With a population of 9.8 million, Hungary has an open economy and GDP of approximately USD 156 billion. Hungary has been a member of the European Union (EU) since 2004, and fellow member states are its most important trade and investment partners. Macroeconomic indicators are generally strong: the economy grew by 4.9 percent in 2018 and likely will grow by 3.5 percent in 2019. The government has kept the deficit below 2.5 percent of GDP since 2013 and has lowered public debt from more than 80 percent of GDP in 2010 to 71 percent in 2018. Ratings agencies upgraded Hungary’s sovereign debt to two notches above investment grade in 2019.
Hungary’s central location and high-quality infrastructure have made it an attractive destination for Foreign Direct Investment (FDI). Between 1989 and 2017, Hungary received approximately USD 98 billion in FDI, mainly in the banking, automotive, software development, and life sciences sectors. The EU accounts for 89 percent of all in-bound FDI. The United States is the largest non-EU investor. The Government of Hungary (GOH) actively encourages investments in manufacturing and high-value added sectors, including research and development centers and service centers. To promote investment, the GOH lowered the corporate tax rate to 9 percent in 2017 and the labor tax to 19.5 percent in 2018, which is among the lowest rates in the EU. Hungary’s Value Added Tax (VAT) however, is the highest in Europe at 27 percent.
Despite these advantages, Hungary’s regional economic competitiveness has declined in recent years. Since early 2016, multinationals have identified shortages of qualified labor, specifically technicians and engineers, as the largest obstacle to investment in Hungary. In certain industries, such as finance, energy, telecommunication, pharmaceuticals, and retail, unpredictable sector-specific tax and regulatory policies have favored national and government-linked companies. Additionally, persistent corruption and cronyism continue to plague the public sector. Since 2010, According to Transparency International’s (TI) Corruption Perceptions Index, Hungary placed 64st worldwide and 26th out of 28 EU member states in 2018. In 2016, the GOH withdrew from the Open Government Partnership (OGP), a transparency-focused international organization, after refusing to address the organization’s concerns about transparency and good governance. Both foreign and domestic investors are reporting pressure to sell their businesses to government-affiliated investors. Those who refuse to sell often face increased tax audits or spurious regulatory and court challenges. Additionally, some executives in Hungarian subsidiaries of U.S. multinationals have noted that the GOH’s strong anti-migrant rhetoric and actions have negatively affected board members’ views of Hungary, making it more difficult for the subsidiaries to obtain approval for new investments.
Analysts remain concerned that the GOH may intervene in certain priority sectors to unfairly promote domestic ownership at the expense of foreign investors. In September 2016, PM Viktor Orban announced that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Through various tax changes, analysts say the GOH pushed several foreign owned banks out of Hungary and increased Hungarian ownership in the banking sector to approximately 50 percent, up from 40 percent in 2010. In the energy sector, foreign-owned company share of total revenue fell from 70 percent in 2010 to below 50 percent by the end of 2018. Foreign media ownership also has reduced drastically in recent years as GOH-friendly businesses have consolidated control of Hungary’s media environment. The number of media outlets owned by GOH-allies increased from around 30 in 2015 to nearly 500 in 2018. In November 2018, the owners of 476 pro-GOH media outlets, comprising 85 percent of all media, donated those outlets to the Central European Press and Media Foundation (KESMA) run by (ruling) Fidesz party insiders. PM Orban exempted KESMA from scrutiny by Hungary’s media and competition authorities. Despite threats to impose new regulations and taxes for the retail sector that would disproportionately impact multinational firms, foreign retail chains continue to maintain a large presence in Hungary. Finally, the GOH has identified tourism as a priority industry and government-allied firms have begun to invest heavily in the sector.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||64 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||53 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||33 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$7,100||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$12,870||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Hungary maintains an open economy and its high-quality infrastructure and central location are features that make it an attractive destination for investment. Attracting FDI is an important priority for the GOH, especially in manufacturing and export-oriented sectors. According to some reports, in other sectors, including banking and energy, however, government policies have resulted in some foreign investors selling their stakes to the government or state-owned enterprises. Hungary was a leading destination for FDI in Central and Eastern Europe in the mid-nineties and the mid-two-thousands, with annual FDI reaching over USD 6 billion in 2005. The pace of FDI inflows slowed in subsequent years as a result of the 2008 global financial crisis and increasing competition for investment from other countries in the region. In 2017, net annual FDI amounted to USD 5.6 billion while total gross FDI amounted to USD 98 billion.
As a block, the EU accounts for approximately 89 percent of all FDI in Hungary in terms of direct investors and 62 percent in terms of ultimate controlling parent investor. Germany is the largest investor, followed by the United States, Austria, France, the United Kingdom, Italy, Japan, the Netherlands, and China. The majority of U.S. investment falls within automotive, software development, and life sciences sectors. Approximately 450 U.S. companies maintain a presence in Hungary.
The GOH actively seeks foreign investment and has implemented a number of tax changes to increase Hungary’s regional competitiveness and attract investment, including a reduction of the personal income tax rate to 15 percent in 2016, reducing the business income tax rate to 9 percent in 2017, and the gradual reduction of the employer-paid welfare contribution from 27 percent in 2016 to 19.5 percent in 2018. As of 2016, the GOH streamlined the National Tax and Customs authority (NAV) procedure to offer fast-track VAT refund to customers categorized as “low risk” based on their internal controls and previous tax record.
Many foreign companies have expressed displeasure with the unpredictability of Hungary’s tax regime, its retroactive nature, slow response times, and the volume of legal and tax changes. According to the European Commission (EC), a series of progressively-tiered taxes implemented in 2014 disproportionately penalized foreign businesses in the telecommunications, tobacco, retail, media, and advertisement industries, while simultaneously favoring Hungarian companies. Following EC infringement procedures, the GOH phased out most discriminative tax rates by 2015 and replaced them with flat taxes.
In 2017, the GOH passed a regulation that gives the government preemptive rights to purchase real estate in World Heritage areas. The rule has been used to block the purchase of real estate by foreign investors in the most desirable areas of Budapest.
A 2014 law required retail companies with over USD 53 million in annual sales to close if they report two consecutive years of losses. Retail businesses claimed the GOH specifically set the threshold to target large foreign retail chains. The EC determined that the law was discriminatory and launched an infringement procedure in 2016, which resulted in the GOH repealing the controversial legislation in November 2018.
The GOH publicly declared that reducing foreign bank market share in the Hungarian financial sector is a priority. Accordingly, GOH initiatives over the past several years have targeted the banking sector and reduced foreign participation from about 70 percent before the financial crisis in 2008 to just over 50 percent by the end of 2018. In addition to the 2010 bank tax and the 2012 financial transaction tax levied on all cash withdrawals, regulations between 2012-2015 obligated banks to retroactively compensate borrowers for interest rate increases on foreign currency denominated mortgage loans, even though these increases were spelled out in the original contract with the customer, and were permitted by Hungarian law.
While the pharmaceutical industry is competitive and profitable in Hungary, multinational companies complain of numerous financial and procedural obstacles, including high taxes on pharmaceutical products and operations, prescription directives that limit a doctor’s choice of drugs, and obscure tender procedures that negatively affect the competitiveness of certain drugs. Pharmaceutical firms have also taken issue with GOH moves to weigh the cost of pharmaceutical procurement as more important than efficacy when issuing tenders for public procurement.
