Hungary continues to recover from the COVID-19 pandemic and now faces rising inflation and economic uncertainty due to Russia’s war in Ukraine. Despite a growing deficit and energy prices, as well as a continued skilled labor shortage and corruption concerns, ratings agencies in 2021 maintained Hungary’s sovereign debt at BBB, two notches above investment grade, with a stable outlook. In December 2021, the Finance Ministry forecasted 5.9 percent economic growth and a 4.9 percent budget deficit for 2022. Analysts since then have revised their forecasts and project 2 percentage points lower economic growth for this year.
Hungary, an EU member since 2004, currently has a population of 9.7 million and a GDP of $155 billion. Fellow EU member states and the United States are Hungary’s most important trade and investment partners, although Asian influence is growing; foreign direct investment (FDI) from Asian sources was five percent of total FDI in 2019 and now accounts for over 30 percent of new foreign direct investment in 2020.
Macroeconomic indicators were generally strong before the COVID-19 pandemic, with GDP growing by 4.9 percent in 2019. Following a 5.1 percent pandemic-induced contraction in 2020, Hungary’s GDP increased by 6.4 percent in 2021. As the Government of Hungary (GOH) increased spending to support the economy and other priorities, the 2021 budget deficit reached approximately 7.5 percent of GDP, which pushed up public debt close to 80 percent of GDP.
Hungary’s central location in Europe and high-quality infrastructure have traditionally made it an attractive destination for Foreign Direct Investment (FDI). Between 1989 and 2019, Hungary received approximately $97.8 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, whereas in terms of annual investment, South Korea was the largest investor overall in 2021. The GOH actively encourages investments in manufacturing and other sectors promising high added value and/or employment, such as research and development, defense, and service centers.
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 procurement sector. According to Transparency International’s (TI) 2021 Corruption Perceptions Index, Hungary placed 73rd worldwide and ranked 26th out of the 27 EU member states, outperforming only Bulgaria.
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, Prime Minister (PM) Viktor Orban announced that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Since then, observers note that through various tax changes the GOH has pushed several foreign-owned banks out of Hungary. GOH efforts have helped increase Hungarian ownership in the banking sector to close to 60 percent, up from 40 percent in 2010. In the energy sector, foreign-owned companies’ share of total revenue fell from 70 percent in 2010 to below 50 percent by 2022. Foreign media ownership has decreased drastically as GOH-aligned businesses have consolidated control of Hungary’s media landscape: 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, constituting between 80 and 90 percent of all media, donated those outlets to the Central European Press and Media Foundation (KESMA) run by individuals with ties to the ruling Fidesz party.
Ostensibly in response to the COVID crisis, the Hungarian government has had uninterrupted state-of-emergency (SOE) powers since November 2020 with authority to bypass Parliament and govern by decree. Parliament passed the first SOE legislation in March 2020 as part of its COVID-19 pandemic response; this legislation did not have a sunset clause, and the government repealed it in June 2020. The GOH passed a second SOE law in November 2020, this time for a 90-day period. Following the expiration of the first 90-day term, the Parliament extended the SOE in February, May, September and most recently in December 2021 – until June 2022 – without any support from opposition parties. As part of the emergency measures, the GOH extended measures for national security screening of foreign investments from December 31, 2020, until December 31, 2022, and may extend this deadline further.
|TI Corruption Perception Index||2021||
73 of 180
|Global Innovation Index||2021||34 of 132||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2020||$13,295||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2020||$15,890||https://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
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 ).
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 EUR 10 million or $11 million). The incentives are designed to benefit investors who establish manufacturing facilities, logistics facilities, regional service centers, R&D facilities, and 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 Innovation and Technology (MIT) and the Ministry of Foreign Affairs and Trade (MFAT). The government provides non-refundable subsidies to foreign investments in less developed areas and certain sectors including research and development, innovation, and high-tech manufacturing, based on case-by-case government decisions. In 2020, the GOH extended additional incentives or support to foreign investments as part of its economic response to the pandemic. For more information please see: https://hipa.hu/additional-favourable-changes-in-the-non-refundable-cash-incentives-system .
