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In Budapest on 9 May 2024, the leaders of China and Hungary announced the establishment of a new era in an all-weather comprehensive strategic partnership between the two countries, a move that is expected to create more opportunities for Chinese companies to invest in Hungary. Based on the Hungarian policy of foreign direct investment (FDI) review, this article introduces the key concerns of Chinese companies investing in new energy projects in Hungary.

Legal regimes

In general, Hungary maintains an open stance towards foreign investment and accords national treatment to foreign investors. However, the Hungarian government has increasingly recognised the importance of foreign investment reviews, particularly in acquisitions of Hungarian companies or assets in key sectors, such as new energy. Consequently, relevant regulations and measures are introduced to address these concerns.

Notably, there are now in force two legal regimes of foreign investment review in Hungary, namely, the Act LVII of 2018 on Controlling Foreign Investments Violating Hungary¡¯s Security Interests, which has established the framework for the review of FDI in Hungary since enforcement on 1 January 2019, and the Government Decree (covid-19 decree) issued in late December 2022, primarily in response to the covid-19 outbreak and the lasting impact of the conflict between Russia and Ukraine.

On 14 December 2023, Hungary further amended the covid-19 decree, with the revisions set to take effect on 13 January 2024. Under this amendment to the covid-19 decree, the Hungarian government is granted the pre-emptive right over photovoltaic (PV) projects.

Act of 2018

Under the above-mentioned act of 2018, investors from outside the EU, European Economic Area (EEA) and Switzerland conducting any of the following investment acts in specific sectors (such as electricity, gas and water services, and electronic communication services) are obliged to notify the Hungarian Ministry of Interior within 10 days of signing the relevant investment agreement:

1. Direct or indirect acquisition of 25% or more shares in a Hungarian company (or 10% or more in a listed entity);
2. Establishment of a company or branch; and
3. Any act that alters a company¡¯s business scope or operating rights of vital infrastructure, equipment and assets.

The Hungarian Ministry of Interior may make a prohibiting decision on the transaction if it is considered detrimental to national security. Otherwise, the transaction may proceed to settlement on approval.

Failure to fulfil the notification obligation will result in the acquisition or establishment of a company being invalidly registered. Individuals may face fines of HUF1 million (USD2,800), while legal entities may be fined up to HUF10 million.

Covid-19 decree

The covid-19 decree expands the Hungarian government¡¯s scope of foreign investment review, with a broader scope of application and lower trigger amounts of mandatory notification compared to the act of 2018.

Under the covid-19 decree, if a foreign investor intends to carry out a transaction related to a strategic company and the transaction meets certain criteria, the investor shall notify the Hungarian Minister for National Economy prior to the completion of the transaction. The transaction can only be finalised after the ministry is formally notified, which in practice means that prior approval from the ministry is required.

Strategic company. A strategic company is defined as a legal entity whose primary or additional business operations fall within key strategic sectors, such as energy, transportation and telecoms.

Foreign investor. A foreign investor under the covid-19 decree is: (1) a legal entity or other entity registered in Hungary, the EU, EEA or Switzerland and under the majority control of a legal entity or other entity registered outside these countries and regions; (2) a natural person, legal entity or other entity from a country or region outside Hungary, the EU, EEA or Switzerland; and (3) any citizen or legal entity from the EU, EEA or Switzerland whose investment value reaches or exceeds HUF350 million, and who will gain majority control (more than 50% of shareholding) of the strategic company.

Criteria of the notification obligation. The investor shall fulfil the notification obligation when the transaction meets the following criteria:

1. The target company is a strategic company;
2. The investment value reaches HUF350 million; and
3. After the share transfer, a third-country entity or individual will directly or indirectly acquire at least 5% of the strategic company¡¯s shares (or at least 50% if the third-country entity or individual is based in another EU member-state).

Government¡¯s pre-emptive right

Under the amended covid-19 decree, at the time the investor performs its notification obligation, the Hungarian government is entitled to exercise a pre-emptive right on the proposed PV projects, except for small household PV power plants under 50kVA, if the following conditions are met:

1. The target company is a Hungarian company engaging in the business of power generation through its own PV power plants and holding commercial interests in the energy sector, with its business operations categorised as ¡°power generation¡±; and
2. The transaction pertains solely to the sale and acquisition of the target company’s shares, excluding other forms such as capital injection, merger/split, or convertible bond.

The Minister for National Economy notified of the transaction will then review whether it is subject to the government¡¯s pre-emptive right. In the event that the pre-emptive right is inapplicable, or it is concluded that the pre-emptive right is not to be exercised, the minister will review the transaction against the covid-19 decree and decide whether to prohibit or approve the transaction. If the pre-emptive right is to be exercised, the ministry will terminate the foreign investment review process. In light of the two legal regimes of foreign investment review operating in Hungary, investors are suggested to consult with professional legal counsel for a deep insight into details of the application. For example, which regime applies to a proposed investment? And is the investment notifiable? This will help ensure legal compliance of the proposed investment in new energy projects in Hungary and prevent any possible impact on project implementation and timelines.

Wang Jihong is a senior counsel and Liang Danni is an associate at Zhong Lun Law Firm