According to the information provided by the Polish Geological Institute, Poland’s shale gas resources are estimated for ca 350-770 billion cubic meters (PGI report from March 2012). This is 2,5 to 5,5 times more than the documented conventional gas supplies (ibid.) Earlier American research had shown even bigger shal gas reserves in Poland, up to 5,3 billion cubic meters (PGI according to global report of the US Energy Information Agency from 2011). Possible revenues from shale gas exploitation excites interest of both Polish and foreign actors in the extractive industry.  At the same time, this subject is a matter of concern that gives rise to a number of questions. This study is to present the legal foundations of and general information about shale gas extraction in Poland.   

Prospection for and extraction of hydrocarbons in Poland

The legal foundations of Polish extractive industry are dispersed among several legal acts. The main regulations are contained in the The Freedom of Economic Activity Act and the Geological and Mining Law Act. Currently major legislative work is being performed in the field of energy and mining law that may have significant influence on the extractive sector and the situation of investors.  

The Ministry of the Environment has been preparing a draft of a major amendment to the geological and mining law, which introduces changes inter alia into the regulations on the mining concession system. In the first quarter of 2013 the draft law was submitted to public and interministerial consultations. The Ministry of Economy has been working on three new complex legal acts in the field of gas law, energy law and green energy (so called the „Energy Three-Pack”). Since no compromise has been reached yet regarding the act on renewable energy sources, the adoption of the Energy Three-Pack isn’t expected soon. The legal status of the Polish extractive sector is also determined by the EU legislation.  At the end of 2012 and beginning of 2013 the European Commission took up work on regulations on environmental aspects of shale gas development. New regulations might lead to restrictions in the EU environmental law concerning the unconventional shale gas extraction methods (hydraulic fracturing).  

Concessions

Polish law requires an investor to obtain a concession for prospecting or identification of mineral resources deposits and for the extraction of minerals from deposits. The concession is an administrative act that entitles an entrepreneur to conduct a particular economic activity regulated by state. Under the geological and mining law three types of concessions are in force: concession for prospecting for, for prospecting for and identification of and concession for extraction of minerals. The draft amendment presented by the Ministry of the Environment reduces the number of concessions to one, i.e. non-drilling explorarion work will be exempted from the license, while indentification and extraction of mineral recources will fall under one concession.

According to the wording of the Geological and Mining Law Act, concessions are awarded on the basis of an application for a period no shorter than 3 years and not longer than 50 years, unless the entrepreneur submitted an application for granting concession for shorter period. Both national and foreign investors may apply for a concession as long as they carry out economic activity pursuant to the Freedom of Economic Activity Act. Requirements for concessions are stated in the Freedom of Economic Activity Act and in the Geological and Mining Law Act. To the application for a concession shall be attached inter alia the evidence of the right to use geological information and the right to the land within the boundaries of which the intended activity is to be conducted. Drawing up an application requires a comprehensive and detailed assessment of the deposit, as well as of the area where the mining or geological activity would be carried out. This also includes an analysis of the environmental background and the protection of the cultural heritage. Investors who have already applied for a concession in Poland complain about the excessive bureaucracy and quite a long waiting time for the decision (even 9 months).   

A concession may be transferred from its current holder to another. This requires the acceptance of new concessionaire to assume the terms and conditions of the concession. Investor applying for a transfer should have the right to use geological information or mining usufruct and the right to the land. The concession authority issues a decision authorizing the transfer providing that it is not against the public interest, including the national security and environmental protection.

As on March 1, 2013 total 109 concessions are in force for prospecting for or identification of deposits of petroleum and natural gas, both conventional and unconventional (shale gas) in Poland. The major investors in the Polish extractive sector are: the State Treasury, including PGNiG S.A., with 16 concessions and the American concern Marathon Oil Company – with its 11 concessions (according to the Ministry of the Environment, Register of the concessions granted by Minister of the Environment for prospecting, exploration and exploitation of shale gas as on March, 1). Recently the Polish company PKN Orlen S.A. increased the number of its concessions after the transfer of 9 concessions from which ExxonMobil had withdrawn. In regard to some investors-concessionaires doubts have been raised over their ownership structure. At the end of 2011, Polish media revealed that one fifth of the concessions for prospecting for shale gas in Poland belongs to Russian investors. Although officially non of the concessions is associated with Russian capital, the ownership and organizational structure of some of the investors may suggest close links with the Russian Federation.  