In 2017 Hungary introduced a new Renewable Energy Support Scheme (METAR) – replacing the former feed-in tariff system (KAT) – in which producers of renewable energy can bid for state subsidies, paid as a premium over the market reference price. Newly established renewable energy producing facilities from 0.5 to 1 MW can apply for a feed-in premium in addition to the market price, and over 1 MW the support level is set through competitive auctions. Applicants can be companies with a registered office in the EU, the EEA or the Energy Community, Hungarian branch offices of foreign companies and Hungarian business entities or municipalities, but the tender is only available to projects located in Hungary. Since the first METAR tender in 2019, the Hungarian Energy Authority has launched six successful tenders, each time generating a significant interest and oversubscription from bidders. For more information on the METAR scheme, please see: HYPERLINK “http://www.mekh.hu/information-on-the-renewable-energy-support-system” http://www.mekh.hu/information-on-the-renewable-energy-support-system
Foreign trade zones were eliminated because of EU accession.
Hungary does not mandate the hiring of local employees. 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 2021, investments in certain strategic sectors including the military, intelligence, public utilities, financial services, and electronic information systems require investment permits issued by the Ministry of Interior; in other key sectors, the Ministry for Innovation and Technology issues 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 on transfer of personal data outside the economy. Storage of personal data is regulated by a data protection law and falls 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) 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 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
6. Financial Sector
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 Eastern 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. In 2021, the BSE has 23 members and 139 issuers. The issued securities are typically shares, investment notes, certificates, corporate bonds, mortgage bonds, government bonds, treasury bills, and derivatives. In December 2021, the BSE had a market capitalization of $30.2 billion, and the average monthly equity turnover volume amounted to $2.1 billion. The most traded shares are OTP Bank, pharmaceutical company Richter, MOL, Magyar Telekom, and 4iG.
Financial resources flow freely into the product and factor markets. In line with IMF rules, international currency transactions are not limited and are accessible both in domestic and foreign currencies. Individuals can hold bank accounts in either domestic or foreign currencies and conduct transactions in foreign currency. Since March 2020, commercial banks introduced real time bank transfers for domestic currency transactions.
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.
There are no rules preventing a foreigner or foreign firm from opening a bank account in Hungary. Valid personal documents (i.e., a passport) are needed and as of 2015, when the Foreign Account Tax Compliance Act (FATCA) came into force, also a declaration of whether the individual is a U.S. citizen. Banks have not discriminated against U.S. citizens in opening bank accounts based on FATCA.
The Hungarian banking system has strengthened over the past few years, and the capital position of banks is generally adequate even in the challenging economic environment created by COVID-19. Following several years of deleveraging after the 2008 crisis, the banking system is mainly deposit funded. The penetration of the banking system decreased slightly in 2019 due to a relatively high GDP growth rate. The sector’s total assets amounted to 92.6 percent of GDP.
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 85 percent in 2015 and has been fluctuating between this value and a 92.4 percent peak in 2019. In spring 2020, during the first wave of the COVID-19 in Hungary, it reached 91.6 percent but decreased to 81.7 percent by the end of the year. The liquidity cover ratio was 160 percent in the first wave of COVID-19, then climbed to 220.8 percent by the end of the year. In response to the COVID-19 crisis, the Central Bank restructured and expanded its monetary policy tools to provide liquidity to the financial sector through currency swaps, fixed-rate loans, and exemptions from minimum reserve requirements. The Central Bank also introduced instruments to influence short- and long-term term yields. It offered low-interest loans through commercial banks to the SME sector and launched a government securities purchase program on the secondary market.
