Transparency of the Regulatory System
Generally, legal, regulatory, and accounting systems are consistent with international and EU standards. However, some executives in Hungarian subsidiaries of U.S. companies complain about a lack of transparency in the GOH’s policy-making process and an uneven playing field in public tendering. In recent years, there has been an uptick in the number of companies, including major U.S. multinational franchises, reporting pressure to sell their businesses to government-affiliated investors. Those that refuse to sell report an increase in tax audits, fines, and spurious regulatory challenges and court cases. SMEs increasingly report a desire to either remain small (and therefore “under the radar” of these government-friendly investors) or relocate their businesses outside of Hungary.
For foreign investors, the most relevant regulations stem from EU directives and the laws passed by Parliament to implement these. Laws in Parliament can be found on Parliament’s website (http://www.parlament.hu/parl_en.htm ). Legislation, once passed, is published in a legal gazette and available online at www.magyarkozlony.hu . The GOH can issue decrees, which also have national scope, but they cannot be contrary to laws enacted by Parliament. Local municipalities can create local decrees, limited to the local jurisdiction.
Hungarian financial reporting standards are in line with the International Accounting Standards and the EU Fourth and Seventh Directives. The Accounting law requires all businesses to prepare consolidated financial statements on an annual basis in accordance with international financial standards.
The GOH rarely invites interested parties to comment on draft legislation. Civil organizations have complained about a loophole in the current law that allows individual MPs to submit legislation and amendments without public consultation. The average deadline for submitting public comment is often very short, usually less than one week. The Act on Legislation and the Law Soliciting Public Opinion, both passed by Parliament in 2010, govern the public consultation process. The laws require the GOH to publish draft laws on its webpage and to give adequate time for all interested parties to give an opinion on the draft. However, implementation is not uniform and the GOH often fails to solicit public comments on proposed legislation.
The legislation process – including key regulatory actions – are published on Parliament’s webpage (www.parlament.hu ). Explanations attached to draft bills include a short summary on the aim of the legislation, but public comments received by regulators are only occasionally made public.
Regulatory enforcement mechanisms include the county and district level government offices whose decisions can be challenged at county level labor and administrative courts. The court system generally provides efficient oversight over the GOH’s administrative processes.
In December 2018 the Parliament passed a new law on establishing a new parallel administrative court system with jurisdiction over cases relating to “public administration,” including tax, construction licensing, public procurement, competition cases, and politically sensitive matters like electoral law, freedom of information requests, and the right to protest. The new court system will be under the control of the Minister of Justice and will start operating in January 2020. Critics – including NGOs and opposition parties – claim the new system will further undermine the rule of law in Hungary and eliminate constitutional boundaries between the executive and judicial branches of government, paving the way for political interference. In its opinion issued in March 2019, the Council of Europe’s Venice Commission (VC) found that the planned court system lacks effective checks and balances and said the new regime grants the Minister of Justice excessively wide powers to appoint and promote judges. The VC also determined that the head of the new administrative courts also has unjustifiably wide powers. The GOH passed amendments it claimed addressed, the VC’s concerns. Watchdog NGOs, however, did not believe the amendments addressed the VC’s most significant criticisms.
The new administrative courts’ jurisdiction will extend to several types of cases significant for investors. Although the creation of the administrative court is not expected to have direct economic impact, the independence of the judiciary is crucial to maintaining a positive business climate.
The GOH does not review regulations on the basis of scientific or data driven assessments, but some NGOs and academics do. A 2017 study by Corruption Research Center Budapest (CRCB) found that in the 2010-2013 period the annual average number of new laws passed by Parliament increased, while the average time spent debating new laws in Parliament decreased significantly. The analysis points out that the accelerating lawmaking process in Hungary in the 2010-2013 period had negative effects on the stability of the legal environment and the overall quality of legislation. The Parliament passed less new legislation in the past few years.
Hungary’s budget was widely accessible to the general public, including online through the Parliament and Finance Ministry websites and the Legal Gazette. The government made budget documents, including the executive budget proposal, the enacted budget, and the end-of-year report publicly available within a reasonable period of time. Information on debt obligations was publicly available, including online through the Hungarian Central Bank and Hungarian State Debt Manager’s websites.
International Regulatory Considerations
As an EU Member State, all EU regulations are directly applicable in Hungary, even without further domestic measures. If a Hungarian law is contrary to EU legislation, the EU rule takes precedence. As a whole, labor, environment, health, and safety laws are consistent with EU regulations. Hungary follows EU foreign trade and investment policy and all trade regulations follow EU legislation. Hungary participates in the WTO as an EU Member State.
