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Country Commercial Guides
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CHAPTER VII. INVESTMENT CLIMATE
A.1. Openness to Foreign Investment
Hungary attracted $19.7 billion in foreign direct investment from 1989 to 1998. Hungary received almost one-third of all FDI invested in Central and Eastern Europe during this period. In 1998, $1.9 billion in FDI flowed into the country, a pace that is expected to continue in the medium term. With more than $7 billion invested, U.S. firms continue to be Hungary's biggest investors, and a number of U.S. companies have expanded operations in Hungary through reinvestment. The current environment in Hungary encourages foreign investment and participation in virtually all aspects of the private economy; in turn, 30,000 foreign companies have established operations. (See Appendix D; Table 1: Major Foreign Investors in Hungary)
FDI in Hungary was jump-started by the extensive cash privatization of state assets to foreign strategic investors. The most recent privatization law (June 1995) and a later amendment (February 1997) accelerated privatization while making it more transparent. The State Privatization and Holding Company (APV) manages and sells state-owned properties, with Ministry of Finance approval on issues concerning the banking sector. Continued state ownership consists of three components: small minority share holdings that carry no use for the government, and will likely be sold; golden shares in 27 important concerns, which give the government an advisory role and weak veto power on major management decisions, but no influence on day-to-day running of the firm; and majority ownership in 92 firms for which privatization decisions have not been made. Some 60 percent of these are numerous small firms in a single sector, such as regional bus companies, which will likely be sold in the next ten years.
FDI has so far been concentrated in Western Hungary and in Budapest, due to more developed infrastructure and proximity to the European Union. However, eastern Hungary offers a well-trained workforce and a long tradition in industry, agriculture, and research; there are also special incentives for doing business in Eastern Hungary (see A.5. below).
Foreign investment in Hungary typically takes one of four forms: establishing a new (greenfield) business; entering into a joint venture; obtaining equity in a state enterprise through privatization; and making a portfolio investment or participating in a capital increase. Local subsidiaries are typically incorporated as a limited liability company (known by its Hungarian abbreviation Kft). Other commonly used forms are joint stock companies (Rt.), joint ventures, business associations, general and limited partnerships, and sole proprietorships. Many foreign companies operate through representative offices, and establishing branches has become easier under the revised Branching Act effective January 1998.
Act 24 of 1988 (as Amended) on Investments of Foreigners in Hungary (the "Investment Act") governs the establishment and operations of companies with foreign participation, and grants significant rights and benefits to foreign investors. It guarantees national treatment for foreign investments and abolishes the general requirement of government approval. It also provides protection against losses resulting from nationalization, expropriation, or similar measures, and guarantees free repatriation of invested capital and dividends.
Foreign ownership up to 100 percent is permitted with the exception of designated "strategic" holdings as mentioned above, some defense-related industries, and the national airline MALÉV. Since July 1996, government approval is not needed for foreigners to invest in financial institutions and insurance (only official notification). As of 1 January 1998, foreign financial institutions may operate branches and conduct cross-border financial services, in keeping with Hungary's commitments at the time of its OECD accession in May 1996.
Foreign-owned companies that are Hungarian legal entities may acquire real estate, with the exception of agricultural land. Under the Investment Act, a company incorporated in Hungary may only acquire real estate "required for its economic activities," however, this has not prevented U.S. and other foreign entrepreneurs from engaging in property development. The Land Law (Act 4 of 1994) restricts the purchase of land by foreigners to 6,000 square meters, but allows for leases up to 10 years for up to 300 hectares.
Only Hungarian natural persons can purchase arable land at present. The liberalization of restrictions on arable land ownership was derailed in 1997 by a vocal opposition campaign. Proposed legislation would have allowed any company registered in Hungary (regardless of ownership) to buy land for agricultural use within the same county where its headquarter is domiciled, provided it had been engaged in agriculture for at least five years. Hungary must lift restrictions on foreign land ownership as part of accession to the European Union.
A.2. Conversion and Transfer Policies
The Hungarian forint (HUF) became convertible for essentially all business transactions within Hungary on 1 January 1996 and complies with IMF Article VIII and OECD convertibility requirements. As of July 1999, one USD equaled approx. HUF 240. The forint is not actively traded outside Hungary, but futures markets in Budapest allow investors to hedge exchange risk against the USD and other major currencies. The forint exchange rate is managed via a crawling peg to a basket composed of the Euro (70 percent) and the U.S. dollar (30 percent). Currently this peg is devalued at a preannounced rate of 0.5 percent per month (0.4 percent from October 1, 1999). It will be replaced by a pure Euro peg starting in 2000.