The Hungarian Investment Promotion Agency (HIPA), under the authority of the Ministry of Foreign Affairs and Trade, encourages and supports inbound FDI. HIPA offers company and sector-specific consultancy, recommends locations for investment, acts as a mediator between large international companies and Hungarian firms to facilitate supplier relationships, organizes supplier training, and maintains active contact with trade associations. Its services are available to all investors. For more information, see: https://hipa.hu/main
Foreign investors generally report a productive dialogue with the government, both individually and through business organizations. The American Chamber of Commerce enjoys an ongoing high-level dialogue with the GOH and the government has adopted many AmCham policy recommendations in recent years. In 2017, the government established a Competitiveness Council, chaired by the Minister of Economy, which includes representatives from multinationals, chambers of commerce, and other stakeholders, to increase Hungary’s competitiveness. Many U.S. and foreign investors have signed MOUs with the GOH to facilitate one-on-one discussions and resolutions to any pending issues. For more information, see: http://www.kormany.hu/en/ministry-for-national-economy and https://www.amcham.hu/
The US-Hungary Business Council (USHBC) – a private, non-profit organization established in 2016 – aims to facilitate and maintain dialogue between American corporate executives and the top government leaders on the U.S.-Hungary commercial relationship. The majority of significant U.S. investors in Hungary have joined USHBC, which hosts roundtables, policy conferences, briefings, and other major events featuring senior U.S. and Hungarian officials, academics, and business leaders. For more information, see: http://ushungarybc.org/
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign ownership is permitted with the exception of some “strategic” sectors including defense-related industries, which require special government permit, and farmland. There are no general limits on foreign ownership or control.
Foreign law firms and auditing companies must sign a cooperation agreement with a Hungarian company to provide services on Hungarian legal or auditing issues.
According to the Land Law, only private Hungarian citizens or EU citizens resident in Hungary with a minimum of three years of experience working in agriculture or holding a degree in an agricultural discipline can purchase farmland. Eligible individuals are limited to purchasing 300 hectares (741 acres). All others may only lease farmland. Non-EU citizens and legal entities are not allowed to purchase agricultural land. All farmland purchases must be approved by a local land committee and Hungarian authorities, and local farmers and young farmers must be offered a chance to purchase the land first before a new non-local farmer is allowed to purchase the land. For those who do not fulfill the above requirements or for legal entities, the law allows the lease of farmland up to 1200 hectares for a maximum of 20 years. The GOH has invalidated any pre-existing leasing contract provisions that guaranteed the lessee the first option to purchase, provoking criticism from Austria and Austrian farmers. Austria has reported the change to the European Commission, which initiated an infringement procedure against Hungary in October 2014. In March 2018, the European Court of Justice ruled that the termination of land use contracts violated EU rules, opening the way for EU citizens who lost their land use rights to sue the GOH for damages. In March 2015, the EC launched another – still ongoing – infringement procedure against Hungary concerning its restrictions on acquisitions of farmland.
The GOH passed a law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25 percent stake in a Hungarian company in certain “sensitive sectors” (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry. The Ministry has up to 90 days to issue an opinion and can only deny the investment if it determines that the investment is designed to conceal an activity other than normal economic activity. As of publication, we are not aware of any instances in which the Ministry has reviewed an investment.
Other Investment Policy Reviews
Hungary has not had any third-party investment policy reviews in the last three years.
Hungary maintains an open economy and its high-quality infrastructure and central location make it an attractive destination for investment. Attracting FDI is an important priority for the GOH, especially in manufacturing and export-oriented sectors. In 2006, Hungary joined the EU initiative to create a European network of “point of single contact” where existing businesses and potential investors can access all information on the business and legal environment, as well as connect to Hungary’s investment promotion agency. Over the past two years, the government has strengthened investor relations and, in addition to signing strategic agreements with key investors, established a National Competitiveness Council to discuss competitiveness challenges, formulate pro-competitiveness measures, and build constructive stakeholder relationships.
The registration of business associations is compulsory in Hungary. Firms must contract an attorney and register online with the Court of Registration. Registry courts must process applications to register limited liability and joint-enterprise companies within 15 workdays, but the process usually does not take more than three workdays. If the Court fails to act within the given timeframe, the new company is automatically registered. If the company chooses to use a template corporate charter, registration can be completed in a one-day fast track procedure. Registry courts provide company information to the Tax Office (NAV) eliminating the need for separate registration. The Court maintains a computerized registry and electronic filing system and provides public access to company information. The minimum capital requirement for a limited-liability company is HUF 3,000,000 (USD 10,800); for private limited companies HUF 5,000,000 (USD 17,900), and for public limited companies HUF 20,000,000 (USD 71,400). Foreign individuals or companies can establish businesses in Hungary without restrictions.
Further information on business registration and the business registry can be obtained at the GOH’s information website for businesses: http://eugo.gov.hu/starting-business-hungary or at the Ministry of Justice’s Company Information Service: http://ceginformaciosszolgalat.kormany.hu/index
Hungarian business facilitation mechanisms provide equitable treatment for women, but offer no special preference or assistance for them in establishing a company.
The stock of total Hungarian investment abroad amounted to USD 28.7 billion in 2017. Outward investment is mainly in manufacturing, services, finance and insurance, and science and technology. There is no restriction in place for domestic investors to invest abroad. The GOH announced in early 2019 that it would like to increase Hungarian investment abroad and it is considering incentives to promote Hungarian investment.
2. Bilateral Investment Agreements and Taxation Treaties
Hungary and the United States do not have a bilateral investment treaty (BIT).
Hungary has bilateral investment treaties that the following countries: Albania, Argentina, Australia, Austria, Azerbaijan, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, Chile, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, India, Indonesia, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxemburg, The former Yugoslav Republic of Macedonia, Malaysia, Moldova, Mongolia, Morocco, The Netherlands, Norway, Paraguay, Poland, Portugal, Romania, Russian Federation, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Thailand, Tunisia, Turkey, Ukraine, United Kingdom, Uruguay, Uzbekistan, Vietnam and Yemen.
Hungary has tax treaties that eliminate many aspects of double taxation with the United States and the following other countries: Albania, Australia, Austria, Azerbaijan, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Great Britain, Greece, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kuwait, Latvia, Lithuania, Luxembourg, The former Yugoslav Republic of Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Morocco, The Netherlands, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Korea, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, Tunisia, Ukraine, Uruguay, Uzbekistan and Vietnam
Negotiations were concluded in 2010 to revise Hungary’s current tax treaty with the United States; this is currently awaiting U.S. Senate ratification.
In January 2014, Hungary signed a Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement with the United States to improve international tax compliance through mutual assistance in tax matters and the automatic exchange of tax information. The United States and Hungary have also signed a totalization agreement that will eliminate double social security taxation and fill gaps in benefits for workers that have divided their careers between the two countries.
3. Legal Regime
Transparency of the Regulatory System
Generally, legal, regulatory, and accounting systems are consistent with international and EU standards. However, some executives in Hungarian subsidiaries of U.S. companies complain about a lack of transparency in the GOH’s policy-making process and an uneven playing field in public tendering. In recent years, there has been an uptick in the number of companies, including major U.S. multinational franchises, reporting pressure to sell their businesses to government-affiliated investors. Those that refuse to sell report an increase in tax audits, fines, and spurious regulatory challenges and court cases. SMEs increasingly report a desire to either remain small (and therefore “under the radar” of these government-friendly investors) or relocate their businesses outside of Hungary.
