Upcoming Legal Changes Affecting the Real Estate Sector

Upcoming Legal Changes Affecting the Real Estate Sector

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Market Spotlight - Hungary

Greenfield Investments: Extended Liability of General Contractors and Interim Subcontractors

In the construction industry, it sometimes happens that the blue-collar employees working on a project do not receive their wages because the employer, acting as the subcontractor, is insolvent. For this reason, the Hungarian legislator has argued that it is necessary to increase liability on the construction market and thus to force general contractors and subcontractors to choose reliable subcontractors and agents.

Due to an amendment, as of February 1, 2020 Hungary’s labor supervision authority will require the general contractor of a construction project or any interim subcontractor to pay the wages of employees hired by another company acting as the subcontractor or other agent if they do not get paid by the employer.

The new rules are only applicable to third-country nationals hired for seasonal work and only if the employer does not pay the wages of such employees in full by the end of the employment relationship.

Real Estate Transactions: Changing the Transfer Tax Rules

Generally, real estate classified as “urban area” is designated for construction activities, whereas real estate classified as “non-urban area” serves primarily for agricultural and other purposes. According to the legislator, the acquisition of non-urban real estate may be speculative. There have been several cases in the past where non-urban real estate was acquired, then reclassified to urban and sold at a considerable profit.

As of February 1, 2020, the transferring party (i.e.,  the seller) in a transfer of urban real estate via an asset deal must pay transfer tax if the real estate was reclassified from non-urban to urban within the ten years leading up to the transfer, except if the reclassification occurred in the sixth year or later from the original acquisition by the seller. For example, if the original acquisition was in 2010 and the subsequent sale occurs in 2020, then a transfer tax is payable if the reclassification from non-urban to urban occurred by December 31, 2015, whereas no payment obligation exists if the reclassification occurred later. No amount will be payable if the real estate is sold more than ten years following the reclassification.

The tax base of the real estate transfer tax is the difference between the market value of the non-urban real estate at the time of the original acquisition and the market value of the urban real estate at the time of the subsequent transfer. Transactions will be taxable on 90% of the tax base. The transferor (the seller) will need to notify the tax authority of the market value and the tax will be paid not by the acquirer (i.e.,  the purchaser) but by the transferor on a self-assessment basis. Except for corporate tax exemptions (e.g., a  beneficiary asset transfer), no tax exemption will apply. The new law also applies to share deals, i.e.,  if the transaction concerns the transfer of shareholding in a company holding reclassified real estate. In a share deal, however, the purchaser will pay real estate transfer tax only if it acquires (together with its related parties) more than a 75% stake in such a company, whereas in a transfer of reclassified real estate, the seller’s payment obligation exists irrespective of the transferred stake.

Building Authority Procedures: Governmental Offices to Act as General First-Instance Building Authorities

As of March 1, 2020, local notaries in Hungary have lost their competency to act as general, first-instance building authorities. Such competence has been be passed to governmental offices, previously acting as second-instance building authorities Thus, building authority procedures have become single-tier and it is no longer possible to file an appeal against their decisions. It will still be possible to challenge such a decision before competent courts. According to the legislator, the aim is to streamline decision-making.

Ongoing procedures that were not closed by February 29, 2020 will be decided by the governmental office. In practice, the transfer process may lead to a delay in terms of decision-making. In any case, the inability to file an appeal within the public administration system may alter the actions of developers and other parties in construction processes. As litigation is expensive and time-consuming, this may discourage those clients from seeking legal remedies.

By Laszlo Krupl, Head of Real Estate, and Adrian Menczelesz, Associate, Schoenherr Budapest

This Article was originally published in Issue 7.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.