1. Openness To, and Restrictions Upon, Foreign Investment
Hungary’s government actively courts FDI; net annual FDI in 2020 amounted to $3.2 billion, and gross FDI totaled $98.1 billion. EU countries account for approximately 89 percent of all FDI in Hungary in terms of direct investors and 62 percent in terms of ultimate controlling parent investor. In terms of ultimate investor – i.e., country of origin – the United States was the second largest investor after Germany in 2019. In terms of direct investor location, Germany was the largest investor, followed by the Netherlands, Austria, Luxembourg, and then the United States; approximately 450 U.S. companies maintain a presence in Hungary. Most U.S. investment falls within the automotive, software development, and life sciences sectors. According to Hungarian Investment Promotion Agency (HIPA) data, U.S. foreign direct investment produced more jobs in Hungary in 2020 than investment from any other country.
Total cumulative FDI from Asian sources has doubled since 2010, accounting for over five percent of total FDI stock in 2019. According to HIPA, South Korea, Japan, China, India, and other Asian countries accounted for about 40 percent of the value of new foreign investment projects in Hungary in 2020 and in 2021, with $3.1 billion in investments creating 3,500 jobs.
The GOH has implemented tax changes to increase Hungary’s regional competitiveness and attract investment; the government reduced the personal income tax rate to 15 percent in 2016, the corporate income tax rate to 9 percent in 2017, the employer-paid welfare contribution to 13 percent in 2021, and employers’ payroll tax to 13 percent. Hungary’s Value-Added Tax (VAT), however, is the highest in Europe at 27 percent. As of 2016, the GOH streamlined the National Tax and Customs authority (NAV) procedure to offer fast-track VAT refunds to customers categorized as “low-risk.” In 2020 Hungary committed to join the OECD Global Minimum Tax Agreement with a 10-year transitionary period.
Government policies have resulted in some foreign investors selling their stakes to the government or state-owned enterprises in other sectors, including banking and energy. 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 discriminatory tax rates by 2015 and replaced them with flat taxes. Another 2014 law required retail companies with over $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 likewise determined that the law was discriminatory and launched an infringement procedure in 2016, leading the GOH to repeal the law in November 2018.
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. In April 2020 the GOH issued a decree that levied sector-specific taxes on the banking and retail sectors to fund COVID-19 pandemic economic support. This progressive tax on retail grocery outlets is structured such that it applies mainly to large foreign retail firms. In December 2021, the Parliament fast-tracked a legislation to increase the retail tax and compelled retail chains with an annual revenue over $310 million to offer their food items nearing expiry date to a state-owned nonprofit company, introducing another measure which hits only foreign-owned retailers.
The GOH publicly declared its intention to reduce foreign ownership in the banking sector in 2012. Accordingly, various GOH initiatives have reduced foreign ownership from about 70 percent in 2008 to 40.5 percent by the end of 2020. These initiatives included a 2010 bank tax; a 2012 financial transaction tax levied on all cash withdrawals; and regulations enacted between 2012-2015 that 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 contracts with customers and had been permitted by Hungarian law.
While the pharmaceutical industry is competitive and profitable in Hungary, multinational enterprises 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 companies also complain about the lengthy procedure to accept innovative medications in the national reimbursement system, making business planning challenging for them.
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 (AmCham) 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, now chaired by the Minister of Finance, 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. The GOH has regularly consulted foreign businesses and business associations as it has developed economic support measures during the pandemic. For more information, see: HYPERLINK “https://kormany.hu/kulgazdasagi-es-kulugyminiszterium/strategiai-partnersegi-megallapodasok” HYPERLINK “https://kormany.hu/kulgazdasagi-es-kulugyminiszterium/strategiai-partnersegi-megallapodasok” https://kormany.hu/kulgazdasagi-es-kulugyminiszterium/strategiai-partnersegi-megallapodasok and https://www.amcham.hu/.
The U.S.-Hungary Business Council (USHBC) – a private, non-profit organization established in 2016 – aims to facilitate and maintain dialogue between American corporate executives and top government leaders on the U.S.-Hungary commercial relationship. Most 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: https://www.us-hungarybusinesscouncil.com/ .
Foreign ownership is permitted except for certain “strategic” sectors including farmland and defense-related industries which require special government permits. As part of its economic measures during the COVID-19 pandemic, the GOH passed a decree which requires foreign investors to seek approval for foreign investments in Hungary.
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 right of first refusal before a new non-local farmer is allowed to purchase the land. For legal entities and those who do not fulfill these requirements, 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 Austrian farmers. Austria has reported the change to the European Commission, which initiated an infringement procedure against Hungary in 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.
