Transparency of the Regulatory System
Generally, legal, regulatory, and accounting systems are consistent with international and EU standards. However, some executives in Hungarian subsidiaries of U.S. companies complain about a lack of transparency in the GOH’s policy-making process and an uneven playing field in public tendering. In recent years there has been an uptick in the number of companies reporting pressure to sell their businesses to government-affiliated investors. Those that refuse to sell report an increase in tax audits, fines, and spurious regulatory challenges and court cases. SMEs increasingly report a desire to either remain small (and therefore “under the radar” of these government-friendly investors) or relocate their businesses outside of Hungary.
For foreign investors, the most relevant regulations stem from EU directives and the laws passed by Parliament to implement these. Laws in Parliament can be found on Parliament’s website (http://www.parlament.hu/parl_en.htm). Legislation, once passed, is published in a legal gazette and available online at www.magyarkozlony.hu. The GOH can issue decrees which also have national scope, but they cannot be contrary to laws enacted by Parliament. Local municipalities can create local decrees, limited to the local jurisdiction.
The GOH infrequently invites interested parties to comment on draft legislation. Civil organizations have complained about a loophole in the current law that allows individual MPs to submit legislation and amendments without public consultation. The average deadline for submitting public comment is often very short, usually less than one week. The Act on Legislation and the Law Soliciting Public Opinion, both passed by Parliament in 2010, govern the public consultation process. The laws require the GOH to publish draft laws on its webpage and to give adequate time for all interested parties to give an opinion on the draft. However, implementation is not uniform and the GOH often fails to solicit public comments on proposed legislation.
There are no informal regulatory processes governing foreign investment or foreign investors.
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.
As noted, companies in industries affected by crisis taxes have complained repeatedly that the business sector was not consulted before new taxes were announced, and that the GOH failed to take into account industry views.
A Corruption Research Center Budapest (CRCB) study found that since 2010 the annual average number of new laws passed by Parliament has increased, while the average time spent debating new laws in Parliament has decreased significantly. The analysis points out that the accelerating lawmaking process in Hungary since 2010 has had negative effects on the stability of the legal environment and the overall quality of legislation.
The legislation process – including key regulatory actions – are published on Parliament’s webpage (www.parlament.hu). Explanations attached to draft bills include a short summary on the aim of the legislation, but public comments received by regulators are only occasionally made public.
Regulatory enforcement mechanisms include the county and district level government offices whose decisions can be challenged at county level labor and administrative courts. The court system generally provides efficient oversight over the GOH’s administrative processes.
International Regulatory Considerations
As an EU Member State, all EU regulations are directly applicable in Hungary, even without further domestic measures. If a Hungarian law is contrary to EU legislation, the EU rule takes precedence. As a whole, labor, environment, health, and safety laws are consistent with EU regulations. Hungary follows EU foreign trade and investment policy and all trade regulations follow EU legislation. Hungary participates in the WTO as an EU Member State.
Legal System and Judicial Independence
The Hungarian legal system is based on continental European (German-French and Roman law) traditions. Contracts are enforced by ordinary courts or – if stipulated by contract – arbitration centers. Investors in Hungary can agree with their partners to turn to Hungarian or foreign arbitration courts.
Apart from these arbitration centers, there are no specialized courts for commercial cases; ordinary courts are entitled to judge any kind of civil case. The Civil Code of 2013 applies to civil contracts.
The Hungarian judicial system includes four tiers: district courts (formerly referred to as local courts) and courts of public administration and labor; courts of justice (formerly referred to as county courts); courts of appeal; and the Curia (the Hungarian Supreme Court). Hungary also has a Constitutional Court that reviews cases involving the constitutionality of laws and court rulings.
Although the GOH has criticized court decisions on several occasions, ordinary courts still primarily operate independently and judicial procedures are generally fair and reliable. Recently, several current and former judges have raised concerns about growing GOH influence over the court system. Most business complaints about the court system pertain to the lengthy proceedings rather than the fairness of the verdicts. The GOH hopes to improve the speed and efficiency of court proceedings with the new Civil Procedure Code which entered into force in January 2018.
