1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Hungary maintains an open economy and its high-quality infrastructure and central location are features that make it an attractive destination for investment. Attracting FDI is an important priority for the GOH, especially in manufacturing and export-oriented sectors. According to some reports, in other sectors, including banking and energy, however, government policies have resulted in some foreign investors selling their stakes to the government or state-owned enterprises. Hungary was a leading destination for FDI in Central and Eastern Europe in the mid-nineties and the mid-two-thousands, with annual FDI reaching over USD 6 billion in 2005. The pace of FDI inflows slowed in subsequent years as a result of the 2008 global financial crisis and increasing competition for investment from other countries in the region. In 2017, net annual FDI amounted to USD 5.6 billion while total gross FDI amounted to USD 98 billion.
As a block, the EU accounts for approximately 89 percent of all FDI in Hungary in terms of direct investors and 62 percent in terms of ultimate controlling parent investor. Germany is the largest investor, followed by the United States, Austria, France, the United Kingdom, Italy, Japan, the Netherlands, and China. The majority of U.S. investment falls within automotive, software development, and life sciences sectors. Approximately 450 U.S. companies maintain a presence in Hungary.
The GOH actively seeks foreign investment and has implemented a number of tax changes to increase Hungary’s regional competitiveness and attract investment, including a reduction of the personal income tax rate to 15 percent in 2016, reducing the business income tax rate to 9 percent in 2017, and the gradual reduction of the employer-paid welfare contribution from 27 percent in 2016 to 19.5 percent in 2018. As of 2016, the GOH streamlined the National Tax and Customs authority (NAV) procedure to offer fast-track VAT refund to customers categorized as “low risk” based on their internal controls and previous tax record.
Many foreign companies have expressed displeasure with the unpredictability of Hungary’s tax regime, its retroactive nature, slow response times, and the volume of legal and tax changes. According to the European Commission (EC), a series of progressively-tiered taxes implemented in 2014 disproportionately penalized foreign businesses in the telecommunications, tobacco, retail, media, and advertisement industries, while simultaneously favoring Hungarian companies. Following EC infringement procedures, the GOH phased out most discriminative tax rates by 2015 and replaced them with flat taxes.
In 2017, the GOH passed a regulation that gives the government preemptive rights to purchase real estate in World Heritage areas. The rule has been used to block the purchase of real estate by foreign investors in the most desirable areas of Budapest.
A 2014 law required retail companies with over USD 53 million in annual sales to close if they report two consecutive years of losses. Retail businesses claimed the GOH specifically set the threshold to target large foreign retail chains. The EC determined that the law was discriminatory and launched an infringement procedure in 2016, which resulted in the GOH repealing the controversial legislation in November 2018.
The GOH publicly declared that reducing foreign bank market share in the Hungarian financial sector is a priority. Accordingly, GOH initiatives over the past several years have targeted the banking sector and reduced foreign participation from about 70 percent before the financial crisis in 2008 to just over 50 percent by the end of 2018. In addition to the 2010 bank tax and the 2012 financial transaction tax levied on all cash withdrawals, regulations between 2012-2015 obligated banks to retroactively compensate borrowers for interest rate increases on foreign currency denominated mortgage loans, even though these increases were spelled out in the original contract with the customer, and were permitted by Hungarian law.
While the pharmaceutical industry is competitive and profitable in Hungary, multinational companies complain of numerous financial and procedural obstacles, including high taxes on pharmaceutical products and operations, prescription directives that limit a doctor’s choice of drugs, and obscure tender procedures that negatively affect the competitiveness of certain drugs. Pharmaceutical firms have also taken issue with GOH moves to weigh the cost of pharmaceutical procurement as more important than efficacy when issuing tenders for public procurement.
The Hungarian Investment Promotion Agency (HIPA), under the authority of the Ministry of Foreign Affairs and Trade, encourages and supports inbound FDI. HIPA offers company and sector-specific consultancy, recommends locations for investment, acts as a mediator between large international companies and Hungarian firms to facilitate supplier relationships, organizes supplier training, and maintains active contact with trade associations. Its services are available to all investors. For more information, see: https://hipa.hu/main
Foreign investors generally report a productive dialogue with the government, both individually and through business organizations. The American Chamber of Commerce enjoys an ongoing high-level dialogue with the GOH and the government has adopted many AmCham policy recommendations in recent years. In 2017, the government established a Competitiveness Council, chaired by the Minister of Economy, which includes representatives from multinationals, chambers of commerce, and other stakeholders, to increase Hungary’s competitiveness. Many U.S. and foreign investors have signed MOUs with the GOH to facilitate one-on-one discussions and resolutions to any pending issues. For more information, see: http://www.kormany.hu/en/ministry-for-national-economy and https://www.amcham.hu/
The US-Hungary Business Council (USHBC) – a private, non-profit organization established in 2016 – aims to facilitate and maintain dialogue between American corporate executives and the top government leaders on the U.S.-Hungary commercial relationship. The majority of significant U.S. investors in Hungary have joined USHBC, which hosts roundtables, policy conferences, briefings, and other major events featuring senior U.S. and Hungarian officials, academics, and business leaders. For more information, see: http://ushungarybc.org/
Limits on Foreign Control and Right to Private Ownership and Establishment
Foreign ownership is permitted with the exception of some “strategic” sectors including defense-related industries, which require special government permit, and farmland. There are no general limits on foreign ownership or control.