For foreign investors, the most relevant regulations stem from EU directives and the laws passed by Parliament to implement these. Laws in Parliament can be found on Parliament’s website (http://www.parlament.hu/parl_en.htm ). Legislation, once passed, is published in a legal gazette and available online at www.magyarkozlony.hu . The GOH can issue decrees, which also have national scope, but they cannot be contrary to laws enacted by Parliament. Local municipalities can create local decrees, limited to the local jurisdiction.
Hungarian financial reporting standards are in line with the International Accounting Standards and the EU Fourth and Seventh Directives. The Accounting law requires all businesses to prepare consolidated financial statements on an annual basis in accordance with international financial standards.
The GOH rarely invites interested parties to comment on draft legislation. Civil organizations have complained about a loophole in the current law that allows individual MPs to submit legislation and amendments without public consultation. The average deadline for submitting public comment is often very short, usually less than one week. The Act on Legislation and the Law Soliciting Public Opinion, both passed by Parliament in 2010, govern the public consultation process. The laws require the GOH to publish draft laws on its webpage and to give adequate time for all interested parties to give an opinion on the draft. However, implementation is not uniform and the GOH often fails to solicit public comments on proposed legislation.
The legislation process – including key regulatory actions – are published on Parliament’s webpage (www.parlament.hu ). Explanations attached to draft bills include a short summary on the aim of the legislation, but public comments received by regulators are only occasionally made public.
Regulatory enforcement mechanisms include the county and district level government offices whose decisions can be challenged at county level labor and administrative courts. The court system generally provides efficient oversight over the GOH’s administrative processes.
In December 2018 the Parliament passed a new law on establishing a new parallel administrative court system with jurisdiction over cases relating to “public administration,” including tax, construction licensing, public procurement, competition cases, and politically sensitive matters like electoral law, freedom of information requests, and the right to protest. The new court system will be under the control of the Minister of Justice and will start operating in January 2020. Critics – including NGOs and opposition parties – claim the new system will further undermine the rule of law in Hungary and eliminate constitutional boundaries between the executive and judicial branches of government, paving the way for political interference. In its opinion issued in March 2019, the Council of Europe’s Venice Commission (VC) found that the planned court system lacks effective checks and balances and said the new regime grants the Minister of Justice excessively wide powers to appoint and promote judges. The VC also determined that the head of the new administrative courts also has unjustifiably wide powers. The GOH passed amendments it claimed addressed, the VC’s concerns. Watchdog NGOs, however, did not believe the amendments addressed the VC’s most significant criticisms.
The new administrative courts’ jurisdiction will extend to several types of cases significant for investors. Although the creation of the administrative court is not expected to have direct economic impact, the independence of the judiciary is crucial to maintaining a positive business climate.
The GOH does not review regulations on the basis of scientific or data driven assessments, but some NGOs and academics do. A 2017 study by Corruption Research Center Budapest (CRCB) found that in the 2010-2013 period the annual average number of new laws passed by Parliament increased, while the average time spent debating new laws in Parliament decreased significantly. The analysis points out that the accelerating lawmaking process in Hungary in the 2010-2013 period had negative effects on the stability of the legal environment and the overall quality of legislation. The Parliament passed less new legislation in the past few years.
Hungary’s budget was widely accessible to the general public, including online through the Parliament and Finance Ministry websites and the Legal Gazette. The government made budget documents, including the executive budget proposal, the enacted budget, and the end-of-year report publicly available within a reasonable period of time. Information on debt obligations was publicly available, including online through the Hungarian Central Bank and Hungarian State Debt Manager’s websites.
International Regulatory Considerations
As an EU Member State, all EU regulations are directly applicable in Hungary, even without further domestic measures. If a Hungarian law is contrary to EU legislation, the EU rule takes precedence. As a whole, labor, environment, health, and safety laws are consistent with EU regulations. Hungary follows EU foreign trade and investment policy and all trade regulations follow EU legislation. Hungary participates in the WTO as an EU Member State.
Legal System and Judicial Independence
The Hungarian legal system is based on continental European (German-French and Roman law) traditions. Contracts are enforced by ordinary courts or – if stipulated by contract – arbitration centers. Investors in Hungary can agree with their partners to turn to Hungarian or foreign arbitration courts.
Apart from these arbitration centers, there are no specialized courts for commercial cases; ordinary courts are entitled to judge any kind of civil case. The Civil Code of 2013 applies to civil contracts.
The Hungarian judicial system includes four tiers: district courts (formerly referred to as local courts) and courts of public administration and labor; courts of justice (formerly referred to as county courts); courts of appeal; and the Curia (the Hungarian Supreme Court). Hungary also has a Constitutional Court that reviews cases involving the constitutionality of laws and court rulings. From 2020, per legislation passed in December 2018, a new administrative court system will rule on administrative cases (see above). As a result, it is expected that labor courts and judges will be merged into district courts.
Although the GOH has criticized court decisions on several occasions, ordinary courts are considered to generally operate independently under largely fair and reliable judicial procedures. Recently, an increasing number of current and former judges have raised concerns about growing GOH influence over the court system and intimidation of judges by court administration. Most business complaints about the court system pertain to the lengthy proceedings rather than the fairness of the verdicts. The GOH hopes to improve the speed and efficiency of court proceedings with the new Civil Procedure Code, which entered into force in January 2018.
Regulations and law enforcement actions pertaining to investors are appealable at ordinary courts or at the Constitutional Court.
Laws and Regulations on Foreign Direct Investment
Hungarian law provides strong protections for property and investment. The Hungarian state may only expropriate property in exceptional cases where there is a public interest; any such expropriations must be carried out in a lawful way, and the GOH is obliged to make immediate and full restitution for any expropriated property, without additional stipulations or conditions
The GOH passed a law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25 percent stake in a Hungarian company in certain “sensitive sectors” (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry. The Ministry has up to 90 days to issue an opinion and can only deny the investment if it determines that the investment is designed to conceal an activity other than normal economic activity. As of publication, we are not aware of any instances in which the Ministry has reviewed an investment.
There is no primary website or “one-stop shop” which compiles all relevant laws, rules, procedures, and reporting requirements for investors. HIPA, the Hungarian Investment Promotion Agency, however, facilitates establishment of businesses and provides guidance on relevant legislation.
Competition and Anti-Trust Laws
The Hungarian Competition Authority, tasked with safeguarding the public interest, enforces the provisions of the Hungarian Competition Act. Since EU accession in 2004, EU competition law also binds Hungary. The Competition Authority is empowered to investigate suspected violations of competition law, order changes to practices, and levy fines and penalties. According to the Authority, since 2010 the number of competition cases has decreased, but they have become more complex. Out of more than 100 cases over the past year, only a few minor cases pertained to U.S.-owned companies. Hungarian law does not consider conflict of interest to be a criminal offense. Citing evidence of conflict of interest and irregularities the European Anti-Fraud Office OLAF recommended opening a criminal investigation in a high profile USD 50 million EU-funded public procurement project, but Hungarian authorities declined to prosecute the case.
Expropriation and Compensation
Hungary’s Constitution provides protection against expropriation, nationalization, and any arbitrary action by the GOH except in cases of extreme national security concern. In such cases, immediate and full compensation is to be provided to the owner. There are no known expropriation cases where the GOH has discriminated against U.S. investments, companies, or representatives. There have been some complaints from other foreign companies within the past several years that expropriations have been improperly executed, without proper remuneration. Parties involved in these cases turned to the legal system for dispute settlement.