Right to use geological information

One of the essential elements of the application for a concession under the Polish law is the right to use geological information. The definition contained in the Geological and Mining Law Act describes geological information as the data and geological samples together with the results of their processing and interpretation, particularly given in the geological documentation and recorded on data carriers. The State Treasury has the exclusive right to the geological information, which arises in the very moment a geological information is produced. According to the geological and mining law, the use of the geological information is free of charge. However, if the geological information is going to be used for the purpose of conducting economic activity aiming at the exploitation of minerals from deposits, underground non-reservoir storage of substances, underground waste storage, the use of the geological information is subjected to a charge. Also, if its use would lead to damaging or destroying of a geological sample or to the sharing of geological data. In the above mentioned situations the use of geological information is performed under a contract which provides for a payment for the State Treasury.

Controversies surrounding shale gas

One of the investors’ major concerns is the question of the profitability of shale gas extraction in Poland. Mining activities related to the prospecting and exploration for natural gas require significant expenditures, and as a result they carry a high financial risk. Most of the costs are to be invested long before the drilling has begun and the deposit has been examined. First test drillings in Poland have shown that the Polish shales have less permeability than shales in the U.S.A. As a consequence, shale gas extraction in Poland will likely generate higher costs than expected by American investors. Both, the uncertainty about the costs of extraction and the adoption of new tax regulations do not encourage investments in the Polish gas and oil sector.

The extraction of shale gas and its methods have raised environmental concerns. It has been argued that hydraulic fracturing, which uses pressurized water with chemicals to propagation of fractures in a rock layer, may lead to the contamination of groundwater supplies. Other concerns have included risks to air quality and the health effects on humans. For this reason, hydraulic fracturing has been banned in France and Bulgaria. Currently research is being conducted on alternative methods of shale gas extraction, which would minimize the negative environmental impact of shale drilling. Such studies are also done by Polish scientist, who have suggested to replace the fracturing fluid and chemical additives with liquid carbon dioxide. This method appears to be more expensive, but safer for the environment, as it reduces the environmental degradation considerably.     

Hydrocarbons tax

In March 2013 the Ministry of Finance published a draft on a special hydrocarbons tax, which is going to be paid on the company’s profits from the extraction of petroleum and natural gas (hydrocarbons). The tax burden for the gas and oil sector will include several elements. New tax structures are going to be introduced: i) a special hydrocarbons tax (worth 12,5% or 25% of the difference between companies’ sales and spending, rate depending on the overall profitability) and ii) a tax on the extraction of certain minerals (worth 1,5% or 3% for gas, tax rate depending on the conventional or unconventional character of the resource). According to the draft law, the planned total tax burden for the oil and gas sector is expected to reach even 40% of gross profit. The new tax regulations are supposed to enter into force on January 1, 2015.

March 2013,

Bisztrai Law Firm

Who can apply for the Hungarian investment citizenship?

The „investment citizenship” (permanent residence permit in return for investment) may be granted to the third country nationals (i.e. from outside the European Economic Area, hereinafter: „the foreigners”), meant as individuals or a business entity, in which a foreigner is a majority shareholder. Foreigners applying for investment citizenship in Hungary are expected to invest at least 250.000 EUR in special government residency bonds with a 5-year maturity date. Such investor residency is valid for 5 years, with a possibility to renew it for the next period. It should be bear in mind that the purchase of government bonds does not guarantee an investor the Hungarian citizenship, but the permanent residence permit – the latter, however, allows a foreigner to travel freely within the Schengen zone countries for up to 90 days every six months. A permanent resident enjoys the right to work in Hungary, as well as the right to health service and education system.

Preferential treatment

After the purchase of government bonds, a temporary residence permit will be issued to the foreigner, providing that he or she fullfills all necessary conditions. After 6 months the foreigner will be entitled to apply for a permanent residence permit. According to the Hungarian immigration law, the procedure of application for the „investment citizenship” shall not last longer than 30 days, nevertheless, in practice this might be as long as 2-3 months. According to the ministerial decree of February 2013, the sales of the government bonds will be made exclusively by the Államadósság Kezelő Központ Zrt.. The Hungarian government offers an interest rate for the residency bonds, which is ca 50% lower than in case of other government bonds.

The process of applying for a permanent residence permit in return for purchase of government residency bonds is far more preferential towards the foreigners than the standard procedure. The most important aspect of the investor residency is the fact that the continuous residence of 3 years prior to the application is not required. Moreover, unlike in other countries which offer the possibility of investment citizenship (e.g. Austria, Spain, Bulgaria), Hungary does not require a purchase of real estate. It is sufficient for a foreigner to have a permanent address of residence in Hungary – such as the address of a rented apartment.

The conditions of the acquisition of the „investment citizenship” in Hungary belong to the most advantageous in Europe. In comparison – to obtain investment citizenship in Bulgaria in general at least 500.000 Euro investition in bonds and a purchase of a real estate worth 300.000 Euro is required, in addition to this, opening 10 workplaces and 1-year residency on the territory of Bulgaria. In Cyprus a direct investition of 10 mln Euro is required and a purchase of a real estate worth at least 500.000 Euro.   

