According to a recent survey of the Ministry of National Development and Economy and the Hungarian National Bank, the FDI stock in Hungary is estimated to be more than €60 billion ($81.6 billion), the highest in the Central and Eastern European region. Around 75% of all FDI in Hungary comes from the European Union and 25% originates from Germany.
Before 1989, foreign direct investment was limited, although at higher levels than in most other Eastern-bloc countries. Since 1989 and the political changes and reorientation which then occurred, the position has changed dramatically, reflected in the fact that according to a recent survey on globalisation, Hungary ranked in the top 10 for 'connecting to the rest of the world', alongside countries such as Finland and the Netherlands.
Since 2004, Hungary has been a member of the EU. Government changes in 2010 have heralded certain developments, with clearly expressed aims to reverse some of the favourable treatment given to multinationals during the privatisation process in the 1990s and for greenfield investment, and to favour local SMEs. However the importance of foreign direct investment is not denied and the new government has been explicit in its attempts to encourage investment from, for example, China. Significant recent new or additional investments in the country have been made by companies including Mercedes Benz, Lego, Wanhua Industries, Audi, General Motors and Huawei.
Restrictions on investment
Generally, there are no direct restrictions on foreign investment; on the contrary, the Hungarian government is willing to offer favourable terms (such as tax incentives) for key investors.
Notwithstanding the above, there are certain statutory prohibitions and restrictions regulated by special administrative authorisation for companies in many sectors, notably financial services and insurance, telecommunications, media, home security and energy-related industries. Certain sector specific rules on acquisition can differ from the general rules or impose stricter provisions than those presented here. For example, the acquisition of stakes in companies in certain sectors requires either notification to or, at certain levels, approval of, the relevant regulator.
Companies and persons from outside the EU may acquire ownership of real estate only with prior permission from local municipalities. EU resident/domiciled companies/persons may, without restriction, acquire ownership of real estate for the purpose of establishing a primary domicile. For many years there has been a prohibition on the acquisition of agricultural and forestry land by legal persons (companies, whether Hungarian or foreign) and foreign individuals. Leasing of land is not so restricted. There was a period in the 1990s when companies could buy agricultural land, and companies which acquired land at that time may be acquired without restriction.
In addition to the above, the common European regulatory restrictions also apply (competition and merger-control restrictions, for example).
Licensing process
Licensing processes are always dependent on the actual transaction and circumstances. Although it is sometime the subject of complaint, the extent and nature of licensing requirements is not particularly onerous and the processes work reasonably fairly and efficiently. As in many countries, a well placed and experienced local agent can facilitate the licensing process. Generally, as far as licensing is concerned, transactions effected as share purchases present fewer legal difficulties than asset acquisitions.
Relevant local laws
The basic rules of employment are regulated by Hungary's Labour Code (Act No 22 of 1992), which at present implements the majority of EU employment law directives. Collective agreements and employment contracts may only regulate employee's rights and obligations as far as these are not dealt with in the Labour Code or if they are more favourable to the employees.
There is no foreign exchange control restricting repatriation of profit. Repatriation can take the form of distributing dividends or capital reduction, provided the appropriate corporate law and accounting rules are respected (the principal rule, in general, is that equity cannot fall below the registered capital). Inter-company dividends and liquidation proceeds are exempt from any withholding tax. In case of private individual investors, 16% withholding tax applies, subject to the provisions of the respective tax treaty.
There is no foreign exchange control preventing subsidiaries from providing loans to parent or other group companies and vice-versa. Interest on intra-group loans shall be subject to transfer pricing rules. The debt-equity ratio allowed for tax purposes is one to three.
Hungary has implemented all of the relevant EU competition law directives, and Act No 57 of 1996 on Prohibition of Unfair Trading Practices and Unfair Competition regulates the national dimension of antitrust law. In addition, the Hungarian Competition Authority assumes the role of the local market watchdog.
Hungary is a party to many international forums, organisations, conventions and international agreements aimed at fighting corruption.
The main legal background of the rules concerning anti-corruption is based on the Hungarian Criminal Code, but some other statutory acts also contain specific anti-corruption provisions. Corruption offences are designated as Bribery. A corruption offence may lead to other negative legal consequences both in the public and private sector. For example, according to the Public Procurement Act it may be grounds of disqualifications from the public procurement procedures. A corruption offence may also lead to a civil-damage claim raised by the affected person or entity.
Dispute resolution and enforcement
Litigious proceedings and rulings can be lengthy and the legal system is sometimes characterised as slow and overburdened; therefore common market practice is to include a dispute resolution clause into the agreement. The court of arbitration attached to the Hungarian Chamber of Commerce is frequently used and other tribunals outside Hungary can also be used.
The government is not immune from civil law proceedings.
In case an agreement is breached. the affected party may initiate a court proceeding against the breaching party. If the court decided with a final judgment in favour of the applicant, it may seek for the judicial execution of the court's judgment.
In Hungary judicial executions are performed by court bailiffs. The court bailiffs are assigned to the local courts and are contacted directly by the court of first instance upon such request of the claimant (the claimant cannot contact the bailiff directly). The court bailiffs are entitled by statutory provisions to become acquainted with and process the personal data of the debtors and, accordingly, to receive information from public databases with regards to their bank accounts, place of employment, personal incomes and assets, and so on.