There is no recent history of official GOH expropriations, but many critics raised concerns that the 2014 tobacco and advertising taxes were a de facto expropriation attempt because they intentionally and disproportionately targeted foreign firms with the intent to force them to seek a buy-out from a domestic firm. The GOH backtracked on the taxes after a 2015 EU injunction. The increasing reports of the use of government regulatory and tax agencies to pressure businesses to sell to government-friendly investors may also be construed as a form of de-facto expropriation.
ICSID Convention and New York Convention
Hungary is a signatory to the International Centre for the Settlement of Investment Disputes (ICSID Convention), proclaimed in Hungary by Law 27 of 1978. Hungary also is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), proclaimed in Hungary by Law 25 of 1962.
There is not specific legislation providing for enforcement other than the two domestic laws proclaiming the 1958 New York Convention and the ICSID Convention. According to Law 71 of 1994, an arbitration court decision is equally binding to that of a court ruling.
Investor-State Dispute Settlement
Hungary is signatory to the 1965 Washington Convention establishing the International Centre for Settlement of Investment Disputes (ICSID) and to UN’s 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Under the New York Convention, Hungary recognizes and enforces rulings of the International Chamber of Commerce’s International Court of Arbitration.
Hungary has no Bilateral Investment Treaty or Free Trade Agreement with the United States. In recent years, the number of investor-State arbitration claims against Hungary has increased, although very few involve U.S. investors.
Over the past 10 years U.S. investors have been involved only in a few investment disputes, including a recent major dispute with Hungary’s state owned energy company MVM, where the U.S. claimant stepped back after it was unable to reclaim a USD 17 million compensation. Since 2010, ten cases have been launched against Hungary at the ICSID, but none of them involved U.S. investors.
Local courts recognize and enforce foreign arbitral awards against the GOH.
In 2016 Hungarian Tax Office NAV froze the bank account and working capital of a U.S. owned company, before any wrongdoing had been confirmed. After several months, NAV released the account, but by that time the company has suffered significant losses.
International Commercial Arbitration and Foreign Courts
Hungary has accepted international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. In the last few years, parties have increasingly turned to mediation as a means by which to settle disputes without engaging in lengthy court procedures. Law 71 of 1994 on domestic arbitration procedures is based on the UNCITRAL model law.
Investment dispute settlement clauses are usually regulated by stipulations of the investment contract. Hungarian law allows the parties to set the jurisdiction of any courts or arbitration centers. The parties can also agree to set up an ad hoc arbitration court. The law also allows investors to agree on settling investment disputes by turning to foreign arbitration centers, such as the International Centre for Settlement of Investment Disputes (ICSID), UNCITRAL’s Permanent Court of Arbitration (PCA), or the Vienna International Arbitral Centre. In Hungary, foreign parties can turn to the Hungarian Chamber of Commerce and Industry arbitration court, which has its own rules of proceedings (https://mkik.hu/en/court-of-arbitration ) and in financial issues to the Financial and Capital Market’s arbitration court.
Local courts recognize and enforce foreign or domestic arbitral awards. Arbitral ruling may only be annulled in limited cases, and under special conditions.
Domestic courts do not favor SOEs disproportionately. Investors can expect a fair trial even if SOEs are involved. Investors do not complain about non-transparent or discriminatory court procedures.
The Act on Bankruptcy Procedures, Liquidation Procedures, and Final Settlement of 1991, covers all commercial entities with the exception of banks (which have their own regulatory statutes), trusts, and state-owned enterprises, and brought Hungarian legislation in line with EU regulations. Debtors can only initiate bankruptcy proceedings provided that they have not sought bankruptcy protection within the previous three years. Within 90 days of seeking bankruptcy protection, the debtor must call a settlement conference to which all creditors are invited. Majority consent of the creditors present is required for all settlements. If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims to be paid: 1) liquidation costs; 2) secured debts; 3) claims of the individuals; 4) social security and tax obligations; 5) all other debts. Creditors may request the court to appoint a trustee to perform an independent financial examination. The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.
The debtor, the creditors, the administrator, or the Criminal Court may file liquidation procedures with the court. Once a petition is filed, regardless of who filed it, the Court notifies the debtor by sending a copy of the petition. The debtor has eight days to acknowledge insolvency. If the insolvency is acknowledged, the company declares if any respite for the settlement of debts is requested. Failure to respond results in the presumption of insolvency. Upon request, the Court may allow a maximum period of 30 days for the debtor to settle its debt.
If the Court finds the debtor insolvent, it appoints a liquidator. Transparency International (TI) has raised concerns about the transparency of the liquidation process because a company may not know that a creditor is filing a liquidation petition until after the fact. TI also criticized the lack of accountability of liquidator companies and the impractical deadlines in the process. The EU has also criticized the Hungarian system as being rescue-unfriendly, since bankruptcy proceedings typically only recover 44 cents to the dollar, compared to the OECD average of 71 cents on the dollar.
Bankruptcy in itself is not criminalized, unless it is made in a fraudulent way, deliberately, and in bad faith to prevent the payment of debts.
Law 122 of 2011 obliges banks and credit institutions to establish and maintain the Central Credit Information System to assess creditworthiness of businesses and individuals to facilitate prudent lending (http://www.bisz.hu ).
4. Industrial Policies
Hungary has a well-developed incentive system for investors, the cornerstone of which is a special incentive package for investments over a certain value (typically over 10 million Euro, or USD 11 million). The incentives are designed to benefit investors who establish manufacturing facilities, logistics facilities, regional service centers, R&D facilities, bioenergy facilities, or those who make tourism industry investments. Incentive packages may consist of cash subsidies, development tax allowances, training subsidies, and job creation subsidies. The incentive system is compliant with EU regulations on competition and state aid and is administered by the Hungarian Investment Promotion Agency (HIPA) and managed by the Ministry of National Development (MND).
Foreign Trade Zones/Free Ports/Trade Facilitation
Foreign trade zones were eliminated as a result of the EU accession.
Performance and Data Localization Requirements
Hungary does not mandate local employment.
The number of work permits issued for third-country nationals is limited by law, but in recent years, this limit was well above the actual number of registered third-country employees. Residency and work permits are issued by the Immigration Office and the local labor offices.
As of 2019, for investments in certain strategic sectors including the military, intelligence, public utilities, financial services and electronic information systems, the Ministry of Interior issues investments permits. There are no laws in place requiring the fulfilment of special labor force related conditions to get investment permits. However, in certain cases, the GOH has established retention of workforce as a condition to award state grants to investors.
Hungary has no forced data localization policy. Foreign IT providers do not need to turn over source code or provide access to encryption. Hungary follows EU rules as regards transfer of personal data outside the economy. Storage of personal data is regulated by a data protection law and it is under the authority of a Data Protection Ombudsman.
There are no general performance requirements for investors in Hungary. However, investors may receive government subsidies in the event they meet certain performance criteria, such as job creation or investment minimums, which are available to all enterprises registered in Hungary and are applied on a systematic basis. To comply with EU rules, the GOH no longer grants tax holidays based on investment volume. There is no requirement that investors must purchase from local sources, but the EU Rule of Origin applies. Investors are not required to disclose proprietary information to the GOH as part of the regulatory process.
Hungary, as an EU Member State, follows the General Data Protection Regulation (GDPR) rules on transmitting data outside of the EU and local data storage requirements. The National Authority for Data Protection and Freedom of Information is responsible for enforcing GDPR rules.
5. Protection of Property Rights
Hungary maintains a reliable land registry, which provides public information for anyone on the ownership, mortgage, and usufruct rights of the real estate or land parcel. Secured interests in property (mortgages), both moveable and real, are recognized and enforced but there is no title insurance in Hungary.