If you are interested in applying for an investment citizenship, i.e. permanent residence in Hungary, please do not hesitate to contact our lawyers at: izabela.kislow@bisztrai.com or gabor.bisztrai@bisztrai.com.

March 2013

Bisztrai Law Firm

The important first step of the greenfield investment process in Hungary, even before the acquirement of the chosen plot (real estate), is to inquire about the legal regulations concerning the acquiring of real estate by foreigners in Hungary and the area, e.g. about its legal status, the cultivation, possible restrictions in land development. This information can be obtained at the competent Land Registry Office and the Technical and Construction Department of a local self-government, as well as at the National Inspectorate for Environment, Nature and Water. It is also recommended to incquire about the archaeological status of the given area. This data is managed and made available by the National Office of Cultural Heritage (from 21st Semptember 2012: Forster Gyula Nemzeti Örökséggazdálkodási és Szolgáltatási Központ). This Office is competent to issue a certificate of the archaeological status with regard to a particular area. At the design and planning phase an environmental specialist should be consulted, who will precisely indicate what types of environmental permit an investor needs to complete his project. Bisztrai Law Firm renders all services regarding the Due diligence  of the chosen real estate.

It is reasonable to apply for a preliminary building permit at the local construction office before the acquirement of the real estate. The preliminary building permit is important in view of the procedures following significant financial contributions and investmens. Such document  provides grounds for the issue of a final building permit. The documents and plans submitted to apply for a preliminary permit can also be used to apply for the final permit. Every person is entitled to apply for a preliminary building permit, whether he or she is the owner of the plot or not. The consent of the real estate owner is not required. There might be situations prescribed by law, where a preliminary building permit is obligatory.

If the planned project is to be carried out on several separate plots with different evidence numbers, it might be necessary to obtain a permit to consolidate the plots. Such consolidation should not be underestimated from the point of view of the future costs: proceedings at the Hungarian Land Registry Office are charged on the basis of a single evidence number.

It is important to know that the construction can be carried out only on uncultivated plots (non-agricultural land). In order to obtain a land conversion permit, an application should be submitted to the Land Registry Office. The application shall state precise reasons for the change of land use. If the investment is to take place on an area bigger than 400 square meters, a soil conservation plan should be prepared.

The next step of the investment process is the preparation of the technical and construction documentation (e.g. construction plan, mechanical plan, electrical plan, fire plan, health and safety plan) and its submission to competent authorities, as well as the application for an environmental permit. This is followed by the application for a (final) building permit, which is done on a standard form and should be accompanied by the the full technical documentation. In order for the procedure to be a quick and efficient process, it is recommended to obtain a consent for the project from the neighbouring land owners before submitting an application to the Land Register Office. This way the appeal proceedings and deadlines can be ommitted, as long as there are no conflicting interests.

The construction works can begin only after the investor has obtained a building permit. It is obligatory to inform the construction inspection authorities at least 15 days before the works start.

During the construction works the investor may expect numerous inspections by the authorities. Inspectors will check compliance with the requirements arising under the provisions of law, regulations and permits. They will also verify the certificate of conformity of the products used in construction, check the application of health and safety standards, as well as the construction schedule. Non-compliance with the requirements may result in fine, or even suspension of the construction.

After the construction is completed, the investor shall apply for a certificate of occupancy authorization, and – in cases specified in the law – a permit for an establishment.

Budapest, April 2013
Bisztrai Law Firm

When is a permit necessary?

It is relatively easy for nationals from the EEA countries and Switzerland to buy real estate in Poland. Until 1^st of May 2016 foreigners from this area or companies having its seat there are still obliged to get a permit issued by the minister responsible for internal affairs, but only in case of the acquisition of agricultural and forest real estate.

However, there are some exceptions – a permit is not required for the EEA/Swiss nationals to buy agricultural real estate, if they have concluded a lease agreement for a certain period of time, during which they conducted agricultural activities in person and legally resided on the territory of Poland. Apart from that, the acquisition of agricultural and forest real estate by the EEA/Swiss nationals does not require a permit in case of statutory succession (intestacy) or a specific bequest, since the regulations of the Act does not apply to acquisition of real estate by statutory succession. A permit is required, if a EEA/Swiss national who is not entitled under intestacy rules in a given case acquires agricultural or forest real estate through testamentary succession (i.e. who has been named as a beneficiary under someone’s will). The law applicable to determine who inherits under the statutory succession rules is the national law of the deceased.