The Investment Act guarantees foreigners the right to repatriate "in the currency of the investment" any dividends, after-tax profits, royalties, fees, or other income deriving from the operation or sale of the investment. The Act also grants foreign employees of a foreign investment the right to transfer all of their after-tax salaries. There are no onerous foreign exchange requirements, and there are no reported instances of delay in repatriations.
The Hungarian Government has gradually eliminated nearly all restrictions on long-term capital account transactions. As of 1 January 1998, restrictions were eliminated on (a) non-resident purchase of collective investment securities to open-ended investment funds, (b) resident firm acceptance of foreign credits or loans in excess of USD 50 million, (c) resident firm loan payments abroad, (d) resident persons borrowing abroad, and (e) resident investments in instruments of OECD-based issuers of less than investment grade. Restrictions remain on non-resident investments in instruments with less than one-year maturity.
Foreign investors may keep export receipts and other cash contributions in convertible currencies in a foreign exchange account. The company may use these funds to import, duty-free in some circumstances, goods considered as part of the investment. Alternatively, it may import goods using foreign exchange bought in HUF.
In 1998, the Hungarian National Bank recorded capital outflow of $962 million. Outflows have increased consistently since the early 1990s reflecting the liberalization of capital controls and, in 1998, repatriation of the profits of some earlier investments.
A.3. Expropriation and Compensation
There has been no substantial expropriation of foreign-owned assets since the initial communist takeover, though claims from the initial period have arisen since 1989. Following the change of regime in 1990, the government began a compensation program for persons who lost property under the fascist and communist regimes. These Hungarians and foreign citizens were eligible to receive compensation coupons that could be sold or exchanged for privatized shares, real estate or annuities. In April 1997, Parliament passed a Jewish Compensation Program that returns property stolen from Jewish victims of Nazism and Communism. Under this law, some property, as well as monetary compensation, is designated for the Jewish Public Heritage Foundation and Jewish victims of the Holocaust.
A.4. Dispute Settlement
Hungary will accept binding international arbitration where conciliation of disputes between foreign investors and the state is unsuccessful. Hungary is a member of the International Center for the Settlement of Investment Disputes (ICSID), also known as the Washington Convention. It is also a signatory of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.
A.5. Performance Requirements/Incentives
Hungary does not impose performance requirements as a condition for establishing, maintaining, or expanding an investment. There are no government-imposed conditions on investment, whether location in specific geographical areas, local content or ownership, substitution for imports, export requirements or targets, employment of host country nationals, technology transfer, or source of financing.
In 1994, Hungary replaced its blanket tax incentives for foreign investment with incentives open to all large investors, based on export promotion, reinvestment of profits, and job creation (companies that qualified for tax abatements prior to 1994 retained their benefits under court rulings). Tax incentives reward investment to underdeveloped regions, primarily in eastern areas of the country. Other incentives include interest-free loans (repaid over five years) and/or partial reimbursement for high technology imports, research and development, quality assurance (ISO and QS certifications), and trade promotion costs. Incentives are subject to change, and some are limited by fiscal allocations.
The Hungarian Investment and Trade Development Agency (ITD) can provide information and other support. In June 1999, the ITD and the U.S. Department of Commerce signed an agreement to improve support for U.S. trade and investment.
In the fall of 1998, U.S. Ambassador to Hungary Peter Tufo launched the "U.S.-Eastern Hungary Partnership." Under this pilot program, the Embassy has opened commercial offices in the cities of Debrecen, Miskolc, and Nyíregyháza. These offices, administered by the U.S. Department of Commerce, can help organize contacts for U.S. companies and locate information on related issues.
A.6. Right to Private Ownership and Establishment
The Hungarian constitution guarantees the right to private ownership and provides other related guarantees. Foreign and domestic private entities may establish and own business enterprises and engage in all forms of remunerative activity, except those prohibited by law. Hungarian law guarantees the right of private entities to freely establish, acquire, and dispose of interests in business enterprises.
Private enterprises enjoy competitive equality in markets, business licenses, supplies, and credit access. In 1998, about 80 percent of Hungary's GDP was reportedly produced by the private sector, a remarkable turnaround from 1990 when the private sector accounted for less than a quarter of economic output.