Regulations and law enforcement actions pertaining to investors are appealable at ordinary courts or at the Constitutional Court.
Laws and Regulations on Foreign Direct Investment
Hungarian law provides strong protections for property and investment. The Hungarian state may only expropriate property in exceptional cases where there is a public interest; any such expropriations must be carried out in a lawful way, and the GOH is obliged to make immediate and full restitution for any expropriated property, without additional stipulations or conditions.
The Foreign Investment Act of 1988 is the main law protecting investors. It grants full protection to the investments and businesses of non-Hungarian resident investors and guarantees that non-Hungarian investors will be treated in the same manner as Hungarian investors. The Act also contains a repatriation guarantee under which foreign investors are free to remit profits and investment capital to their home country in the event of partial or complete termination of their enterprise.
A substantial body of other laws also protects foreign investment, provides equal treatment under Hungarian laws, and enables profit repatriation. Institutions and procedures are in place to ensure compliance with legislation and competition rules. Most important are the Civil Code of 2013, which includes legislation on business organizations; the 1996 Competition Law; the 1995 Privatization Law; and the 1992 law on transforming state companies into economic associations. Other significant laws include the 1991 Law on Bankruptcy, the Law on Securities, and the 1994 Law establishing the Commodity Exchange Legislation. These laws do not differentiate between domestic and foreign investors, treating all investors equally. Commercial law in Hungary is well developed; however, most analysts see both a need to continue to revise the corporate legal code and to improve the judicial and administrative capacity for enforcing it.
There is no primary website or “one-stop shop” which compiles all relevant laws, rules, procedures, and reporting requirements for investors.
Competition and Anti-Trust Laws
The Hungarian Competition Authority, tasked with safeguarding the public interest, enforces the provisions of the Hungarian Competition Act. Since EU accession in 2004, EU competition law also binds Hungary. The Competition Authority is empowered to investigate suspected violations of competition law, order changes to practices, and levy fines and penalties. According to the Authority, since 2010 the number of competition cases has decreased, but they have become more complex. Out of more than 100 cases over the past year, only a few minor cases pertained to U.S.-owned companies.
Expropriation and Compensation
Hungary’s Constitution provides protection against expropriation, nationalization, and any arbitrary action by the GOH except in cases of extreme national security concern. In such cases, immediate and full compensation is to be provided to the owner. There are no known expropriation cases where the GOH has discriminated against U.S. investments, companies, or representatives. There have been some complaints from other foreign companies within the past several years that expropriations have been improperly executed, without proper remuneration. Parties involved in these cases turned to the legal system for dispute settlement. Recently, the GOH bought out certain foreign investors in the energy sector – remuneration appeared to be sufficient and there were no known complaints about the agreed purchase price.
There is no recent history of official GOH expropriations, but many critics raised concerns that the 2014 tobacco and advertising taxes were a de facto expropriation attempt because they intentionally and disproportionately targeted foreign firms with the intent to force them to seek a buy-out from a domestic firm. The GOH backtracked on the taxes after a 2015 EU injunction. The increasing reports of the use of government regulatory and tax agencies to pressure businesses to sell to government-friendly investors may also be construed as a form of de-facto expropriation.
ICSID Convention and New York Convention
Hungary is a signatory to the International Centre for the Settlement of Investment Disputes (ICSID Convention), proclaimed in Hungary by Law 27 of 1978. Hungary also is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), proclaimed in Hungary by Law 25 of 1962.
There is not specific legislation providing for enforcement other than the two domestic laws proclaiming the 1958 New York Convention and the ICSID Convention. According to Law 71 of 1994, an arbitration court decision is equally binding to that of a court ruling.
