On 1 January 2019, Act LVII of 2018 on the screening of foreign investments harming Hungary’s security interests (the "Act") has entered into force, together with its implementing Government Decree  no. 246/2018. (XII. 17.) (the "Government Decree") . The newly adopted legislation applies to transactions set to be signed after 1 January 2019 and related administrative proceedings initiated after 1 January 2019.

Pursuant to the Act, if a foreign investor (i.e. a non-EU, non-EEA or non-Swiss legal or natural person or a legal person registered in the EU, the EEA or in Switzerland if such legal person is controlled by a non-EU, non-EEA or non-Swiss natural or legal person with majority control (as defined in the Civil Code)) intends to

  1. acquire a direct or indirect ownership exceeding 25% (10% for a public company limited by shares) or dominant influence (as defined in the Civil Code) in a Hungarian target entity, or as a result of the acquisition, the ownership of foreign investors would exceed 25% in the Hungarian target entity (except for public companies limited by shares);
  2. establish a branch in Hungary; or
  3. obtain the right to operate or use the infrastructures, facilities, machinery and other assets that are essential for carrying out the activities of national security interest as set out in the Act and the Government Decree;

it must notify the minister responsible for the managing of civil national security services (i.e. currently the Minister of Interior, the "Minister") as competent authority in Hungarian about the transaction within 10 days from the conclusion of the agreement, pre-contract, term sheet, letter of intent etc., or in case the notification obligation arises from a new business activity, within 10 days from the registration of said business activity with the trade registry,

provided that the target entity pursues or intends to pursue (as a new business activity) any of the following activities as set out in the Act and further specified in Schedule 1 to the Government Decree:

  1. manufacture of weapons, parts of weapons, munition (except for historical munition), military tools;
  2. manufacture of dual use products;
  3. manufacture of secret service tools;
  4. data processing by a financial institution operating the central credit information system and operation of payment systems, excluding the operation in respect of payment transactions exclusively executed with cash-substitute payment instruments;
  5. if any of the below listed activities affect an activity, as laid down in a separate act, which is essential for the maintenance of vital societal functions, such as healthcare, safety of life and property of the citizens, provision of economic and social public services or the disruption of which would have a significant impact as a result of the failure to maintain those functions:
    1. transfer and distribution of electricity, system operation, electricity production by a power plant of at least 50 MW capacity;
    2. distribution, storage, transport of natural gas, system operation;
    3. outsourcing and development of public water supply;
  6. provision of electronic communications services;
  7. participation in the investigation of a security incident and vulnerability examination in connection with the electronic information safety of public bodies.

The agreement, pre-contract, term sheet, letter of intent, etc. must be attached to the notification. All relevant documents must be submitted in original or certified copy, in Hungarian or with a certified Hungarian translation.

The Minister will confirm receipt of the notification within 8 days of receiving the notification, and if necessary, it will request further documents and may give a 45-day deadline for their submission. This deadline may be extended once by another 45 days. The Minister must be notified about the changes of the data contained in the notification or the supporting documents within 5 days.

The Minister may request the opinion of those public bodies that operate in the sectors at question (supervising the activities of national security interest) but is not bound by their recommendation, and will decide within 60 days whether the investment would harm Hungary’s security interests – in exceptional cases this deadline may be prolonged by an additional 60 days. The Minister may prohibit the investment, if he seems that the investment would be contrary to Hungary's security interests. The prohibition may not be appealed and may only be challenged in an administrative procedure. The foreign investor may only acquire the ownership or interest if it completed the notification and the Minister has confirmed positive acknowledgement thereof.

In case of non-compliance with the notification and information obligation, being monitored by the Constitution Protection Office (in Hungarian: Alkotmányvédelmi Hivatal) pursuant to the Government Decree, the Minister may issue a fine of up to HUF 10 million to a legal person foreign investor and HUF 1 million to a natural person foreign investor.

The newly adopted legislation is in line with the European Commission's recent proposal for a regulation on establishing a framework for screening of foreign direct investments into the European Union. The proposal does not attempt to harmonise the Member States' screening regimes which vary significantly among Member States or to create an EU-wide screening mechanism. Rather the framework would create a cooperation mechanism between Member States and the Commission which aims to enhance the coordination of screening decisions taken by the Member State(s) concerned and to increase the awareness of Member States and the Commission about planned or completed foreign investments that may affect security or public order by way of exchanges of information. The draft regulation reaffirms that national security interests are the responsibility of Member States and the framework will not affect the Member States' ability to maintain their existing review mechanisms already in place, to adopt new ones or to remain without such national mechanisms (currently 15 Member States, including Hungary, have such mechanisms in place). The proposal also confirms that Member States shall keep the last word whether a specific operation should be allowed or not in their territory. However, the regulation would introduce a new Commission competence to screen foreign investments and issue a non-binding opinion, if (i) an FDI in a Member State may affect the security or public order of projects or programmes "of Union interest" in the areas of research, space, transport, energy and telecommunications or (ii) an FDI in a Member State may affect the security or public order of another/other Member State(s).