Registering a company in Hungary has become easier with the new Companies Act that came into force in June 1998. It compels registry courts to process applications to register limited liability (Kft.) and joint-stock (Rt.) companies within 30 days (60 days for unincorporated business entities). After this period, if the registry court does not act, a new company is automatically registered. The Act eliminates the need for separate registrations at the tax and social security authorities; a single registration will suffice. The Act also increased minimum capital requirements for limited-liability companies (from HUF 1m to HUF 3m) and joint-stock companies (from HUF 10m to HUF 20m), the first such increase since 1989.
Strong bankruptcy laws help protect investors in their dealings with Hungarian firms. The Act on Bankruptcy Procedures, Liquidation Procedures and Final Settlement, as amended in 1993, encompasses all commercial entities except banks (which have their own regulatory statutes), trusts, and state-owned enterprises. Bankruptcy proceedings can be initiated only by the debtor and only if the debtor has not sought protection under bankruptcy in the past 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 settlement plans. If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims: 1) liquidation costs; 2) secured debts; 3) claims of individuals; 4) social security and tax obligations; and 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.
A.7. Protection of Property Rights
The Hungarian constitution and legal system provides strong protection for owners of real property, and protection of intellectual property has been strengthened, but needs further improvement. The United States and Hungary signed a Comprehensive Bilateral Intellectual Property Rights Agreement in 1993. The agreement addresses copyright, trademarks and patent protection. The U.S. government tracks the Hungarian government's enforcement on a regular basis to ensure compliance with the agreement. In April 1999, Hungary was cited on the "Watch List" of the Special 301 review, citing U.S. industry concerns over copyright infringement and other regulatory issues. Hungary must come into full compliance with the WTO TRIPS agreement no later than January 1, 2000. This includes protection for pre-1974 sound recordings--which a new Copyright Law is expected to provide. Hungary must also adopt adequate protection for confidential data that companies submit to regulatory authorities.
Industrial property and copyright legislation in effect since July 1, 1994 extends protection for products (previously, Hungary issued only process protection), defines who controls the rights of works, extends and unifies the terms of protection, provides the legal means to prevent proprietary information from being disclosed or acquired without the consent of the trade secret owner by other than "honest commercial practices," and ensures that enforcement procedures are available under civil, criminal or administrative law to permit effective action against IPR infringement.
Hungary has copyright laws that largely conform to international standards. The 1993 IPR agreement recognizes an exclusive right to authorize the public communication of work, including to perform, project, exhibit, broadcast, transmit, retransmit or display; it also requires that protected rights be freely and separately exploitable and conferrable (contract rights), and recognizes an exclusive right to authorize the first public distribution including importation for protected works.
Patent protection in Hungary covers the use, sale, offering for sale, and import of a patented product or products made using a patented process. The definition of infringement has been extended to "supplying the means" so that a person who sells or offers to sell the means of producing a patented product may be sued if that person is proven to have known that the means can be used for infringement.
The application process for a patent can take from six months to a year. Under a revised Patent Act effective 1 January 1996, patentable inventions are those which are novel and capable of industrial application. The term of the patent is 20 years from the filing date. A six-month grace period was adopted and disclosure of an invention in breach of confidence is disregarded when considering the novelty of an invention. The Act also includes the principle of exhaustion of rights, a provision concerning compulsory licensing of patents, and a number of procedural modifications. The law conforms to the guidelines of the European Patent Convention. Act 39 of 1991 protects the topography (layout design) of semiconductor chips.
A.8. Transparency of the Regulatory System
Although much Hungarian regulation of business, including competition laws, already conforms to EU regulations, a lack of regulatory and legal transparency is a common complaint of U.S. companies doing business in Hungary.
Some employers complain that social security and unemployment contributions are too high and that tax compliance is costly. Hungary continues to have high individual income taxes, but the highest bracket was reduced from 48 percent to 43 percent in January 1997. However, corporate tax is low (18 percent). Hungary and the United States have a double taxation treaty that reduces some income and corporate tax obligations for U.S. taxpayers.
Companies also pay a general turnover tax (VAT) of up to 25 percent on many business expenses, but can only reclaim VAT paid to the extent that they offer a VAT-taxable product or service within Hungary, a problem for foreign companies in some sectors.
Foreign companies operating in regulated-price sectors, particularly energy and pharmaceuticals, have experienced difficulty in realizing profits, due primarily to administrative delays in adjusting prices to reflect inflation, the devaluation of the forint, and (in the case of energy producers) contractual stipulations of cost-plus-eight percent return.