Moreover, the acquisition of agricultural and forest real estate is possible in case of the acquisition or subscription of shares of a company, which has its seat on the territory of Poland and who is the owner or perpetual lessee of real estate (see next paragraphs).

As appears from the above, in Poland the acquisition by the EEA and Swiss nationals of real estate other than agricultural and forest real estate (e.g. an apartment, commercial premises, building or leisure plot, etc.) does not require a permit. The acquisition of agricultural and forest real estate requires a permit except for the situations mentioned above. It is worth mentioning, that on 1^st of May 2009 the obligation to receive a permit to acquire a so-called “second house” in Poland was abolished. A second house within the meaning of the Act is real estate destined for residential, recreational or commercial purposes, which is not a permanent residence of the foreigner.

The situation of other foreigners i.e. non-EEA/Swiss nationals or companies having its seat outside the EEA and Switzerland under Polish law is distinctively different. They are always obliged to obtain a permit to acquire real estate in Poland, except for very few exemptions. The exemptions, however, do not apply to real estate located in border area and agricultural real estate of area exceeding 1 hectare (10.000 m²).

Non-EEA/Swiss national are exempted from the obligation to get a permit issued by Polish minister of internal affairs, if they are about to acquire:

- a separate living accommodation (a flat, an apartment) or a separate business premises destined for garages (garage), if it relates to providing for the living needs (as a consequence, the acquisition of commercial premises requires a permit);

- real estate after having resided in Poland for at least 5 years following the granting of a settlement permission or the EC long-term residence permission;

- real estate that will constitute marital estate of the spouses by the foreigner who is a spouse of a Polish citizen and have resided in of Poland for at least 2 years following the granting of a settlement permission or the EC long-term residence permission.

What are the requirements to obtain a permit?  

A permit is issued through an administrative decision on the basis of a relevant application submitted by the foreigner. There is no pre-printed form of the application. The foreigner may be granted a permission to acquire real estate, if such acquisition does not pose a threat to national security and public order and is not contrary to social policy or public health considerations of Poland. There is also an additional requirement, according to which the foreigner is obliged to prove the circumstances confirming his bonds with the Republic of Poland, such as Polish nationality or Polish origin, being married to a Polish citizen, a settlement permission or the EC long-term residence permission or conducting business or agricultural activities on the territory of the Republic of Poland in compliance with the Polish law.

What other types of real estate acquisition fall within the scope of application of the Act?

According to Polish civil law, real estate acquisition goes beyond a mere sales agreement, encompassing gift, transfer of title to secure loan repayment, testamentary succession, acquisitive prescription and establishment of perpetual usufruct on real estate. Therefore, the rules of real estate acquisition described above will be applicable also in these cases. For example, when an apartment in Warsaw is transferred as a gift to a Hungarian citizen, such acquisition will not require a permit of the Polish Minister of Internal Affairs.

The above mentioned rules are also applicable to the acquisition of real estate through the acquisition or subscription by a foreigner of shares in a company seated on the territory of Poland, which is an owner or a perpetual lessee of real estate in Poland if as a result thereof the company becomes a controlled company (a company is controlled by a foreigner when a foreigner holds more than 50% of the votes at the shareholders’ meeting, or when a foreigner has a dominant position within the meaning of the Polish Commercial Companies Code) or if the company is already controlled and the shares are acquired or subscribed for by a new strategic investor who is a foreign national.

While the acquisition or subscription of shares in such company by a EEA/Swiss national does not require a permit, the acquisition or subscription of share by other nationals requires one. It is worth noticing that according to the regulations issued by the Ministry of Internal Affairs, the acquisition or subscription of shares by a EEA/Swiss national does not require a permit even if the company is an owner or a perpetual lessee (perpetual usufructuary) of agricultural and forest real estate.

When is the Act not applicable to the acquisition of real estate by foreigners?

The restrictions under the Act, i.e. the requirement for a permit, are not applicable in case of a company transformation. However, the above mentioned rules concerning the permit are applicable to merger and division of companies which are not excluded from the scope of applicability of the Act. A permit is not required for the acquisition of the title to a cooperative ownership of the flat as a limited property right. As mentioned above, the regulations of the Act do not apply to the acquisition of real estate by foreigners by statutory succession.

In the event of failure to comply with the regulations of the Act on the Acquisition of Real Estate by Foreigners severe consequences will be imposed. Without a permit issued by the Polish Ministry of Internal Affairs, the act of the acquisition of real estate will be null and void. Therefore, it is in the interest of the potential foreign investors on the Polish real estate market to become acquainted with the rules presented in this article. Should you have any questions regarding the above, please contact us at izabela.kislow@bisztrai.com or gabor.bisztrai@bisztrai.com

Bisztrai Law Office,

January 2012