According to the Land Law of 2013 only private Hungarian citizens or EU citizens resident in Hungary with a minimum of three years of experience in agriculture, or holding a degree in an agricultural field, can purchase farmland. The law allows the lease of farmland up to 1200 hectares for a maximum of 20 years. There is no restriction for purchase or lease of non-farmland properties.
Hungarian law allows acquisitive prescription for unoccupied real property if the user of the property occupies it continuously for at least 15 years.
Intellectual Property Rights
Hungary has an adequate legal structure for protecting intellectual property rights (IPR), although it lacks deterrent-level sentences for civil and criminal IPR infringement cases. There has been no new major IPR legislation passed over the last year. According to some representatives of the pharmaceutical and software industries, enforcement could be improved if the Prosecution Office were to establish specialized units to combat IPR violations. The most common IPR violations in Hungary include selling counterfeit goods, the sale of imported counterfeit pharmaceuticals, and Internet-based piracy. Most counterfeit goods sold in Hungary are of Chinese origin.
Hungary acceded to the European Patent Convention in 2003 and has accordingly amended the Hungarian Patent Act. Hungary is a party to the World Trade Organization (WTO) Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement and most other major international IPR agreements, including the most recent World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performance and Phonograms Treaty. It is also a party to the EU Information Society Directive and implemented the EU Enforcement Directive in 2005.
The United States and Hungary signed a Comprehensive Bilateral Intellectual Property Rights Agreement in 1993 that addresses copyright, trademarks, and patent protection.
In July 2010, the U.S. Patent and Trademark Office (USPTO) and the Hungarian Intellectual Property Office (HIPO) launched a pilot program to facilitate patent recognition between the United States and Hungary. Due to the pilot’s success, in April 2012 the USPTO and HIPO signed a Memorandum of Understanding to further streamline and expedite patent recognition. More details about this Patent Processing Highway (PPH) program can be found on USPTO’s website at www.hipo.gov.hu/English/szabadalom/pph/ .
Hungary is not listed in the United States Trade Representative (USTR) Special 301 Report or the Notorious Markets List.
For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .
Resources for Rights Holders
Embassy Point of Contact for IPR issues:
Hungary prosecutes IPR violations and authorities have the relevant statistical data. In 2017 the total number of IPR related crime cases was 631, the total value of these crimes amounted to USD 5.7 million and authorities seized USD 2.5 million worth of counterfeit products.
6. Financial Sector
Capital Markets and Portfolio Investment
The Hungarian financial system offers a full range of financial services with an advanced information technology infrastructure. The Hungarian Forint (HUF) has been fully convertible since 2001, and both Hungarian financial market and capital market transactions are fully liberalized. The Capital Markets Act of 2001 sets out rules on securities issues, including the conversion and marketing of securities. As of 2007, separate regulations were passed on the activities of investment service providers and commodities brokers (2007), on Investment Fund Managing Companies (2011), as well as on Collective Investments (2014), providing more sophisticated legislation than those in the Capital Markets Act. These changes aimed to create a regulatory environment where free and available equity easily matches with the best investment opportunities. The 2016 modification of the Civil Code removed remaining obstacles to promote collection of public investments in the course of establishing a public limited company.
The Budapest Stock Exchange (BSE) re-opened in 1990 as the first post-communist stock exchange in the Central and East European region. Since 2010, the BSE has been a member of the Central and Eastern Europe (CEE) Stock Exchange Group. In 2013, the internationally recognized trading platform Xetra replaced the previous trading system. Currently, the BSE has 40 members and 62 issuers. The issued securities are typically shares, investment notes, certificates, corporate bonds, mortgage bonds, government bonds, treasury bills, and derivatives. In 2018, the Budapest Stock Exchange had a market capitalization of USD 32 billion, and the average monthly equity turnover volume amounted to USD 1.1 billion. The most traded shares are OTP Bank, Richter Gedeon, MOL, Magyar Telekom, and FHB Mortgage Bank
Financial resources flow freely into the product and factor markets. International currency transactions are not limited and are accessible both in domestic or foreign currencies.
Commercial banks provide credit to both Hungarian and foreign investors at market terms. Credit instruments include long-term and short-term liquidity loans. All banks publish total credit costs, which includes interest rates as well as other costs or fees.
Money and Banking System
The Hungarian banking system has strengthened over the past two years, and the capital positon of banks is adequate. Following several years of deleveraging after the 2008 crisis, the banking system is mainly deposit funded. Customer deposits account for roughly 60 percent of banks’ total liabilities
The Hungarian banking system is healthy and banks have a stable capital position. The loan-to-deposit ratio has been gradually decreasing from its 160 percent peak in 2009 after the financial crisis to 78 percent in 2017, similar to regional peers. The ratio of non-performing loans (NPLs) has declined from a high of 18 percent in 2013 to 7.4 percent in 2017 as a result of portfolio cleaning, the improving economic environment, and increased lending. The banking sector became profitable in 2016 after several years of losses, and the return on equity increased to 14 percent, up from a record low of negative 17 percent in 2015.
The largest bank in Hungary is OTP Bank, which is Hungarian-owned and controls 25 percent of the market, with approximately USD 29 billion in assets.
Hungary has a modern two-tier financial system and a developed financial sector, although some reports that regulatory issues have arisen as a result of the Central Bank’s (MNB) 2013 absorption of the Hungarian Financial Supervisory Authority (PSZAF), which was the financial sector regulatory body. Between 2000 and 2013, the PSZAF served as a consolidated financial supervisor, regulating all financial and securities markets. PSZAF, in conjunction with the MNB, managed a strong two-pillar system of control over the financial sector, producing stability in the market, effective regulation, and a system of checks and balances. When the MNB absorbed PSZAF and took over all of its functions, including customer protection, this regulation system was weakened. A Hungarian State Audit Office (SAO) report published in April 2015 determined that the MNB’s consolidation of financial regulation undermined the system’s ability to provide effective enforcement. In March 2015, insolvency, lax regulations, and alleged embezzlement resulted in the failure of three brokerage firms (Buda-Cash, Quaestor, and Hungaria Ertekpapir), resulting in a total loss of over USD 1.2 billion, close to 1 percent of Hungary’s GDP. At the end of 2015, Parliament passed legislation to tighten control over brokerage firms’ operations as well as increase banks’ contribution to the fund established to compensate investors.
The proportion of foreign banks in total assets of the financial sector decreased to about 50 percent in 2017, down from its peak of 70 percent before the financial crisis. Foreign banks are subject to central bank uniform regulations and prudential measures, which are applied to Hungary’s entire financial market without discrimination. Commercial banks have extensive direct correspondent banking relationships and are capable of transferring domestic or foreign currencies to most banks outside of Hungary. No loss or jeopardy of correspondent banking relations has been reported.
Recent regulations restrict foreign currency loans to only those that earn income in foreign currency, in an effort to eliminate the risk of exchange rate fluctuations. Additionally, the MNB lowered the loan-to-deposit ratio, forcing banks to restrict lending to firms in riskier sectors. Foreign investors continue to have equal – if not better – access to credit on the global market, with the exception of special GOH credit concessions such as small business loans.
There are no rules preventing a foreigner or foreign firm from opening a bank account in Hungary. Valid personal documents (i.e. passport) is needed and as of 2015, when the Foreign Account Tax Compliance Act (FATCA) came into force, a declaration whether the individual is a U.S. citizen. Banks have not discriminated against U.S. citizens in opening bank accounts based on FATCA.
