1 Question 1: How does the legislation of Hungary define the concept of an affiliated party?

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1 REGULATION OF AFFILIATED PARTIES HUNGARY A Executive Summary There is no generally applicable affiliated party definition in Hungarian legislation. The concept is described in various general and sector-specific laws slightly differently and the terminology used to denote it is not uniform. Generally, Hungarian legislation regards the concept as an interrelationship between persons that can be characterized by common economic objectives, directly or indirectly centralized control, and the possible lack of arms-length dealings. Such interrelationships are caught on the basis of objective criteria, in particular a specific degree of direct or indirect control legally or de facto. B Question by Question Answers 1 Question 1: How does the legislation of Hungary define the concept of an affiliated party? 1.1 The concept in legislation protecting creditors rights and minority shareholders According to the Hungarian Civil Code, there is a rebuttable presumption that contracts between persons that exist in concentration ( összefonódás ) with each other are not entered into on arms-length terms and/or they are not entered into for bona fide purposes. Two persons are said to be in concentration with each other if they are in a relationship where the party (who may be a natural person or an entity) with direct or indirect (i.e., through an intermediary undertaking) influence in an undertaking (which may be a for-profit organization, or a not-for-profit organization in connection with its business-like activities) (i) holds over 50% of the voting rights by way of his own right or on the basis of his agreement with other members (shareholders) of the undertaking, or (ii) as a member (shareholder) of the undertaking he is entitled to appoint or remove the majority of directors or supervisory board members. The detailed rules regarding the calculation of the percentage of voting rights in case of indirect control are set out in the attached extracts of the Civil Code in Annex According to the Hungarian Companies Act, a person s ownership interest in a corporation operating as a limited liability company ( korlátolt felelősségű társaság ) or a company limited by shares ( részvénytársaság ) entails certain obligations and restrictions aimed at the protection of creditors and minority shareholders. A person (who may be a natural person or an entity) has a significant interest ( jelentős befolyás ) in the controlled company if he holds more than 25% of the voting rights, a majority interest ( többségi irányítást biztosító befolyás ) if he holds more than 50% of the voting rights, and a controlling interest ( közvetlen irányítást biztosító befolyás ) if he holds more than 75% of the voting rights. Extracts of the relevant legislation are attached in Annex

2 1.2 The concept in the context of own share acquisitions According to the Companies Act, a company limited by shares (issuer) may acquire its own shares subject to certain conditions. The provisions setting forth these conditions are also applicable to the acquisition of the shares by another corporation operating as a company limited by shares or a limited liability company in which the issuer has more than 50% of the voting rights or a decisive influence ( meghatározó befolyás ). The issuer is deemed to have a decisive influence in the other company if it is a member or a shareholder of that other company, and (i) it has the right to appoint or remove the majority of the company s directors or supervisory board members or (ii) holds alone more than 50% of the voting rights in the company on the basis of an agreement with other members/shareholders of the company. Further details and extracts of the relevant legislation can be found in Annex The concept in anti-trust legislation According to the Hungarian Competition Act, agreements between independent undertakings which may prevent competition are prohibited. Two undertakings are deemed to be not independent if (i) one of them controls the other, or (ii) the two of them are controlled by the same undertaking or more undertakings jointly. The definition of control is stated below. An undertaking (or more undertakings acting jointly) shall be deemed to have direct control ( közvetlen irányítás ) over another undertaking (i) if it holds stock in the controlled undertaking with more than 50% of the voting rights, or otherwise holds more than 50% of the voting rights in the controlled undertaking, or (ii) if it has the right to nominate, appoint, or remove the majority of the directors of the other undertaking, or (iii) if it has the right by contract to assert significant influence over the decisions of the other undertaking, or (iv) if it can, de facto, assert significant influence over the decisions of the other undertaking. An undertaking shall be deemed to have indirect control ( közvetett irányítás ) over another undertaking if the latter is under the control of one or more undertakings controlled by the former. The same control definition is applicable in connection with the regulatory control of concentrations between formerly independent undertakings. Other details can be found in the extracts attached in Annex The concept in legislation concerning financial disclosure requirements According to the Hungarian Accounting Act, subject to a few exceptions, every forprofit organization and not-for-profit organization in Hungary is obligated to comply with the Act s bookkeeping and financial disclosure requirements. 2

