Act; e. g. if the payment of the consideration precedes the fulfilment of the transaction and falls on a date before 1^st July 2012); or

an advance payment is paid before 1st July 2012 (in this case the taxable person fulfilling the transaction in his own name is required to pay tax on the advance payment according to Art. 59 (1)-(2), while the purchaser of the product is required to pay tax on the part of the tax base decreased by the net amount of the advance payment)

The foregoing summary is intended to raise awareness and does not constitute legal advice.

If you have any questions or need further information, please do not hesitate to contact us.

SUMMARY ON CORPORATE LAW CHANGES IN HUNGARY AS OF 1st MARCH 2012

17/Mar/2012

The Act CXCVII of 2011 (the “Amendment Act”) adopted by the Parliament has significantly amended the provisions of Act IV of 2006 on Business Associations (the „Companies Act”) and Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings (the “Company Registry Act”). The Parliament has also passed the amendment to the Economic Chambers Act, which imposes additional administrative obligations on enterprises.

I. New provisions concerning company registration proceedings

I.1. Obligatory appointment of delivery agent

The Amendment Act sets forth that companies and natural persons (as owners or executive officers, etc. of Hungarian companies) not resident in Hungary must appoint a delivery agent and have to have the agent registered in the company registry.

The following persons may not serve as delivery agent:

the members (shareholder) of the company,
executive officers and
the members of the supervisory board.

The delivery agent must be appointed and reported to the Court of Registration at the time of the first change in the data registered in the company registry but by February 1^st, 2013 at the latest.

I.2. Obligatory statement on registered seat

Companies will have to prove their title to use the property, which serve as their registered seat, branch office or business site, by submitting appropriate documentation to the court (e.g. land registry extract, extract of the lease agreement, certificate of usage).

I.3. Additional data required for the company registry

The administrative burden increases, as more data and documentation will need to be submitted to the Court of Registration. Therefore, the following data is required in case of every company registration proceedings:

tax numbers of shareholders (members),
dates of birth of the persons indicated as representatives of the Company in the company registry,
the trade registry extract of the foreign shareholder entity.

I.4. Duty related changes

As of March 1^st, 2012, the duty for the registration of companies by the simplified proceeding shall increase to 50,000 HUF in case of private companies limited by shares and limited liability companies, to 25,000 HUF in case of general and limited partnerships and to 15,000 in case of sole proprietorships instead of the previous flat duty of 15,000 HUF for all company registrations made under the simplified procedure.

I.5. Data on the activities of the company

All business activities of the company (not just the main activity) need to be indicated in the articles of association of the company and in the company register, however, generally changes to the activities has to be reported to the tax authority (and not to the court of registry) together with statistical classification numbers.

I.6. Abolition of registered seat services

Registered seat services (including law firms and specialized firms) provided by third parties will no longer be permitted but the current ones will not be affected.

I.7. Company extracts of foreign company owners

Pursuant to the Amendment Act, in case of a foreign owner of the company, after March 1^st, 2012 it is mandatory to submit the company extract (or other document which verifies the registration of the owner according to its jurisdiction and the representation powers of the authorized representative) of the foreign owner to the Court of Registration along with a certified Hungarian translation of the company extract.

II. New provisions for the protection of creditors

II.1. Grounds for incompatibility of the owners of the company

The Amendment Act sets forth stringent prohibitions with respect to persons holding positions as executive officers and those persons with ownership (members) in the company exercising exclusive or majority influence who have been found liable for unsettled claims under a final and binding decision that concluded the termination of the prior company without a legal successor and who have not settled their payment obligations.

Pursuant to the Amendment Act such persons may not

be the sole member in a newly formed single owner company,
acquire ownership ensuring direct or indirect majority influence in a company or
become members with unlimited liability in general and limited partnerships.

The Amendment Act also sets forth that persons who have not fulfilled their obligations in connection with their previous ownership interest under the Companies Act may not become members with unlimited liability in general or limited partnerships or acquire ownership stakes ensuring direct or indirect majority influence in the company.

The above restrictions are applicable to the persons concerned for 5 years from the occurrence of the fact serving as the basis thereof.

II.2. Additional grounds for incompatibility regarding executive officers and company managers

Would-be executive officers (e.g. managing directors) will have to face stricter disqualification criteria. Information from the criminal records which relate to them will be obtained by the Court of Registration, and if a certain person is banned from becoming an executive officer this will appear in the companies’ register.