Foreign Exchange and Remittances
The Hungarian forint (HUF) has been convertible for essentially all business transactions since January 1, 1996, and foreign currencies are freely available in all banks and exchange booths. Hungary complies with all OECD convertibility requirements and IMF Article VIII. Act XCIII of 2001 on Foreign Exchange Liberalization lifted all remaining foreign exchange restrictions and allowed free movement of capital in line with EU regulations.
According to Hungary’s EU accession agreement, it must eventually adopt the Euro once it meets the relevant criteria, but the GOH has not set a specific target date even though Hungary meets most of the necessary fiscal and financial criteria. According to the Economic Ministry, Hungary‘s economic performance should mirror the Eurozone average more closely before adapting the Euro.
Short-term portfolio transactions, hedging, short, and long-term credit transactions, financial securities, assignments and acknowledgment of debt may be carried out without any limitation or declaration. While the Forint remains the legal tender in Hungary, parties may settle financial obligations in a foreign currency. Many Hungarians took out mortgages denominated in foreign currency prior to the global financial crisis, and suffered when the Forint depreciated against the Swiss Franc and the Euro. Despite strong pressure, the Hungarian Supreme Court ruled that there is nothing inherently illegal or unconstitutional in loan agreements that are foreign currency denominated, upholding existing contract law. New consumer loans, however, are denominated in Forints only, unless the debtor receives regular income in a foreign currency.
Market forces determine the exchange rate of the HUF to the Euro and thereby to other currencies.
There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.
The timeframes for remittances are in line with the financial sector’s normal timeframes (generally less than 30 days), depending on the destination of the transfer and on whether corresponding banks are easily found.
Sovereign Wealth Funds
Hungary does not maintain a sovereign wealth fund.
7. State-Owned Enterprises
In the 1990s, there was considerable privatization of former State-owned enterprises (SOEs), primarily in strategic sectors such as energy and transportation. Since 2010, the GOH has reversed this trend by making new investments in machinery production and the energy and telecommunications sectors, with the number of SOEs increasing.
As of 2019, there are more than 400 SOEs. The state holds majority ownership in more than half of them. In addition, there are a large number of municipality-owned companies. SOEs are particularly active in the energy and utility sectors, in banking, transportation, forestry, and postal services.
SOEs have independent boards, but in practice, all strategic decisions require government approval.
Major SOEs include the National Asset Management Company (MNV), Magyar Posta, state energy company MVM, Hungarian State Railways (MAV), state gambling monopoly Szerencsejatek, National Infrastructure Development Company (NIF), car manufacturer RABA, and state owned banks Exim bank, Hungarian Development Bank (MFB), Takarekbank, and Budapest Bank. The GOH has a 25 percent stake in hydrocarbon company MOL.
A 2011 law on national assets lists the SOEs of strategic importance, which are to be kept in state ownership (https://net.jogtar.hu/jr/gen/hjegy_doc.cgi?docid=a1100196.tv ); as of April 2019 there were 64 such companies. There is no officially published, complete list of SOEs, but the State Asset Manager MNV has a list of companies under its control on its webpage. The list does not cover all publicly owned companies: http://mnv.hu/felso_menu/tarsasagi_portfolio/mnvportfolio
In principle, the same rules apply to SOEs as to privately owned companies in most cases, but in practice, some companies report that SOEs often enjoy preferential treatment from certain authorities. According to many businesses, since mid-2012, the GOH has made it more difficult for foreign-owned energy companies to operate in the Hungarian market. The GOH has publicly stated its interest in nationalizing some private energy firms. In 2013, the GOH purchased E.ON’s wholesale and gas storage divisions and RWE’s retail gas company, Fogaz. In 2014 and 2015, the GOH acquired other energy companies. By the end of 2016, state-owned Fogaz became the only remaining retail gas utility provider in Hungary. Press has reported that the GOH intends to take over the electricity and the heating retail markets as well.
Hungary adheres to OECD Guidelines on Corporate Governance as well as to EU rules on SOEs. The Hungarian National Asset Management Company is the state asset manager.
According to a 2015 study conducted by Transparency International (TI) Hungary, SOEs scored 61 points on a scale of 100 with regard to meeting transparency obligations in terms of data published on their websites, integrity, codes of ethics, and internal control systems. TI noted that although there was a considerable improvement compared to the previous survey in 2013, none of the SOEs reviewed during their study was in full compliance with transparency and disclosure requirements as mandated by Hungarian law.
In a July 2018 State Audit Office (SAO) report on the monitoring of 62 SOEs, the SAO said that the investigated enterprises’ integrity and compliance regulations have improved over the past years and their current transparency and integrity level is satisfactory. The report added that the auditing and asset management of SOEs could still be improved, and owners should investigate SOEs more often than the current practice, the report added.
In the 1990s, the privatization of state owned enterprises (SOEs), including the energy sector, manufacturing, food processing, and chemistry, ushered in a significant period of change. This policy has stopped in recent years as most SOEs have already been privatized, and in fact, the trend has reversed since 2010 as the state has taken more ownership or de facto control in certain sectors, including energy and public utilities.
8. Responsible Business Conduct
Hungary encourages multinational firms to follow the OECD Guidelines for Multinational Enterprises, which promotes a due diligence, approach to responsible business conduct (RBC). The government has established a National Contact Point (NCP) in the Ministry of Finance for stakeholders to obtain information or raise concerns in the context of RBC. The Hungarian NCP has organized events to promote OECD Guidelines among the business community, trade unions, government agencies, and NGOs. For more information, see: http://oecd.kormany.hu/a-magyar-nemzeti-kapcsolattarto-pont
In recent years, the GOH has organized several conferences on RBC and announced in 2017 to formulate a National Action Plan on Businesses and Human Rights, but the document has not been prepared yet. According to the First National CSR Action Plan formulated in 2015, key RBC priorities of the GOH included the employment of discriminated, disadvantaged, and disabled groups, environment protection, and the expansion of sustainable economy. RBC does not typically play a role in GOH procurement decisions.
According to a survey conducted by CSR Hungary – the country’s largest CSR forum – 55 percent of businesses have a CSR policy and 44 percent of businesses think that CSR increased their competitiveness. According to Nielsen Global Omnibus research, over 60 percent of Hungary’s adult population prefers companies committed to CSR, exceeding the 54 percent average in the EU.
In 2017, Hungary’s independent labor rights protection, consumer protection, cultural heritage protection, and environment protection agencies were merged into their relevant ministries and county level government offices. Environmental NGOs criticized the transformation of the institutional system and warned about the lack of independent agencies.
There are several NGOs and business associations promoting RBC and CSR. The one with the most members, CSR Hungary Forum – created in 2006 – established an annual award and trademark in 2008 to recognize business CSR efforts.
The GOH does not have policies in place to encourage adherence to OECD’s Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas.