3 The concept of affiliation is relevant with respect to certain items in the balance sheet, the mandatory contents of the annual report, and the preparation of consolidated annual reports. The Accounting Act defines several terms relating to the concept of affiliation; these terms are defined below. Parent company ( anyavállalat ): means an undertaking that has the capacity to exercise significant influence ( meghatározó befolyás ) over another undertaking (the subsidiary company), either directly or through its subsidiary company, because it meets at least one of the following conditions: (i) based on its ownership percentage in the share capital, it solely controls the majority (in excess of 50%) of the votes of the owners (shareholders), or (ii) it solely controls the majority of votes based on agreement with the other owners (shareholders), or (iii) in its capacity as an owner (shareholder) of the company, it is entitled to appoint or remove the majority of the directors or members of the supervisory board, or (iv) based on a contract concluded with the owners (shareholders), or a provision of the articles of association, it exercises decisive direction and control, irrespective of its percentage in the share capital, voting ratio and the right to appoint and remove people. Subsidiary company ( leányvállalat ): means the company (which must be in one of the five forms of corporation as per the Companies Act) over which the parent company has the capacity to exercise significant influence. Undertaking under common control ( közös vezetésű vállalkozás ): means a company (which must be in one of the five forms of corporation as per the Companies Act) in which the parent company (as defined above), or the consolidated subsidiary of the parent company, on the one hand, and one or several other undertakings, on the other hand, have the rights described in (i)-(iv) of the definition of parent company on an equal basis, holding at least 33% of the voting rights. An undertaking under common control is directed jointly by the owners. Associated undertaking ( társult vállalkozás ): means a company (which must be in one of the five forms of corporation as per the Companies Act) not completely consolidated, in which the parent company or a consolidated subsidiary thereof has a substantial share and exercises considerable influence ( mértékadó befolyás ) over the business and financial policy of the company. An undertaking is deemed to have considerable influence over a company if it has, directly or indirectly, at least 20% of the voting rights in that company. Affiliated undertaking ( kapcsolt vállalkozás ): means the parent company, the subsidiary company, the undertaking under common control, and the associated undertaking (all as defined above). Relevant extracts are attached in Annex The concept in legislation concerning transfer-pricing According to the Act on Corporate Tax and Dividend Tax, if the consideration payable in an agreement between affiliated undertakings ( kapcsolt vállalkozás ) differs from 3

4 arms-length prices, the parties tax bases may need to be modified with the difference between the consideration actually paid and the consideration which would have been paid had the contract been concluded on arms-length terms. The term affiliated undertaking means: (i) the taxpayer and the person in which the taxpayer has a majority interest ( többségi irányítást biztosító befolyás ) (please refer to response 1.1.2) directly or indirectly; (ii) the taxpayer and the person that has a majority interest in the taxpayer directly or indirectly; (iii) the taxpayer and another person if a third party has a majority interest in both the taxpayer and such other person directly or indirectly; (iv) a foreign enterprise and its domestic place of business and the business premises of the foreign enterprise, furthermore, the domestic place of business of a foreign enterprise and the person who is in the relationship described in (i)-(iii) with the foreign enterprise; provided that the right to appoint or remove the majority of directors and supervisory board members shall also be deemed majority interest, and provided further that in determining majority interest, the voting rights of close relatives shall be taken into account together. Relevant extracts are attached in Annex The concept in legislation concerning capital markets According to the Act on Capital Markets, certain forms and degrees of affiliation trigger various requirements from regulatory and disclosure perspectives. The following definitions regarding different forms of affiliation can be found in the Act on Capital Markets. Affiliated undertaking ( kapcsolt vállalkozás ): means the undertaking s parent company, the undertaking s subsidiary company, the subsidiary company of the undertaking s parent company, the owner of the undertaking with an influencing interest ( befolyásoló részesedés ) in the undertaking, or any other undertaking in which the undertaking or its owner, supervisory board member, director or their close relatives have an influencing interest. Parent company ( anyavállalat ): means every undertaking that has a controlling influence (ellenőrző befolyás ) over the operation of another undertaking. Subsidiary company ( leányvállalat ): means every undertaking whose operation is under the controlling influence of another undertaking. Every subsidiary company of a subsidiary company is deemed the subsidiary company of the parent company. Influencing interest ( befolyásoló részesedés ): means a person s direct or indirect ownership interest in an undertaking, or a relationship between a person and an undertaking, whereby the person (i) has an ownership interest of at least 10% of the total ownership, or hold at least 10% of the voting rights, or (ii) has the right to appoint or remove at least 20% of the members of the undertaking s decision-making, management, supervisory and other bodies, or (iii) has powers to exercise a decisive influence ( döntő befolyás ) [not defined] over the undertaking s operation on the basis of articles of association, deed of foundation, or contract. 4