The GOH passed a national security 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 60 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. In 2020, as part of the measures to mitigate the economic effects of the COVID-19 pandemic, the GOH passed an additional regulation requiring foreign investors to seek approval from the Ministry of Innovation and Technology (MIT) for greenfield or expansion of existing investments. Some observers have suggested this law could be used to disadvantage foreign firms or deny them access to the Hungarian market.
Hungary has not had any third-party or independent civil organization investment policy reviews in the last five years.
In 2006, Hungary joined the EU initiative to create a European network of “point of single contact” through which 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. In recent years, the government has strengthened investor relations, signed strategic agreements with key investors, and established a National Competitiveness Council to formulate measures to increase Hungary’s economic competitiveness.
The registration of business enterprises is compulsory in Hungary. Firms must contract an attorney and register online with the county-level courts of justice operating as courts of registration. Registry courts must process applications to register limited liability and joint-enterprise companies within 15 workdays, but the process is usually complete within 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 Authority (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 ($8,500); for private limited companies HUF 5,000,000 ($14,300), and for public limited companies HUF 20,000,000 ($57,100). 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 https://ceginformaciosszolgalat.kormany.hu/elektronikus-cegeljaras , and the Tax Authority https://en.nav.gov.hu/taxation/registration/specific_rules.html.
Hungarian business facilitation mechanisms offer no special preference or assistance for them in establishing a company.
Outward investment is mainly in manufacturing, pharmaceuticals, services, finance and insurance, and science and technology. The stock of total Hungarian investment abroad amounted to $36.8 billion in 2019. 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 such investment.
3. Legal Regime
Generally, legal, regulatory, and accounting systems are consistent with international and EU standards. However, some executives in Hungarian subsidiaries of U.S. companies express concerns 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 and foreign owners of major infrastructure, 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-affiliated 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 them. Laws in Parliament can be found on Parliament’s website (https://www.parlament.hu/en/web/house-of-the-national-assembly). 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.
As a result of the COVID-19 crisis, in March 2020, the Parliament passed a bill that established a state of emergency (SOE) in Hungary, allowing the GOH to govern by decree without parliamentary approval. The GOH used this decree to levy new sector-specific taxes, to take control of a Hungarian company that had been in an ownership dispute with the GOH, and to reallocate competencies and tax collection duties from an opposition-led municipality to a county-level body led by the ruling Fidesz party.
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 government does not promote or require environmental, social, and governance (ESG) disclosure for companies operating in Hungary.
The GOH rarely invites interested parties to comment on draft legislation. Civil society organizations have complained about a loophole in the current law that allows individual Members of Parliament 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 related to laws – are published on the Parliament’s webpage. Explanations attached to draft bills include a short summary on the aim of the legislation, but regulators only occasionally release public comments.
Regulatory enforcement mechanisms include the county and district level government offices, whose decisions can be challenged at county-level courts. The court system generally provides efficient oversight of the GOH’s administrative processes.
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. Modifications to a current budget, which in 2021 were quite substantial because of the pandemic, are not consolidated with the initial budget law and do not include economic analysis of the effects of those modifications. Information on debt obligations was publicly available, including online through the Hungarian Central Bank ( https://www.mnb.hu/en ) and Hungarian State Debt Manager’s ( https://akk.hu/ ) websites.
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.
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); 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. There are no special commercial courts, but first level public administration and labor cases are judged only by the county level courts of justices.
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. The European Commission’s 2021 Rule of Law Report, issued in July 2021, cited judicial independence in Hungary as a source of concern. Most business complaints about the court system pertain to the lengthy proceedings rather than the fairness of the verdicts. The GOH has said it hopes to improve the speed and efficiency of court proceedings with an updated Civil Procedure Code that entered into force in January 2018.
Regulations and law enforcement actions pertaining to investors may be appealed at ordinary courts or at the Constitutional Court.
Hungarian law protects property and investment. The Hungarian state may expropriate property only 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 national security 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. (Please see above section on limits on foreign control for more details). Based on this law, in April 2021 the Interior Ministry blocked Austria’s Vienna Insurance Group from buying Dutch insurer Aegon’s Hungarian subsidiary. In February 2022 the European Commission decided the blocked sale violated EU rules, but by that time the GOH and VIG agreed that the state would acquire a 45 percent stake in Aegon. Additionally, in 2020, as part of the measures to mitigate the economic effects of the COVID-19 pandemic, the GOH passed another regulation requiring foreign investors to seek approval from the Ministry of Innovation and Technology (MIT) for greenfield or expansion of existing investments.