A.9. Efficient Capital Markets and Portfolio Investment
Hungary attracted $1.983 billion of net portfolio investment in 1998.
Hungary's banking system has gone through a remarkable transformation in recent years from money-losing state-owned monoliths to private enterprises and a strong presence of foreign financial institutions. More than two-thirds of Hungary's banks are fully or partially foreign-owned.
Hungary implemented a major bank reform in 1987, creating a two-tiered system by separating commercial banking from the National Bank of Hungary (MNB). However, the state-owned banking sector remained highly concentrated. From the early 1990s to 1995, the Hungarian government gave over $4 billion in subsidies to state-owned banks to cover bad loans and prepare them for privatization. The privatization of Hungarian banks began in 1994 after some delay. In 1995 the government forced the merger or liquidation of small loss-making banks, and began to sell the larger banks. The only ongoing state intervention in the banking sector concerns Postabank, whose troubled portfolio required a government takeover and bailout in 1998.
The five largest banks in Hungary in 1998, by total assets, were:
1. OTP - National Savings and Commercial Bank (HUF 1,635 billion)
2. MKB - Hungarian Foreign Commercial Bank (HUF 604 billion)
3. K and H - Commercial and Credit Bank (HUF 516 billion)
4. CIB Bank (HUF 388 billion)
5. Postabank (HUF 377 billion)Capital has become more readily available for businesses, due in part to greater foreign presence, falling interest rates and greater competition. However, borrowing rates remain prohibitive for many small and medium-size enterprises (SME's), with lending rates as high as 11 percent over current (decelerating) rates of inflation. Foreigners have greater access to capital outside the country, and at better rates than those available in Hungary. The number of foreign banking subsidiaries has grown and they have won many of the most attractive clients. Foreign investors have equal access to credit on the local market, the only exceptions being special governmental credit concessions, such as small business loans, and international financial organizations which may lend only to Hungarian businesses.
Hungary has made great strides in modernizing its financial sector. In January 1997, two new important banking laws came into effect. The Law on State Money and Capital Market Supervision Act (1996/64) merged the State Securities and Stock Exchange Commission and the State Banking Supervision into the Bank Supervisory Board. This new board exercises control of the operation of general and specialized credit institutions, financial enterprises, securities companies, investment funds and the stock and commodity exchanges.
The Law on Credit Institutions and Financial Businesses Act (1996/62) tightened rules on securing safe operation of the financial sector and harmonizes Hungarian laws with EU standards. It also allows for the introduction of universal banking.
Foreigners do not need a government license to establish bank subsidiaries or to establish more than a 10 percent stake in existing banks. Foreign or Hungarian credit institutions, insurance institutions, and investment companies may own up to 100 percent of a financial institution in Hungary. However, the upper limit for a single owner (foreign or Hungarian) not falling into one of the above categories is 15 percent, stricter than EU norms. Since January 1998, foreign banks may establish bank branches and offer cross border financial services.
Foreign-owned subsidiaries often have a competitive edge over Hungarian banks in customer service, although Hungarian banks have recently been able to develop and to promote retail instruments to service their clients. Hungary's retail sector is still largely a cash-based economy and checks are not generally used, although ATM machines have become widespread and credit card use is becoming more common, particularly in Budapest. Many institutions already conduct network banking through the Giro credit transfer system.
The Budapest Stock Exchange (BSE), the first to reopen in the former socialist countries of Central and Eastern Europe, was formally reestablished in 1990. The Offering of Securities, Investment Services and the Securities Exchange Act (1996/61) and the Securities and the Stock Exchange Act (1990/6) govern public issuing and trading of bonds, shares and other securities. The BSE has 55 members, which are licensed-broker or broker-dealer companies, including several U.S.-based firms. As of May 31, 1999, the total BSE market capitalization was $25.8 billion, having virtually doubled in each of the past two years.
Foreign investors can buy all forint-dominated government bonds with maturities of 12 months or longer, either directly from the government or on the secondary market. Before issuing a bond, the National Bank decides whether to allow foreigners to buy bonds of less than 12-month duration. This law does not apply to treasury bills issued with maturities of one, three, six and twelve months, which foreigners can buy without restriction.
A.10. Political Violence
Violence is not part of the traditional political landscape in Hungary. The transition from communism to democracy was negotiated and peaceful, and three peaceful changes of government via the ballot box have since occurred. There is little cause to expect insurrections, political terrorism, or interstate war. There has been no violence directed at foreign-owned companies.