The ratio of non-performing loans (NPLs) decreased from a high of 18 percent in 2013 to 3.3 percent in 2021 as a result of portfolio cleaning, the improving economic environment, and increased lending. The banking sector became profitable after several years of losses between 2010 and 2015, reaching a return on equity (ROE) record high of 16.8 percent in 2017. Since then, ROE has decreased close to zero in 2020 as a result of the pandemic but recovered to 11.6 percent by the end of 2021. The banking sector’s total assets exceeded 112 percent of GDP in 2021, of which 73 percent were held by five banks. The largest bank in Hungary is OTP Bank, which is mostly Hungarian-owned and controls about 25 percent of the market.
Hungary has a modern two-tier financial system and a developed financial sector. Between 2000 and 2013, the Hungarian Financial Supervisory Authority (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. In 2013, the MNB absorbed the PSZAF and over the past few years has efficiently strengthened its supervisory role over the financial sector and established a customer protection system.
In accordance with the GOH’s stated goal of reducing foreign ownership in the financial sector, the proportion of foreign banks’ total assets in the financial sector decreased to about 40 percent in 2019, down from a peak of 70 percent before the 2008-2009 financial crisis. Following the sale of Budapest Bank and merge with the other Hungarian-owned banks and the Hungarian Savings’ Bank network, it has fallen to about 40 percent by 2021. Foreign banks are subject to central bank uniform regulations and prudential measures, which are applied to Hungary’s entire financial market without discrimination. On March 2, 2020, MNB launched an immediate e-transfer system up to a maximum of HUF 10 million (about $32,000) for domestic transactions in HUF. Commercial banks have extensive direct correspondent banking relationships and are capable of transferring domestic or foreign currencies to most banks outside of Hungary. Since 2018, however, the cashing of U.S. checks is no longer possible. 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, an effort to eliminate the risk of exchange rate fluctuations. Foreign investors continue to have equal – if not better – access to credit on the global market, apart from special GOH credit concessions such as small business loans.
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. Act 93 of 2001 on Foreign Exchange Liberalization lifted all remaining foreign exchange restrictions and allowed free movement of capital in line with EU regulations. Hungary complies with all OECD convertibility requirements and IMF Article VIII.
Hungary’s EU accession agreement dictates that Hungary must adopt the Euro once it meets the relevant criteria. The GOH has not set a specific target date even though Hungary meets most of the necessary fiscal and financial criteria. According to the Ministry of Finance, 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 value of the Hungarian Forint. Analysts note that the MNB’s consistently low interest rates have contributed to a nearly 30 percent decline in the value of the of the Forint against the Euro since 2010.
Sovereign Wealth Funds
Hungary does not maintain a sovereign wealth fund.
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. Members of the Hungarian NCP include representatives of the Ministries of Finance, Foreign Affairs and Trade, Innovation and Technology, and Agriculture. The Hungarian NCP submits annual reports to the OECD Investment Commission, except for 2020 when its activity was strongly impacted by the COVID-19 pandemic. For more information, see: http://oecd.kormany.hu/a-magyar-nemzeti-kapcsolattarto-pont .
In recent years, the Hungarian NCP has organized several conferences, the last one in January 2020, to promote RBC and OECD guidelines. It announced in 2017 its intention to formulate a new National Action Plan on Businesses and Human Rights. According to the first National Corporate Social Responsibility (CSR) Action Plan formulated in 2015, key RBC priorities of the GOH included the employment of discriminated, disadvantaged, and disabled groups, environmental protection, and the expansion of sustainable economy. Hungary’s NCP peer review is scheduled in 2023. The Hungarian Public Relations Association, CSR Hungary, and other NGOs are involved in elaborating the second National Action Plan. The Hungarian NCP reviews complaints from trade unions against multinational companies’ subsidiaries operating in Hungary and coordinates with relevant NPCs of the multinational company’s home country. RBC does not typically play a role in GOH procurement decisions, although the 2015 Public Procurement Act integrates concepts of CSR, responsible business conduct, and good practice.