There is no primary website or “one-stop shop” which compiles all relevant laws, rules, procedures, and reporting requirements for investors. The Hungarian Investment Promotion Agency (HIPA), however, facilitates establishment of businesses and provides guidance on relevant legislation.
The Hungarian Competition Authority, tasked with safeguarding the public interest, enforces the provisions of the Hungarian Competition Act, and 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 60 cases in 2021, 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, in December 2017 the European Anti-Fraud Office (OLAF) recommended opening a criminal investigation into a high-profile $50 million EU-funded public procurement project, but Hungarian authorities declined to prosecute the case.
Hungary’s Constitution provides protection against uncompensated expropriation, nationalization, and any other arbitrary action by the GOH except in cases of threat to national security. 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 investors within the past several years that expropriations have been improperly executed and without proper remuneration. Parties involved in these cases turned to the domestic legal system for dispute settlement.
There is no recent history of official GOH expropriations.
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 New York and ICSID Conventions. According to Law 71 of 1994, an arbitration court decision is equally binding to that of a court ruling.
Investor-State Dispute Settlement
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 shares no Bilateral Investment Treaty or Free Trade Agreement with the United States. Since 2000 Hungary has been the respondent in 16 known investor-State arbitration claims, although none of these involve U.S. investors.
Local courts recognize and enforce foreign arbitral awards against the GOH.
International Commercial Arbitration and Foreign Courts
In the last few years, parties have increasingly turned to mediation to settle disputes without engaging in lengthy court procedures. Law 60 of 2017 on domestic arbitration procedures is based on the UNCITRAL Model Law.
Investment dispute settlement clauses are frequently included in investment contract between the foreign enterprise and GOH. 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 (HYPERLINK “https://mkik.hu/en/court-of-arbitration” HYPERLINK “https://mkik.hu/en/court-of-arbitration” 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. An arbitral ruling may only be annulled in limited cases, and under special conditions.
Domestic courts do not favor State-owned enterprises (SOEs) disproportionately. Investors can expect a fair trial even if SOEs are involved and in case of an unfavorable ruling, may elevate the case to the European Court of Justice (ECJ). Investors do not generally complain about non-transparent or discriminatory court procedures.
The Act on Bankruptcy Procedures, Liquidation Procedures, and Final Settlement of 1991, covers all commercial entities except banks (which have their own regulatory statutes), trusts, and State-owned enterprises, and brought Hungarian legislation in line with EU regulations. Debtors can initiate bankruptcy proceedings only if 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. The Court may allow up to of 30 days for the debtor to settle the debt upon request. If the Court finds the debtor insolvent, it appoints a liquidator.
Bankruptcy 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 (HYPERLINK “http://www.bisz.hu ” HYPERLINK “http://www.bisz.hu” http://www.bisz.hu ).
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 a 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.
Please see the section on Limits on Foreign Control and Right to Private Ownership and Establishment for information regarding restrictions on purchasing farm landfarmland.
Hungarian law allows acquisitive prescription for unoccupied real property if the user of the property occupies it continuously for at least 15 years. Real estate and land purchase contracts must be countersigned by an attorney registered in Hungary.
Hungary has an adequate legal structure for protecting intellectual property rights (IPR), although sentences for civil and criminal IPR infringement cases are not usually adequately harsh to serve as a deterrent. 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 Prosecutor General’s Office were to establish specialized IPR units. The most common IPR violations in Hungary include the sale of imported counterfeit goods, including 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’s (WTO’s) Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and many other major international IPR agreements, including some administered by the World Intellectual Property Organization (WIPO), such as the Berne Convention, the Paris Convention, the WIPO Copyright Treaty, and the WIPO Performance and Phonograms Treaty. As an EU Member State, Hungary is required to implement EU Directives and so is party to the EU Information Society Directive and EU Enforcement Directive, among others.
The United States and Hungary signed a Comprehensive Bilateral Intellectual Property Rights Agreement in 1993 that addresses copyright, trademarks, and patent protection.
In 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. In 2012 the USPTO and HIPO signed a Memorandum of Understanding to further streamline and expedite bilateral patent recognition. More details about this Patent Processing Highway (PPH) program can be found on HIPO’s website at www.hipo.gov.hu/English/szabadalom/pph/ .
Hungary is not included in the U.S. Trade Representative’s (USTR’s) 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 HYPERLINK “http://www.wipo.int/directory/en/” HYPERLINK “http://www.wipo.int/directory/en/” http://www.wipo.int/directory/en/ .
