Legal aspects when buying a business in Hungary

Legal aspects in M&A when buying a Hungarian company

Should a m&a advisor be informed about the Legal landscape? Legal aspects are of high importance when buying a business. Your advisor needs to be up to date with the legal framework that applies to M&A transactions in Hungary. Here we mention some aspects that you need to consider when acquiring a company in Hungary. In general a part of the legal environment is similar to international law. We also touch upon some of the legal regulations for M&A projects in Hungary that are clearly different.

General Legal M&A introduction when buying a Hungarian business

It is important for the parties involved in a transaction to agree on the structure of the acquisition and the relevant assets included in the scope, before the commencement of any negotiation process. Important to know is whether the transaction relates to an asset-deal or a share-deal. In a share deal it is important if the acquisition involves the transfer of part or all of the share capital of the target or whether the acquisition involves the merger of two or more entities. Main documents that are being used are the LOU (Letter of Understanding) and the SPA (Share Purchase Agreement). In this sense legal aspects in Hungary don’t differ that much from global practise. The LOU type that is most common to be used is a binding format which means that the Letter of Understanding has binding legal consequences.

Legal contents around the LOU

A typical LOU (Letter of Understanding) in Hungary will normally involve the following terms and conditions:

  • Names of the acquirer, seller and target company
  • Structure of the transaction
  • Purchase price or issue price in case of capital injection and basic assumptions regarding the valuation (cash free – debt free etc.)
  • Mechanism of payment of the purchase price and escrow mechanism if any
  • Conditions precedent of the acquirer and seller if any, conditions precedent specific to the transaction (such regulatory approvals etc.)
  • Process forward and outline of steps (financial, legal, technical due diligence, approvals of the corporate bodies of the entities etc.) and provisions related to access of company records
  • Conduct of target’s business for the period between signing of the LOU and signing of the SPA (Share Purchase Agreement)

Legal M&A regulations in Hungary

 As member of the European Union, Hungary can offer a broad scale of subsidies. An investment of a large enterprise – depending on the location – can be entitled to receive state subsidies of up to 50% of the eligible costs of the investment.

The legal basis for all investment subsidies within Hungary is provided by common legal framework of the European Union. The following maximum regional subsidy intensity ratios have been set by the European Commission.

For domestic and foreign businesses alike, the corporate tax base is the earnings before taxation modified by the items identified in Act LXXXI of 1996 on corporate tax (hereinafter Corporate Tax Act). The corporate tax is 10 percent of the positive tax base up to HUF 500 million, and 19 percent of the remaining portion of the tax base.  Local taxes are levied by the municipalities at their own discretion.

The general VAT rate is 27 percent. In addition to the general tax rate, two lower rates are defined by the law at 5 and 18 percent. The 5 percent tax rate applies to, among others, medicine, healthcare equipment, books, e-books, periodicals and district heating. The 18 percent tax rate applies to milk and dairy products and products made using corn, flour and milk, as well as commercial accommodation services.

Depending on the type, status and activity field of the relevant target and structure of the transaction, additional legislation and regulatory requirements might need to be taken into consideration during a M&A deal. For companies operating in different strategic fields, additional regulatory approvals and authorizations may be needed.