Several NGOs and business associations promote 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; others include the Hungarian Public Relations Association, “Kovet.”
According to a 2018 survey conducted by CSR Hungary, 60 percent of businesses have a CSR policy and 44 percent of businesses attribute a CSR orientation to increased competitiveness. However, only about 34 percent of multinational and SOEs and 9 percent of SMEs report formally formulating a CSR action plan. According to a 2021 study on corporate social responsibility in Hungary, stakeholder pressure is weak, and they expect increased state-level intervention in CSR issues.
In 2017, Hungary’s independent agencies for labor rights protection, consumer protection, cultural heritage protection, and environment protection were merged into relevant ministries and county-level government offices. Environmental NGOs criticized the transformation of the system and warned about the lack of independent agencies.
In January 2020, the GOH approved and published its new long-term energy strategy and an EU-required National Energy and Climate Plan – both of which focused heavily on decarbonization and sustainable climate policy. According to the documents, Hungary aims to reduce its carbon emissions by at least 40 percent by 2030 (compared to the 1990 level), an additional 10 percent by 2040, and achieve carbon neutrality by 2050. Given that Hungary emits 33 percent less CO2 than it did in 1990, the real cut would be seven percent in the next eight years and 17 percent in the next 20 years. The seven percent cut would be easily achieved with the phase-out of the lignite coal fired Matra Power Plant by 2025. Experts have noted that the plan to have Hungary cut the remaining 50 percent (to achieve carbon neutrality) in the 2040-2050 period is an ambitious goal. Although in December 2020, the GOH committed itself to the new EU goal (“Fit for 55”) of reducing carbon emissions by 55 percent by 2030, the details of achieving the more ambitious goal are to be worked out. The GOH estimates the total costs of Hungary achieving climate neutrality by 2050 at $145 billion.
Private sector contributions to reach the climate goals include increasing Hungary’s solar power capacity from the currently available more than 2000 MW to 6000 MW by 2030 and to 10,000 MW by 2040. In energy efficiency, the GOH’s aim is to limit Hungary’s total final energy demand on the 2005 level by 2030. To reach this goal, the GOH introduced a tax incentive for businesses investing into energy efficiency. Although the GOH strategies stress the great potential in decreasing the energy demand of households, so far there have been only limited efforts.
Despite the February 2021 ruling of the European Court of Justice saying that Hungary had “systematically and persistently” breached legal limits on air pollution, the GOH still has failed to take any efficient measures to deal with the problem. Although the GOH maintains an extensive system of national parks and nature reserves, there are no other government policies, or regulatory incentives helping to preserve biodiversity. The second National Climate Change Strategy adopted in 2018 contains the National Adaptation Strategy which is based on the climate vulnerability assessment of ecosystem and industrial sectors.
Although Hungary’s Public Procurement Act of 2015 allows the government to consider environmental and green growth aspects, the GOH has not yet issued a decree governing the detailed rules of green procurements. Hungary is one of the five EU member states without a national action plan on green public procurements according to the State Audit Office. In April 2021, Hungary’s Public Procurement Authority launched a sustainability working group and in September 2021 issued a Green Codex to provide some guidelines on green procurements.
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
10. Political and Security Environment
The security environment is relatively stable. Politically motivated violence or civil disturbance is rare. Violent crime is low, with street crimes the most frequently reported crimes in the country. 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 4.7 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 record low 3.3 percent unemployment rate at the end of 2019 increased to 3.8 percent in December 2021 as a result of the pandemic, but it is lower than the EU average of 7.3 percent. Hungary’s employment rate for the population aged 15-64 years was 73.9 percent in 2021, higher than the EU average of 68.3 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. In the first wave of the COVID-19 pandemic, out-migration temporarily declined but resumed during the second half of 2020.
Multinationals increasingly cite a skilled labor shortage as their biggest challenge in Hungary and note that Hungarian vocational institutions and universities need to adapt more quickly to changes in the marketplace. 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 2018 data, only 37 percent of working-age Hungarians speak at least one foreign language, while the EU average is 66 percent.