5 Controlling influence ( ellenőrző befolyás ): means the significant influence ( meghatározó befolyás ) used in the parent company definition of the Accounting Act, or a relationship between a person and an undertaking, whereby (i) the influencing person may decide on the appropriation of profits, the redistribution of profits or losses to another undertaking or, the undertaking s strategy, business or sales policies; or whereby (ii) the relationship permits the coordination of the management of the undertaking with that of another undertaking for the purpose of a common objective, regardless of whether the agreement is recorded in the articles of the undertaking or in other written contract; or whereby (iii) the joint management is effected through the partial (but providing a decision-making majority) or uniform composition of the board of directors, the supervisory board or the management; or whereby (iv) the influencing person exercise substantial influence ( jelentős befolyás ) [not defined] over the operation of another undertaking without any capital involvement. Close relationship ( szoros kapcsolat ): means a relationship between two or more natural or legal persons which amount to controlling influence or a participation ( részesedési viszony ). If a person is related to another person by way of controlling influence, which, in turn, exerts controlling influence over a third person, such third person shall also be regarded to be in close relationship with the top tier person. Close relationship occurs also between two or more natural or legal persons if they are all under the controlling influence of the same persons. Participation ( részesedési viszony ): means a relationship between a person and an undertaking, other than a relationship of controlling influence, whereby the person, directly or indirectly, possesses at least a 20% ownership stake or possesses at least 20% of the voting rights. In determining voting rights, the applicable provisions of the Accounting Act shall be taken into consideration regardless of whether the person in question falls within the scope of the Accounting Act. Relevant extracts are attached in Annex The concept in legislation concerning financial institutions The Financial Institutions Act uses the following concepts to describe affiliation between parties: controlling influence ( ellenőrző befolyás ), participation ( részesedési viszony ), close relationship ( szoros kapcsolat ) influencing interest ( befolyásoló részesedés ), parent company ( anyavállalat ), and subsidiary company ( leányvállalat ). All of the above concepts are defined the same way as they are defined in the Act on Capital Markets. Relevant extracts are attached in Annex The concept in miscellaneous and sector-specific legislation There are other pieces of miscellaneous and sector-specific legislation where the concept of affiliated parties and other ancillary concepts are defined for the purposes 5

6 of application of the legislation in question (e.g., the Insurance Act, the Labor Code, etc.). 2 Question 2: What characteristics must an entity have in order to be recognized as affiliated? In order for an entity to be affiliated with another entity it must be in a relationship with that other entity as described in the response to Question 1. In certain cases, in order for a person to be an affiliated party it must be a legal entity as opposed to a natural person. In certain other cases, in order for a person to be an affiliated party it must operate in a specific company form. For further details please refer to Question 1. 3 Question 3: To what entities do the rules concerning regulation of the activities of affiliated parties apply? The rules concerning the regulation of the activities of affiliated parties apply to the entities falling within the scope of application of the specific piece of legislation which sets forth the rules in question. 4 Question 4: On what grounds and subject to what conditions may the parties be classified as affiliated parties in Hungary? Parties may be classified as affiliated parties on the grounds and subject to the conditions described in the response to Question 1. There is no legislation in Hungary setting forth a general definition of affiliated parties or an exhaustive list of forms of affiliation. 5 Question 5: What is the procedure for recognizing or deeming a party to be affiliated in Hungary? A person is deemed to be affiliated on the basis of objective criteria which apply by force of law. There is no constitutive regulatory or judicial proceeding which would make a party affiliated. Of course, disputes may arise as to the lawful application of the legal provisions containing the criteria for an affiliated status, in which case the issue of affiliation may be the subject of a procedure before the competent court or authority. 6 Question 6: Have any separate laws specifically concerning affiliated parties been adopted in Hungary? No. 7 Question 7: If such separate laws have been adopted, then what impact has the introduction of systematic legislation on affiliated parties had on the economy of Hungary? Not applicable (please see Question 6). 6

7 8 Question 8: What is the procedure in Hungary under which a legal entity or its participants file, maintain, and disclose information on the affiliated parties of the legal entity? Apart from rules of accounting and any applicable regulations on prudential operation, there are no procedures under which a legal entity or its participants would have to maintain information on the legal entity s affiliated parties. As far as filing and disclosure requirements are concerned, the most important rules are the following. According to the Companies Act, the acquisition of a significant interest (25%<), majority interest (50%<), or controlling interest (75%<) (please refer to response 1.1.2) must be notified by the acquiring party to the competent court of registration and must be simultaneously published in the Official Company Journal. According to the Competition Act, the acquisition of direct or indirect control (please refer to response 1.3) in a formerly independent undertaking must be notified to the Hungarian Competition Authority if certain statutory turnover thresholds are met. According to the Accounting Act, every undertaking keeping double entry books and registered in the companies register must deposit its annual report, and every parent company (please refer to response 1.4) must deposit its consolidated annual report at the competent court of registration. Further, the reports must be sent to the Company Registration and Company Information Service of the Ministry of Justice. In addition, according to the Financial Institutions Act, financial institutions must file their consolidated annual reports with the Hungarian Financial Supervisory Authority (HFSA), and according to the Act on Capital Markets, investment services providers, commodity exchange services providers, investment fund managers, clearinghouses, and exchanges must file their annual report with the HFSA. Also according to the Act on Capital Markets, issuers of securities that are obligated to prepare consolidated financial statements must publish the data based on their consolidated reports in a national daily newspaper, as well as through an electronic system approved by the HFSA, and the HFSA s official journal. According to the Act on Capital Markets, the acquisition of an influence ( befolyásszerzés ) in a public company limited by shares ( nyilvános részvénytársaság ) of 5%, 10%, 15%, 20%, 25%, 30%, 35%, 40%, 45%, 50%, 75%, and 90% must be reported to the HFSA and the board of directors of the company, and must be published in a national daily newspaper, through an electronic system approved by the HFSA, the HFSA s official journal, and the company s web-site, if any. For the definition of acquisition of influence please refer to Annex 8. According to the Act on Capital Markets, certain undertakings falling within the scope of application of the Act must notify to the HFSA the coming into existence, change, and termination of a close relationship (please refer to response 1.6). Specific notification requirements are set forth with respect to clearinghouses and exchanges. For details please refer to Annex 8. 7