Legal System and Judicial Independence
The Hungarian legal system is based on continental European (German-French and Roman law) traditions. Contracts are enforced by ordinary courts or – if stipulated by contract – arbitration centers. Investors in Hungary can agree with their partners to turn to Hungarian or foreign arbitration courts.
Apart from these arbitration centers, there are no specialized courts for commercial cases; ordinary courts are entitled to judge any kind of civil case. The Civil Code of 2013 applies to civil contracts.
The Hungarian judicial system includes four tiers: district courts (formerly referred to as local courts) and courts of public administration and labor; courts of justice (formerly referred to as county courts); courts of appeal; and the Curia (the Hungarian Supreme Court). Hungary also has a Constitutional Court that reviews cases involving the constitutionality of laws and court rulings. From 2020, per legislation passed in December 2018, a new administrative court system will rule on administrative cases (see above). As a result, it is expected that labor courts and judges will be merged into district courts.
Although the GOH has criticized court decisions on several occasions, ordinary courts are considered to generally operate independently under largely fair and reliable judicial procedures. Recently, an increasing number of current and former judges have raised concerns about growing GOH influence over the court system and intimidation of judges by court administration. Most business complaints about the court system pertain to the lengthy proceedings rather than the fairness of the verdicts. The GOH hopes to improve the speed and efficiency of court proceedings with the new Civil Procedure Code, which entered into force in January 2018.
Regulations and law enforcement actions pertaining to investors are appealable at ordinary courts or at the Constitutional Court.
Laws and Regulations on Foreign Direct Investment
Hungarian law provides strong protections for property and investment. The Hungarian state may only expropriate property in exceptional cases where there is a public interest; any such expropriations must be carried out in a lawful way, and the GOH is obliged to make immediate and full restitution for any expropriated property, without additional stipulations or conditions
The GOH passed a law on investment screening in 2018 that requires foreign investors seeking to acquire more than a 25 percent stake in a Hungarian company in certain “sensitive sectors” (defense, intelligence services, certain financial services, electric energy, gas, water utility, and electronic information systems for governments) to seek approval from the Interior Ministry. The Ministry has up to 90 days to issue an opinion and can only deny the investment if it determines that the investment is designed to conceal an activity other than normal economic activity. As of publication, we are not aware of any instances in which the Ministry has reviewed an investment.
There is no primary website or “one-stop shop” which compiles all relevant laws, rules, procedures, and reporting requirements for investors. HIPA, the Hungarian Investment Promotion Agency, however, facilitates establishment of businesses and provides guidance on relevant legislation.
Competition and Anti-Trust Laws
The Hungarian Competition Authority, tasked with safeguarding the public interest, enforces the provisions of the Hungarian Competition Act. Since EU accession in 2004, EU competition law also binds Hungary. The Competition Authority is empowered to investigate suspected violations of competition law, order changes to practices, and levy fines and penalties. According to the Authority, since 2010 the number of competition cases has decreased, but they have become more complex. Out of more than 100 cases over the past year, only a few minor cases pertained to U.S.-owned companies. Hungarian law does not consider conflict of interest to be a criminal offense. Citing evidence of conflict of interest and irregularities the European Anti-Fraud Office OLAF recommended opening a criminal investigation in a high profile USD 50 million EU-funded public procurement project, but Hungarian authorities declined to prosecute the case.
Expropriation and Compensation
Hungary’s Constitution provides protection against expropriation, nationalization, and any arbitrary action by the GOH except in cases of extreme national security concern. In such cases, immediate and full compensation is to be provided to the owner. There are no known expropriation cases where the GOH has discriminated against U.S. investments, companies, or representatives. There have been some complaints from other foreign companies within the past several years that expropriations have been improperly executed, without proper remuneration. Parties involved in these cases turned to the legal system for dispute settlement.
There is no recent history of official GOH expropriations, but many critics raised concerns that the 2014 tobacco and advertising taxes were a de facto expropriation attempt because they intentionally and disproportionately targeted foreign firms with the intent to force them to seek a buy-out from a domestic firm. The GOH backtracked on the taxes after a 2015 EU injunction. The increasing reports of the use of government regulatory and tax agencies to pressure businesses to sell to government-friendly investors may also be construed as a form of de-facto expropriation.
ICSID Convention and New York Convention
Hungary is a signatory to the International Centre for the Settlement of Investment Disputes (ICSID Convention), proclaimed in Hungary by Law 27 of 1978. Hungary also is a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention), proclaimed in Hungary by Law 25 of 1962.