Investor-State Dispute Settlement
Hungary has no Bilateral Investment Treaty or Free Trade Agreement with the United States. In recent years, the number of investor-State arbitration claims against Hungary has increased, although very few involve U.S. investors.
Local courts recognize and enforce foreign arbitral awards against the GOH.
In 2016 Hungarian Tax Office NAV froze the bank account and working capital of a U.S. owned company, before any wrongdoing had been confirmed. After several months, NAV released the account, but by that time the company has suffered significant losses.
International Commercial Arbitration and Foreign Courts
Hungary has accepted international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. In the last few years, parties have increasingly turned to mediation as a means by which to settle disputes without engaging in lengthy court procedures.
Law 71 of 1994 on domestic arbitration procedures, is based on the UNCITRAL model law.
Investment dispute settlement clauses are usually regulated by stipulations of the investment contract. Hungarian law allows the parties to set the jurisdiction of any courts or arbitration centers. The parties can also agree to set up an ad hoc arbitration court. The law also allows investors to agree on settling investment disputes by turning to foreign arbitration centers, such as the International Centre for Settlement of Investment Disputes (ICSID), UNCITRAL’s Permanent Court of Arbitration (PCA), or the Vienna International Arbitral Centre. In Hungary, foreign parties can turn to the Hungarian Chamber of Commerce and Industry arbitration court, which has its own rules of proceedings (http://www.mkik.hu/en/magyar-kereskedelmi-es-iparkamara/rules-of-proceedings-2072) and in financial issues to the Financial and Capital Market’s arbitration court.
Local courts recognize and enforce foreign or domestic arbitral awards. Arbitral ruling may only be annulled in limited cases, and under special conditions.
Domestic courts do not favor SOEs disproportionately, investors can expect a fair trial even if SOEs are involved. Investors do not complain about non-transparent or discriminatory court procedures.
The Act on Bankruptcy Procedures, Liquidation Procedures, and Final Settlement of 1991, covers all commercial entities with the exception of banks (which have their own regulatory statutes), trusts, and state-owned enterprises, and brought Hungarian legislation in line with EU regulations. Debtors can only initiate bankruptcy proceedings provided that they have not sought bankruptcy protection within the previous three years. Within 90 days of seeking bankruptcy protection, the debtor must call a settlement conference to which all creditors are invited. Majority consent of the creditors present is required for all settlements. If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims to be paid: 1) liquidation costs; 2) secured debts; 3) claims of the individuals; 4) social security and tax obligations; 5) all other debts. Creditors may request the court to appoint a trustee to perform an independent financial examination. The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.
The debtor, the creditors, the administrator, or the Criminal Court may file liquidation procedures with the court. Once a petition is filed, regardless of who filed it, the Court notifies the debtor by sending a copy of the petition. The debtor has eight days to acknowledge insolvency. If the insolvency is acknowledged, the company declares if any respite for the settlement of debts is requested. Failure to respond results in the presumption of insolvency. Upon request, the Court may allow a maximum period of 30 days for the debtor to settle its debt.
If the Court finds the debtor insolvent it appoints a liquidator. Transparency International (TI) has raised concerns about the transparency of the liquidation process because a company may not know that a creditor is filing a liquidation petition until after the fact. TI also criticized the lack of accountability of liquidator companies and the impractical deadlines in the process. The EU has also criticized the Hungarian system as being rescue-unfriendly, since bankruptcy proceedings typically only recover 44 cents to the dollar, compared to the OECD average of 71 cents on the dollar.
Bankruptcy in itself is not criminalized, unless it is made in a fraudulent way, deliberately, and in bad faith to prevent the payment of debts.
Law 122 of 2011 obliges banks and credit institutions to establish and maintain the Central Credit Information System to assess creditworthiness of businesses and individuals to facilitate prudent lending (http://www.bisz.hu). Hungary ranks 62nd in terms of insolvency, behind Poland (22nd), the Czech Republic (25th), and Bulgaria (50th), mainly due to its inefficient bankruptcy processes.