Under certain special circumstances company managers (“cégvezető“) may also be held liable for the unsettled debts of the company.

II.3. Incompatibility criteria to be checked by tax authority

The tax authority may also check, in the event that there is a change to the owner or executive officer of the company subsequent to the company’s establishment, whether any of the incompatibility criteria mentioned above in relation to the establishment of the company will apply with respect to such change. If the tax authority finds that any of the incompatibility criteria is applicable, it will give notice to the tax payer to resolve such incompatibility within 15 days; failure to do so could result in the cancellation of the company’s tax number.

II.4. Quota (share) transfer after March 1^st, 2012

In the event of a change in the ownership structure of a company, the Court of Registration will obtain information from the Hungarian Tax Authority as to whether the company has public debts. If the unsettled debts of the company exceed HUF 15,000,000, it will be obliged to submit its audited balance sheet with the effective date of the transfer.

In the event of a transformation, merger or de-merger, as well as the reduction of the share capital of a limited liability company (Kft.) or a private company limited by shares (Zrt.), non-secured creditors of the company will be entitled to request security from the debtor company in relation to both their expired and non-expired claims.

III. Miscellaneous amendments and changes

The executive officers’ obligation to report the changes to the company’s data to the Court of Registration within 30 days of the signing and/or approval of the deed of foundation has remained unchanged. However, from March 1^st, 2012 if the executive officer fails to do so, the Court of Registration shall impose a mandatory fine on the executive officer, the amount of which shall extend from 50,000 HUF to 900,000 HUF.
Financial sanctions for not publishing the financial statement within the statutory deadline is harsher as of 1^st January 2012, as a fine of up to HUF 500,000 may be imposed on a company which does not meet the above obligation. If the company does not fulfil its obligation, despite the additional 30 day period set by the Hungarian Tax Authority, the maximum amount of the fine increases to HUF 1,000,000. Non-compliance with the repeated notification will result in the deletion of the tax number of the company.
Pursuant to the Amendment of the Company Registry Act, the 15 business days deadline for deciding on the request for the registration of the amended company data will apply in all cases (i.e. the expedited proceedings applicable to companies operating with the statutory template articles of association shall be terminated as of March 1^st, 2012).
For limited liability companies and companies limited by shares, new rules specifying the preconditions for the payment of dividends were introduced. After January 1^st, 2012, the interim balance sheet serving as the basis for the interim dividend payment may be used within six months from the balance sheet’s date and interim dividends may be paid out within six months from the balance sheet’s date on the basis of the annual report as well.
Following March 1^st, 2012 only the shareholders of public companies limited by shares are entitled to request not to be registered in the company’s book of shareholders.
Stricter liability rules will apply to shareholders (members) with majority influence, and executive officers for the unsettled creditors’ claims in the event of an involuntary deletion procedure (“kényszertörlési eljárás”), or a liquidation procedure.

IV. Amendment to the act on Economic Chambers

Pursuant to the amendments, business associations are now obliged to apply for their registration with their local economic chamber residing at the company’s seat. Companies registered after January 1^st, 2012 shall fulfil this obligation within 5 days of their registration, whereas companies already registered shall do so by March 1^st, 2012.
Although already registered companies will not become members of the chamber by way of the aforesaid registration and thus will not be required to pay membership fees, companies are obliged to pay an annual ‘chamber contribution’ of 5,000 HUF. Unpaid chamber contributions may be collected as public debt.

The above information is for general purposes and guidance only and do not purport to give professional or legal advice. Should you have any further question in relation to the above, please do not hesitate to contact us.

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Next Entries »

NEW ACT ON THE CIVIL CODE – Corporate law in the new Civil Code

THE MOST IMPORTANT CHANGES IN LIGHT OF THE NEW CIVIL CODE

SUMMARY ON TAXATION RELATED CHANGES IN HUNGARY AS OF 1st JANUARY 2013

SUMMARY ON LABOUR LAW CHANGES IN HUNGARY AS OF 1ST JULY 2012

THE EXTENSION OF REVERSE TAXATION

SUMMARY ON CORPORATE LAW CHANGES IN HUNGARY AS OF 1st MARCH 2012

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