As the unemployment rate has declined, certain sectors have begun to face shortages of skilled and highly educated employees. 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 retraining programs, incentivizing employment of young mothers and pensioners by lowering employer-paid welfare contributions, and 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. In the eastern half of the country, 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. The deal also included a more than 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 15.5 percent as of July 2020, to offset increasing labor costs. In subsequent years the parties signed annual minimum wage agreements which increased the minimum wage by 8 percent in 2020, by 3.6 percent in 2021, and as of January 2022, by 20 percent. The GOH also facilitates 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 a 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. The GOH did not extend this benefit beyond the normal three months during the pandemic. Labor laws are uniform and there are no waivers available to attract or retain investment. Collective bargaining is increasingly common in large companies, education, public transport, retail, and medical services.
The 2012 changes to the Labor Law transferred some 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 below 10 percent, while the EU average is 25 percent. About 20 percent of businesses have a collective bargaining agreement on labor conditions and benefits, well below the EU average of about 80 percent. During the COVID-19 pandemic the government passed regulations that allow businesses to unilaterally terminate collective bargaining agreements, which led to a few strikes, which have been resolved by negotiations. Beginning in 2021, the GOH decreased state support to trade unions and implemented budget changes to allow discretional funding to each trade union, which replaced the previously uniform system. Hungary has ratified all eight International Labor Organization (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 a 15- 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. Most of these strikes have been resolved quickly with wage increase concessions from management and changes in overtime payment and conditions. All recent strikes have been peaceful and complied with Hungarian labor laws.
Hungary has been a member of the ILO since 1955. Hungary’s labor law and practice are 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 of 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 increased 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. As a part of its COVID-19 economic response plan, the government decreed in 2020 that employers can implement flexible working hours and a 24-month working time frame to calculate overtime without prior agreement from the employee or union. Local labor organizations complained that the move rolled back hard-won concessions from the 2018 labor reform and that certain businesses abuse overtime possibilities to compensate for shutdowns during the COVID-19 pandemic.
The constitution and laws prohibit discrimination based on race, sex, gender, disability, language, sexual orientation and gender identity, infection with HIV or other communicable diseases, or social status. The labor code provides for the principles of equal treatment. The government failed to enforce these regulations effectively. Penalties were not commensurate with those under laws related to civil rights.
Observers asserted that discrimination in employment and occupation occurred with respect to Roma, women, persons with disabilities, and LGBTQI+ persons. According to NGOs, there was economic discrimination against women in the workplace, particularly against job seekers older than 50 and those who were pregnant or had returned from maternity leave. The country does not mandate equal pay for equal work. A government decree requires companies with more than 25 employees to reserve 5 percent of their work positions for persons with physical or mental disabilities. While the decree provides fines for noncompliance, many employers generally paid the fines rather than employ persons with disabilities. The National Tax and Customs Authority issued “rehabilitation cards” to persons with disabilities, which granted tax benefits for employers employing such individuals.
Roma were the country’s largest ethnic minority. According to the 2011 census, approximately 315,000 persons (3 percent of the population) identified themselves as Roma. A University of Debrecen study published in 2018, however, estimated there were 876,000 Roma in the country, or approximately 9 percent of the country’s population. There were approximately 1,300 de facto segregated settlements in the country where Roma constituted the majority of the population. Romani communities are not socially integrated with broader Hungarian society and are characterized by considerably lower indicators on most socioeconomic measures than the majority population. Conditions for the community deteriorated since the collapse of communism in 1989-90 but were rooted in centuries of social exclusion. Lacking advanced education and employment skills, many Roma occupied the margins of society and experienced long-term unemployment, which bred a cycle of poverty and welfare dependence.
14. Contact for More Information
U.S. Embassy Political and Economic Section
Szabadsag Ter 12
1054 Budapest, Hungary
+36 1 475 4400