8 According to the Financial Institutions Act, anyone wishing to acquire an influencing interest (please refer to 1.7) in a financial institution, or wishing to modify his existing influencing interest in a financial institution so that his ownership or voting rights reach 15%, 33%, 50%, or 75%, must request the HFSA s approval in advance of the conclusion of the agreement. Other pieces of Hungarian legislation may contain additional reporting requirements in specific sectors. Relevant extracts are attached in Annex 8. 9 Question 9: Does the legal entity have any obligations to record or account for its affiliated parties? Please refer to the first paragraph of the response to Question Question 10: Is the concept of affiliated parties used in Hungary for tax law purposes? Yes. The concept is defined in the Act on Corporate Tax and Dividend Tax. For the definition of the concept please refer to Question 11: What are the powers and authority of the competent government agency in Hungary which collects information on affiliated entities in cases where such information is presented to the agency? There is no generally applicable affiliated party definition in Hungarian legislation and, therefore, there is no government agency which would collect information on affiliated parties. The powers and authorities of the various authorities to which the undertakings covered by the different pieces of legislation report are set forth in the legislation in question. A detailed introduction of the powers of those authorities is beyond the scope of this memorandum. 12 Question 12: Who may obtain information on affiliated entities from the respective state authority or organization in Hungary? Rules concerning access to the information reported by affiliated parties to the authorities are set forth in the various pieces of legislation covering the reporting entity. Where reporting is done by means of the company s annual reports, publications in official journals, web-sites, or newspapers, the information is available to the public. Files of the court of registration, which is responsible for keeping track of companies corporate records, are also open to the public, provided that the right to perform systematic searches is limited. Certain authorities may also have rights to contact other authorities for information on affiliated parties. 8

9 13 Question 13: Does Hungary impose any liability (in particular, administrative) for violation of the requirements to provide information on affiliated parties? A failure to notify information related to affiliated parties to be registered in official public databases or a failure to observe the Accounting Act s requirements relating to affiliated parties may amount to a crime under the Hungarian Criminal Code. A failure to notify the acquisition of a majority (50%<) or a controlling interest (75%<) (please refer to response 1.1.2) will result in the acquirer s unlimited liability for the liabilities of the company undertaken prior to the notification of the acquisition in case of the company s liquidation ( piercing the corporate veil ). In addition, even if the acquisition is notified, in certain cases unlimited liability may be established by the courts if the acquirer pursues a disadvantageous business policy preventing or threatening the satisfaction of creditors rights. Further, specific pieces of legislation may impose administrative liability for the failure to observe the affiliated party related requirements contained in those pieces of legislation (e.g., the Act on Capital Markets, the Financial Institutions Act). Relevant extracts are attached in Annex Question 14: What limitations does Hungary impose on the rights of affiliated parties? In particular, what requirements are there for transactions with affiliated parties? Until the notification to the competent court of registration and the publication in the official company journal of the acquisition of an influencing (25%<), majority (50%<), or controlling (75%<) interest (please refer to response 1.1.2), the acquirer of such interest may only exercise the voting rights which attach to his interest the size of which is exempt from notification requirements. In case of limited liability companies ( korlátolt felelősségű társaság ), the conclusion of a contract between the company and its owner, director, or their close relatives is subject to the approval of the members meeting of the company. In the case of companies limited by shares ( részvénytársaság ), if a payment is made by the company to its shareholder which is incompatible with the requirements of prudential corporate governance, must be repaid to the company, provided that the company can show the shareholder s wrongful intent. Extracts of the relevant legislation are attached in Annex 14. 9