Hungary has legislation in place to combat corruption. Giving or accepting a bribe is a criminal offense, as is an official’s failure to report such an incident. Penalties can include confiscation of assets, imprisonment, or both. Since Hungary’s entry into the EU, legal entities can also be prosecuted. Legislation prohibits members of parliament from serving as executives of state-owned enterprises. An extensive list of public officials and many of their family members are required to make annual declarations of assets, but there is no specified penalty for making an incomplete or inaccurate declaration. It is common for prominent politicians to be forced to amend declarations of assets following revelations in the press of omission of ownership or part-ownership of real estate and other assets in asset declarations. Politicians are not penalized for these omissions. Transparency advocates claim that Hungarian law enforcement authorities are often reluctant to prosecute cases with links to high-level politics. For example, they reported that, in November 2018, Hungarian authorities dropped the investigation into USD 50 million in EU-funded public lighting tenders won by a firm co-owned by a relative of the prime minister, despite the fact that OLAF, the European Anti-Fraud Office, raised concerns about evidence of conflict of interest and irregularities involving the deal. According to media reports, OLAF concluded that at least some of the tenders were won due to what it considered organized criminal activity.
Annual asset declarations for the family members of public officials are not public and only parliamentary committees can look into them if there is a specified suspicion of fraud. Transparency watchdogs warn that this makes the system of asset declarations inefficient and easy to circumvent as politicians can hide assets and revenues in their family members’ name.
The Public Procurement Act of 2015 initially included broad conflict of interest rules on excluding family members of GOH officials from participating in public tenders, but Parliament later amended the law to exclude only family members living in the same household. While considered in line with the overarching EU directive, the law still leaves room for subjective evaluations of bid proposals and tender specifications that could potentially be tailored to favored companies.
While public procurement legislation is in place and complies with EU requirements, private companies and watchdog NGOs expressed concerns about pervasive corruption and favoritism in public procurements in Hungary. According to their criticism, public procurements in practice lack transparency and accountability and are characterized by uneven implementation of anti-corruption laws. Additionally, transparency NGOs calculate that government allied firms have won a disproportionate percentage of public procurement awards. The business community and foreign governments share many of these concerns. Multinational firms have complained that competing in public procurements presents unacceptable levels of corruption and compliance risk. A recent EU study found that Hungary had the second highest rate of one-bidder EU funded procurement contracts in the European Union. In addition, observers have raised concerns about the appointments of Fidesz party loyalists to the heads of quasi-independent institutions like the Competition Authority, the Media Council, and the State Audit Office. Because it is generally understood that companies without political connections are unlikely to win public procurement contracts, many firms lacking such connections do not bid or compete against politically-connected companies.
The GOH does not require private companies to establish internal codes of conduct.
Generally, bigger private companies and multinationals operating in Hungary have internal codes of ethics, compliance programs, or other controls, but their efficacy is not uniform.
The Hungarian Ministry of Justice and the Ministry of Interior are responsible for combating corruption. There is a growing legal framework in place to support their efforts. Hungary is a party to the UN Anticorruption Convention and the OECD Anti-Bribery Convention and has incorporated its provisions into the penal code, as well as subsequent OECD and EU requirements on the prevention of bribery. Parliament passed the Strasbourg Criminal Law Convention on Corruption of 2002 and the Strasbourg Civil Code Convention on Corruption of 2004. Hungary is a member of GRECO (Group of States against Corruption), an organization established by members of the Council of Europe to monitor the observance of their standards for fighting corruption. GRECO’s reports on evaluation and compliance are confidential unless the Member State authorizes the publication of its report. Despite calls from opposition, NGOs, and other GRECO Member States to publish GRECO’s most recent compliance report on prevention of corruption in respect of MPs, judges, and prosecutors, the GOH keeps the report confidential. Except for Belorussia, Hungary is the only Member State refusing to publish the anti-corruption body’s report. Following a March 2019 visit of senior GRECO officials in Budapest, GRECO said it regrets that almost four years after the adoption of its Fourth Round Evaluation Report – which can be found online at https://rm.coe.int/CoERMPublicCommonSearchServices/DisplayDCTMContent?documentId=09000016806c6b9e few of GRECO’s recommendations have been implemented.
In December 2016, the GOH withdrew its membership in the international anti-corruption organization the Open Government Partnership (OGP). Following a letter of concern by transparency watchdogs to OGP’s Steering Committee in summer 2015, OGP launched an investigation into Hungary and issued a critical report. The OGP admonished the GOH for its harassment of NGOs and urged it to take steps to restore transparency and to ensure a positive operating environment for civil society. The GOH — only the second Member State after Azerbaijan to be reprimanded by the organization — rejected the OGP report conclusions and withdrew from the organization.
Over the past few years, the GOH has amplified its attacks on NGOs – including transparency watchdogs – accusing them of acting as foreign agents and criticizing them for allegedly working against Hungarian interests. This anti-NGO rhetoric endangered the continued operation of anti-corruption NGOs crucial to promoting transparency and good governance in Hungary. In 2017, Parliament passed legislation that many civil society activists criticized for placing undue restrictions on NGOs, including compelling organizations to register as “foreign funded” if they receive funding from international sources. In July 2018, the GOH passed legislation that criminalizes many legal activities, primarily conducted by international NGOs that assist migrants and asylum seekers. Although the legislation does not directly target transparency NGOs, transparency experts claim the GOH could use the overly broad definitions in the legislation to target virtually any NGO in Hungary.
Transparency International (TI) is active in Hungary. TI’s 2018 Corruption Perceptions Index rated Hungary 64 out of 180 countries. Among the 28 EU members, Hungary ranks 26. TI has noted that state institutions responsible for supervising public organizations were headed by people loyal to the ruling party, limiting their ability to serve as a check on the actions of the GOH. After the GOH amended the Act on Freedom of Information in 2013 and 2015, TI and other watchdogs note that data on public spending remains problematically difficult to access. Moreover, according to watchdogs and investigative journalists, the GOH, state agencies, and SOEs are increasingly reluctant to answer questions related to public spending, resulting in lengthy court procedures simply to receive answers to questions. Even if the court orders the release of data, by the time it happens, the data loses significance and has a weaker impact, watchdogs warn. In some cases, even when ordered to provide information, state agencies and SOE release data in nearly unusable or undecipherable formats.
U.S. firms – along with other investors – identify corruption as a significant problem in Hungary. According to the World Economic Forum’s 2017 Global Competitiveness Report, businesses considered corruption as the second most important obstacle to making a successful business in Hungary.
State corruption is also high on the list of EC concerns with Hungary. The EC Anti-Fraud Office (OLAF) has found high indices of fraud in EU-funded projects in Hungary and has levied fines and withheld development funds on several occasions. Over the past few years, the European Commission (EC) has suspended payments of EU funds several times due to numerous irregularities in Hungary’s procurement system. In December 2016, after completing an investigation into the construction of the EU-funded Budapest M4 metro line, OLAF discovered that contracts valued at more than USD 1 billion had been affected by corruption and determined that Hungary should return USD 240 million to the EU. In a January 2018 report, OLAF recommended Hungarian authorities investigate a high-profile corruption case linked to PM Orban’s son-in-law, whose firm the report alleges was fraudulently awarded EU-funded public contracts by local municipalities in Hungary. OLAF requested the GOH return USD 54 million to compensate for the amount of misused EU funds. In November 2018, Hungarian authorities announced they were closing the investigation, claiming to have found no evidence of a crime. In February 2019, the GOH withdrew its request that the EU fund the controversial projects.
TI and other anti-corruption watchdogs have highlighted EU-funded development projects as the largest source of corruption in Hungary. A TI study found indices of corruption and overpricing in up to 90 percent of EU-funded projects. A 2016 study by Corruption Research Center Budapest (CRCB) based on public procurement data from 2009-2015 revealed that the massive influx of EU funds reduced competition and increased levels of corruption risk and overpricing in public procurements. According to the study, EU-funded tenders perform poorly with regard to corruption risks, competitive intensity, and transparency, compared with Hungarian-funded tenders. Besides their positive impact on GDP growth and development, EU funds in Hungary contribute to the system of political favoritism and fuel crony capitalism, the study concluded. A September 2018 CRCB report found – after analyzing more than 120,000 public procurement contracts of the 2010-2016 period – that companies owned by individuals with links to PM Orban enjoy a preferential treatment at public tenders and face less competition than other companies.