Foreign law firms and auditing companies must sign a cooperation agreement with a Hungarian company to provide services on Hungarian legal or auditing issues.
According to the Land Law, only private Hungarian citizens or EU citizens resident in Hungary with a minimum of three years of experience working in agriculture or holding a degree in an agricultural discipline can purchase farmland. Eligible individuals are limited to purchasing 300 hectares (741 acres). All others may only lease farmland. Non-EU citizens and legal entities are not allowed to purchase agricultural land. All farmland purchases must be approved by a local land committee and Hungarian authorities, and local farmers and young farmers must be offered a chance to purchase the land first before a new non-local farmer is allowed to purchase the land. For those who do not fulfill the above requirements or for legal entities, the law allows the lease of farmland up to 1200 hectares for a maximum of 20 years. The GOH has invalidated any pre-existing leasing contract provisions that guaranteed the lessee the first option to purchase, provoking criticism from Austria and Austrian farmers. Austria has reported the change to the European Commission, which initiated an infringement procedure against Hungary in October 2014. In March 2018, the European Court of Justice ruled that the termination of land use contracts violated EU rules, opening the way for EU citizens who lost their land use rights to sue the GOH for damages. In March 2015, the EC launched another – still ongoing – infringement procedure against Hungary concerning its restrictions on acquisitions of farmland.
The GOH passed a law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25 percent stake in a Hungarian company in certain “sensitive sectors” (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry. The Ministry has up to 90 days to issue an opinion and can only deny the investment if it determines that the investment is designed to conceal an activity other than normal economic activity. As of publication, we are not aware of any instances in which the Ministry has reviewed an investment.
Other Investment Policy Reviews
Hungary has not had any third-party investment policy reviews in the last three years.
Hungary maintains an open economy and its high-quality infrastructure and central location make it an attractive destination for investment. Attracting FDI is an important priority for the GOH, especially in manufacturing and export-oriented sectors. In 2006, Hungary joined the EU initiative to create a European network of “point of single contact” where existing businesses and potential investors can access all information on the business and legal environment, as well as connect to Hungary’s investment promotion agency. Over the past two years, the government has strengthened investor relations and, in addition to signing strategic agreements with key investors, established a National Competitiveness Council to discuss competitiveness challenges, formulate pro-competitiveness measures, and build constructive stakeholder relationships.
The registration of business associations is compulsory in Hungary. Firms must contract an attorney and register online with the Court of Registration. Registry courts must process applications to register limited liability and joint-enterprise companies within 15 workdays, but the process usually does not take more than three workdays. If the Court fails to act within the given timeframe, the new company is automatically registered. If the company chooses to use a template corporate charter, registration can be completed in a one-day fast track procedure. Registry courts provide company information to the Tax Office (NAV) eliminating the need for separate registration. The Court maintains a computerized registry and electronic filing system and provides public access to company information. The minimum capital requirement for a limited-liability company is HUF 3,000,000 (USD 10,800); for private limited companies HUF 5,000,000 (USD 17,900), and for public limited companies HUF 20,000,000 (USD 71,400). Foreign individuals or companies can establish businesses in Hungary without restrictions.
Further information on business registration and the business registry can be obtained at the GOH’s information website for businesses: http://eugo.gov.hu/starting-business-hungary or at the Ministry of Justice’s Company Information Service: http://ceginformaciosszolgalat.kormany.hu/index
Hungarian business facilitation mechanisms provide equitable treatment for women, but offer no special preference or assistance for them in establishing a company.
The stock of total Hungarian investment abroad amounted to USD 28.7 billion in 2017. Outward investment is mainly in manufacturing, services, finance and insurance, and science and technology. There is no restriction in place for domestic investors to invest abroad. The GOH announced in early 2019 that it would like to increase Hungarian investment abroad and it is considering incentives to promote Hungarian investment.