There is not specific legislation providing for enforcement other than the two domestic laws proclaiming the 1958 New York Convention and the ICSID Convention. According to Law 71 of 1994, an arbitration court decision is equally binding to that of a court ruling.
Investor-State Dispute Settlement
Hungary is signatory to the 1965 Washington Convention establishing the International Centre for Settlement of Investment Disputes (ICSID) and to UN’s 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Under the New York Convention, Hungary recognizes and enforces rulings of the International Chamber of Commerce’s International Court of Arbitration.
Hungary has no Bilateral Investment Treaty or Free Trade Agreement with the United States. In recent years, the number of investor-State arbitration claims against Hungary has increased, although very few involve U.S. investors.
Over the past 10 years U.S. investors have been involved only in a few investment disputes, including a recent major dispute with Hungary’s state owned energy company MVM, where the U.S. claimant stepped back after it was unable to reclaim a USD 17 million compensation. Since 2010, ten cases have been launched against Hungary at the ICSID, but none of them involved U.S. investors.
Local courts recognize and enforce foreign arbitral awards against the GOH.
In 2016 Hungarian Tax Office NAV froze the bank account and working capital of a U.S. owned company, before any wrongdoing had been confirmed. After several months, NAV released the account, but by that time the company has suffered significant losses.
International Commercial Arbitration and Foreign Courts
Hungary has accepted international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. In the last few years, parties have increasingly turned to mediation as a means by which to settle disputes without engaging in lengthy court procedures. Law 71 of 1994 on domestic arbitration procedures is based on the UNCITRAL model law.
Investment dispute settlement clauses are usually regulated by stipulations of the investment contract. Hungarian law allows the parties to set the jurisdiction of any courts or arbitration centers. The parties can also agree to set up an ad hoc arbitration court. The law also allows investors to agree on settling investment disputes by turning to foreign arbitration centers, such as the International Centre for Settlement of Investment Disputes (ICSID), UNCITRAL’s Permanent Court of Arbitration (PCA), or the Vienna International Arbitral Centre. In Hungary, foreign parties can turn to the Hungarian Chamber of Commerce and Industry arbitration court, which has its own rules of proceedings (https://mkik.hu/en/court-of-arbitration ) and in financial issues to the Financial and Capital Market’s arbitration court.
Local courts recognize and enforce foreign or domestic arbitral awards. Arbitral ruling may only be annulled in limited cases, and under special conditions.
Domestic courts do not favor SOEs disproportionately. Investors can expect a fair trial even if SOEs are involved. Investors do not complain about non-transparent or discriminatory court procedures.
The Act on Bankruptcy Procedures, Liquidation Procedures, and Final Settlement of 1991, covers all commercial entities with the exception of banks (which have their own regulatory statutes), trusts, and state-owned enterprises, and brought Hungarian legislation in line with EU regulations. Debtors can only initiate bankruptcy proceedings provided that they have not sought bankruptcy protection within the previous three years. Within 90 days of seeking bankruptcy protection, the debtor must call a settlement conference to which all creditors are invited. Majority consent of the creditors present is required for all settlements. If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims to be paid: 1) liquidation costs; 2) secured debts; 3) claims of the individuals; 4) social security and tax obligations; 5) all other debts. Creditors may request the court to appoint a trustee to perform an independent financial examination. The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.
The debtor, the creditors, the administrator, or the Criminal Court may file liquidation procedures with the court. Once a petition is filed, regardless of who filed it, the Court notifies the debtor by sending a copy of the petition. The debtor has eight days to acknowledge insolvency. If the insolvency is acknowledged, the company declares if any respite for the settlement of debts is requested. Failure to respond results in the presumption of insolvency. Upon request, the Court may allow a maximum period of 30 days for the debtor to settle its debt.
If the Court finds the debtor insolvent, it appoints a liquidator. Transparency International (TI) has raised concerns about the transparency of the liquidation process because a company may not know that a creditor is filing a liquidation petition until after the fact. TI also criticized the lack of accountability of liquidator companies and the impractical deadlines in the process. The EU has also criticized the Hungarian system as being rescue-unfriendly, since bankruptcy proceedings typically only recover 44 cents to the dollar, compared to the OECD average of 71 cents on the dollar.
Bankruptcy in itself is not criminalized, unless it is made in a fraudulent way, deliberately, and in bad faith to prevent the payment of debts.
Law 122 of 2011 obliges banks and credit institutions to establish and maintain the Central Credit Information System to assess creditworthiness of businesses and individuals to facilitate prudent lending (http://www.bisz.hu ).