Since 1994, there have been several dozen bombings centered in Budapest, including attacks directed at political parties. However, casualties and damage have been limited, and attacks have tapered off in recent months.
A.11. Corruption
Corruption is not pervasive or institutional on the government level, although some foreign companies have complained about incidents of corruption or illicit influence in government administration. Taking bribes is a criminal offense, and media scrutiny is high.
The Hungarian Parliament passed conflict of interest legislation in early 1997 that restricted members of Parliament from serving as executives of state-owned companies. Hungary signed the OECD Anti-Bribery Convention in December 1997, and incorporated its provision into the Penal code with effect as of May 1, 1999.
B. Bilateral Investment Agreements
Hungary and the United States do not have a Bilateral Investment Treaty, nor are the two countries currently in negotiations. As members of OECD and WTO, both countries have been active participants in the negotiations for a multilateral agreement on investment.
Hungary has bilateral investment agreements with the following countries: Albania, Argentina, Australia, Austria, Belgium, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Great Britain, Greece, Holland, Indonesia, Israel, Kazakhstan, Kuwait, Luxembourg, Malaysia, Moldova, Norway, Paraguay, Poland, Portugal, Romania, Russia, Singapore Slovakia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, the United States, Uruguay and Vietnam.
Hungary has tax agreements with the United States and with the following other countries: Albania, Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Finland, the Former Yugoslavia, France, Germany, Great Britain, Greece, Holland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kuwait, Luxembourg, Malaysia, Malta, Moldova, Mongolia, Norway, Italy, Pakistan, Poland, Romania, Russia, Singapore, Slovakia, South Korea, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, Tunisia, Ukraine, Uruguay and Vietnam.
C. OPIC and Other Investment Insurance Programs
The U.S. Overseas Private Investment Corporation (OPIC) has been operational in Hungary since October 1989. OPIC offers U.S. investors insurance against political risk, expropriation of assets, damages due to political violence, and currency inconvertibility. It can also provide specialized insurance coverage for certain contracting, exporting, licensing, and leasing transactions undertaken by U.S. investors in Hungary. Political risk insurance is also available for foreign-owned companies in Hungary from several private carriers in the United States and Western Europe, and from the Multilateral Investment Guarantee Agency (MIGA), a World Bank affiliate. The National Bank of Hungary, for a fee, will guarantee the Investment Act's commitments regarding expropriation and profit repatriation to a foreign-owned company.
D. Labor
Hungary's civilian labor force (4.2 million persons) is overall highly educated and skilled. The literacy rate in Hungary tops 98 percent. About two-thirds of the work force has completed some form of secondary, technical, or vocational education. Hungary is particularly strong in engineering, medicine, economics, and the sciences. Many foreign investors have praised the productivity, motivation and adaptability of Hungarian workers. More and more young people are attending U.S. and European-affiliated business schools in Hungary. Foreign language skills are becoming more common, especially among younger Hungarians, who mainly learn English and/or German as second languages.
The Hungarian labor code guarantees employees the right to form or join trade unions and gives unions the right to operate inside a company. Unions are entitled to conclude collective bargain agreements. The labor code limits the work day and overtime (to 12 hours); guarantees maternity leave, at least 20 days of annual leave, at least 30 days notice, and severance pay for those employed at least three years. The law also forbids discrimination based on gender, age, or nationality. The minimum employment age is 16 years, with the exception of apprenticeships, which may begin at the age of 15. Hungary adheres to ILO conventions protecting worker rights.
E. Foreign Trade Zones/Free Ports
Foreign investors may set up operations or acquire interest in companies within a duty-free foreign trade zone. The zone is considered foreign territory for customs, foreign exchange, and foreign trade regulation purposes. While companies within the zone are legally considered to be foreign companies, they are required to keep their accounts and conduct most of their transactions in foreign currency and establish a forint account at a local bank to meet expenses (such as taxes and wages) that the Act specifies must be paid in local currency. However, these zones may be phased out as part of Hungary's accession to the European Union.
Under the Pan-European Cumulation System and Pan-European Free Trade Zone, effective in Hungary since 1 July 1997, customs duty paid on goods imported from outside the zone and subsequently exported under preferential trade agreements is no longer refunded. However, content from any member state can accumulate to qualify for preferential treatment. Hungarian authorities have sometimes shown flexibility in addressing the customs and tariff issues of some investors.
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[end of document] Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.
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