Resources to Report Corruption
GOH Office Responsible for Combatting Corruption:
National Protective Service
General Director Zoltan Bolcsik
Phone: +36 1 433 9711
Fax: +36 1 433 9751
Contact at “watchdog” organization:
Transparency International Hungary
Falk Miksa utca 30. 4/2
Phone: +36 1 269 9534
Fax: +36 1 269 9535
10. Political and Security Environment
The security environment is relatively stable. Politically motivated violence or civil disturbance is rare. Violent crimes are reasonably low while street crimes are the most frequently reported crimes in the country.
In January 2014, an unknown assailant bombed a CIB BANK branch in Budapest. No one was injured. The perpetrator of this attack has not been found and the motive behind the attack remains unknown. Italian banking firm Intesa Sanpaolo owns CIB.
Political violence is not common in Hungary. The transition from communist authoritarianism to capitalist democracy was negotiated and peaceful, and free elections have been held consistently since 1990.
11. Labor Policies and Practices
Hungary’s civilian labor force of 4.5 million is highly-educated and skilled. Literacy exceeds 98 percent and about two-thirds of the work force has completed secondary, technical, or vocational education. Hungary’s unemployment rate decreased from a peak of 11.8 percent in March 2010 to 3.6 percent by March 2019, lower than the EU average of 6.5 percent. Hungary’s employment rate for the population aged 15-64 years was 69.5 percent in March 2019, higher than the EU average of 67.7 percent. Hungary is particularly strong in engineering, medicine, economics, and science training, although emigration of Hungarians from these sectors to other EU member states has increased in recent years.
Multinationals increasingly cite a skilled labor shortage as their biggest challenge in Hungary and note that Hungarian vocational institutions and universities need to adapt to changes in the market place at a faster pace. An increasing number of young people are attending U.S. – and European-affiliated business schools in Hungary. Foreign language skills, especially in English and German, are becoming more widespread, yet Hungary still has the lowest level of foreign language proficiency in the EU. According to 2017 data, only 37 percent of the working-age Hungarians speak at least one foreign language, while the EU average is 66 percent.
As the rate of unemployment has declined, certain sectors have begun to face shortages of skilled and highly educated employees. Multinational executives consistently identify labor shortages as the single largest obstacle to investment in Hungary. As Hungarians increasingly seek work abroad, shortages of highly educated and skilled labor are negatively affecting growth in certain regions and industries. In addition, declining OECD Program of International Student Assessment (PISA) scores may signal that the workforce is losing its ability to learn new skills and adapt to changing market conditions. The government is attempting to address labor shortage by increasing the minimum wage, offering training programs to facilitate public workers employment on the labor market, and by promoting employment of young mothers and pensioners by lowering employer-paid welfare contributions, and by reforming the education and vocational training system. Shortages of skilled workers, particularly in the IT, financial, and manufacturing sectors, are more acute in the northwest and central regions of the country. East of the Danube, unemployment levels are above average, even though the cost of labor is lower. Wages in Hungary are still significantly lower than those in Western Europe, despite the recent increase in minimum wage. Average Hungarian labor productivity is lower than the EU average, but exceeds that of other Central and Eastern European economies.
In 2016, the government, trade unions, and employer representatives signed a three-year agreement to increase the minimum wage for unskilled and skilled workers by 15 and 25 percent respectively in 2017, and 8 and 12 percent in 2018. The GOH again increased the minimum wage for skilled and unskilled workers by 8 percent in 2019. The deal also included an almost 50 percent cut in the business tax for large companies from 19 percent to 9 percent as of 2017 as well as gradually lowering the payroll tax from 21.5 percent in 2016 by 2 percent each year, down to 17.5 percent as of July 2019 to offset companies’ increased labor costs. The GOH also is considering facilitating the employment of workers from neighboring countries, primarily ethnic Hungarian minority communities in those countries.
The GOH requires hiring of nationals in certain strategic sectors and some areas of public administration.
Labor law stipulates severance payment in case of lay-off, as well as under certain conditions for an employee terminating a work contract. The government pays unemployment benefits for three months and offers the services of local employment offices.
Labor laws are uniform and there are no waivers to attract or retain investment available. Collective bargaining is increasingly common in large companies, education, public transport, retail, and medical services.
The 2012 changes to the Labor Law transferred some of the collective bargaining rights from trade unions to work councils. (Although work councils have a similar mission to those of labor unions, each firm has its own work council, and thus lacks the collective reach of an industry-wide trade union.) Hungary’s trade union membership rate is currently about 15 percent, while the EU average is 25 percent. Following successful wage negotiations in 2019, the popularity of trade unions is started to increase. Hungary has ratified all eight ILO core conventions.
Labor dispute resolution includes mediation as well as court procedures. Employees, however, typically agree with employers outside court or mediation procedures
In 2019, a six-day strike at Audi Hungary was resolved with an agreement between employers and employees for a15 to 20 percent wage increase. The success of this high-profile strike has led to a series of short-term strikes, or threats of strikes, at other companies. The majority of these strikes have been resolved quickly with wage increase concessions from management. All recent strikes have been peaceful and complied with Hungarian labor laws.
Hungary has been a member of the International Labor Organization since 1955. Hungary’s labor law and practice is in line with international labor standards. Discussions between the ILO and the GOH are ongoing on certain provisions of the 2012 modification of Hungary’s labor law, including the freedom expression, registration of trade unions, and minimum level of public service in case of strike.
Hungary passed amendments to its Labor Code in December 2018 that increase the amount of overtime an employer can request and gives employers up to three years to reconcile and pay for overtime. These highly unpopular changes led to a series of large protests throughout Hungary and currently are being reviewed by the European Commission.
12. OPIC and Other Investment Insurance Programs
Corporation (OPIC) has operated in Hungary since October 1989, offering U.S. investors financing through direct loans or guarantees, political risk insurance, and capital for private equity funds. OPIC’s financial support ranges from small micro financings to large infrastructure project loans.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
|Host Country Statistical Source||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|Host Country Gross Domestic Product (GDP) ($M USD)||2017||$139844||2017||$139,135||www.worldbank.org/en/country|
|Foreign Direct Investment||Host Country Statistical Source||USG or International Statistical Source||USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other
|U.S. FDI in partner country ($M USD, stock positions)||2017||$2,965||2017||$7,131||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data|
|Host country’s FDI in the United States ($M USD, stock positions)||2017||$521||2017||$12,938||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data|
|Total inbound stock of FDI as % host GDP||2017||60%||2017||$74%||UNCTAD data available at https://unctad.org/en/Pages/DIAE/World%20Investment%20Report/Country-Fact-Sheets.aspx|
Table 3: Sources and Destination of FDI
|Direct Investment From/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||$246,610||100%||Total Outward||$195,205||100%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
|Portfolio Investment Assets|
|Top Five Partners (Millions, US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||$13,602||100%||All Countries||$8,213||100%||All Countries||$5,390||100%|
|United States||$1,545||11.4%||United States||$1,379||16.8%||Austria||$379||7.0%|
14. Contact for More Information
U.S. Embassy Budapest
Szabadsag Ter 12