Resources for Rights Holders
The Hungarian Ministry of Justice and the Ministry of Interior are responsible for combating corruption. Although a legal framework exists to support their efforts, critics have asserted that the government has done little to combat grand corruption and rarely investigates cases involving politically connected individuals, even when recommended to do so by the European Antifraud Office (OLAF). Hungary is a party to the UN Anticorruption Convention and the OECD Anti-Bribery Convention and has incorporated their 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 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. For several years, the GOH has kept confidential GRECO’s most recent compliance reports on prevention of corruption with respect to members of parliament, judges, and prosecutors, and a report on transparency of party financing.
Following calls from the opposition, NGOs, and other GRECO Member States, and a March 2019 visit by senior GRECO officials to Budapest, the GOH agreed to publish the reports in August 2019. The reports revealed that Hungary failed to meet 13 out of 18 recommendations issued by GRECO in 2015; assessed that Hungary’s level of compliance with the recommendations was “globally unsatisfactory,” and concluded that the country would therefore remain subject to GRECO’s non-compliance procedure. The compliance report on transparency of party financing noted some progress but added that “the overall picture is disappointing.” A November 2020 GRECO report came to the same conclusion, adding that Hungary had made no progress since the prior year on implementing anticorruption recommendations for MPs, judges, and prosecutors.
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 to be reprimanded by the organization, rejected the OGP report conclusions and withdrew from the organization.
In recent 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. Observers assess that this anti-NGO rhetoric endangered the continued operation of anti-corruption NGOs crucial to promoting transparency and good governance in Hungary. In 2017 and 2018, Parliament passed legislations that many civil society activists criticized for placing undue restrictions on NGOs. In its June 2018 and November 2021 rulings, the European Court of Justice found both legislations in conflict with EU law.
Transparency International (TI) is active in Hungary. TI’s 2021 Corruption Perceptions Index rated Hungary 73 out of 180 countries. Out of the 27 EU member states, Hungary ranked 26th, outperforming only Bulgaria. 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. TI and other watchdogs note that data on public spending remains difficult to access since the GOH amended the Act on Freedom of Information in 2013 and 2015. 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 to receive answers to questions. Even if the court orders the release of data, by the time it happens, the data has lost significance and has a weaker impact, watchdogs warn. In some cases, even when ordered to provide information, state agencies and SOEs 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 European Anti-Fraud Office (OLAF) has found high levels 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 EC has suspended payments of EU funds several times due to irregularities in Hungary’s procurement system.
TI and other anti-corruption watchdogs have highlighted EU-funded development projects as the largest source of corruption in Hungary. A TI study found indications of corruption and overpricing in up to 90 percent of EU-funded projects. Reports by Corruption Research Center (CRCB) from April and May 2020 found – after analyzing more than 240,000 public procurement contracts from 2005-2020 – that companies owned by individuals with links to senior government officials enjoy preferential treatment in public tenders and face less competition than other companies. The studies also revealed that the share of single-bidder public procurement contracts was over 40 percent in 2020, and that the corruption risk reached its highest level since 2005. In a March 2022 report CRCB found that in the 2011-2021 period, more than 20 percent of the EU-funded public contracts were won by 42 companies owned by 12 entrepreneurs closely affiliated with the government. In 2020, a year which was particularly difficult for many businesses because of the Covid-crisis, this small group of entrepreneurs won almost one-third of the EU-funded public tenders.
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 politicians. For example, they reported that, in November 2018, Hungarian authorities dropped the investigation into $50 million in EU-funded public lighting tenders won by a firm co-owned by a relative of the prime minister, despite concerns raised by OLAF about evidence of conflict of interest and irregularities involving the deal. According to media reports, OLAF concluded that several of the tenders were won due to what it considered organized criminal activity. In December 2021, the Prosecutor General’s Office charged a senior government politician for accepting bribes to influence cases at the request of the president of the Court Bailiff Chamber. The senior government official resigned immediately but kept his position as an MP and was left at large for the time of the investigation.
Annual asset declarations for the family members of public officials are not public and only parliamentary committees can investigate 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’ names.
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 to 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 2019 European Commission study found that Hungary had the second-highest rate (40 percent) 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 head quasi-independent institutions such as 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, larger private companies and multinationals operating in Hungary have internal codes of ethics, compliance programs, or other controls, but their efficacy is not uniform.
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
Transparency International Hungary
Falk Miksa utca 30. 4/2
Phone: +36 1 269 9534
Fax: +36 1 269 9535