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Hungary is an independent, democratic, constitutional state located in Central Europe. The country has been in continuous existence since 895, with the foundation of the Principality of Hungary. Hungary is an OECD high-income economy and ranks highly on the Human Development Index.

Hungary joined the European Union (EU) in 2004 and the Schengen Area in 2007. Due to its strategic location, the country is an important industrial transit hub between Western and Eastern Europe.

Hungary is a member of numerous international organizations, including the United Nations, NATO, WTO, World Bank, OECD, and the Asian Infrastructure Investment Bank.

The main strengths of Hungary are its low employment costs, good IT and communication infrastructure, low legal risk and the profile of its capital city Budapest, which plays a crucial role in the Hungarian economy. It is by far the largest city and is the political, administrative, financial and cultural hub of the country.

The Hungarian legal system is based on the German-Austrian legal system and has a statue-based civil and criminal law system. The main sources of law are: EU law, international law, the constitution, acts issued by the parliament, governmental and ministerial decrees.

Hungary recognizes and is bound by the rules and regulations of the law of the European Union as well as international law and harmonizes the internal laws and statutes of the country.

Hungary is a signatory to a number of international conventions which provide for investment protection, most notably ICSID and MIGA.

Hungary is also a signatory of numerous bilateral asset protection treaties (APT), further enhancing the favorable investment climate.

TAX

The Hungarian taxation system provides a secure legal framework for the conduct of business. Currently, the following significant taxes and levies are imposed in Hungary: corporate income tax, value added tax, personal income tax.

CORPORATE INCOME TAX

If a company is tax resident in Hungary, it is taxed on its worldwide income. The taxable income of both resident and non-resident corporate taxpayers is based on pre-tax profits, calculated in the profit-and-loss statement prepared in accordance with the accounting rules, with a number of corrections for the differences in deductive and non-deductible items recognized by accounting and tax law.

The corporate income tax rate is 9% flat rate.

In Hungary, there is no withholding tax on dividend, royalties and interest payments made between corporate entities from a Hungarian source.

Dividends paid by corporate entities are not subject to withholding tax, irrespective of the residence of the corporate recipient. Except for dividends received from controlled foreign companies, dividends received are tax base decreasing items. Due to the company participation exemption regime, the capital gain deriving from registered company participation is not subject to tax after a one year holding period.

In addition, Hungary has a vast network of bilateral tax treaties on double taxation avoidance, which may decrease the effective tax rate to zero.

VALUE ADDED TAX (VAT)

The general rate of VAT is 27% applied to most products and services. The VAT rate of 18% is applied to basic food products and the provisions of accommodation, while the VAT rate of 5% is applied to pharmaceuticals and certain medical equipment, aids for the blind, books and newspapers.

PERSONAL INCOME TAX

The tax payable on personal income is 15 per cent of the tax base.

For Hungarian tax resident private individuals, tax on all income has to be paid. For non-Hungarian tax resident individuals, tax has to be paid only on the income received from Hungary. In respect of the income of Hungarian resident private individuals, the tax paid in a foreign country on such income is to be deducted from the tax payable in Hungary.

In addition, Hungary has a vast network of bilateral tax treaties on double taxation avoidance, which may decrease the effective tax rate to zero.

QUICK FACTS

• Population:

  9.7 million

• Government Type:

  Democratic Parliamentary Republic

• Legal System:

  Statue-based Civil and Criminal Law System

• Court System:

  Curia of Hungary (Sub-divided into Administrative, Civil, and Criminal Departments)

  Regional Courts of Appeal

  Regional Courts

  District Courts

• Economy:

  • GDP—$157.9 billion
  • Currency—forint (HUF)

  THE HUNGARIAN LEGAL SYSTEM

  Hungary is an independent, democratic constitutional state. According to the revised Constitution that came into force on 1^st January 2012, Hungary is an independent and democratic State governed by the rule of law.

  The Hungarian legal system is based on the German-Austrian legal system, and has a statue-based civil and criminal law system. The main sources of law are:

  • EU law
  • the constitution
  • acts issued by the parliament
  • governmental and ministerial decrees

  The legal system of the Republic of Hungary accepts the universally recognized rules and regulations of international law, and shall harmonize the internal laws and statutes of the country with the obligations assumed under international law. Hungary is a signatory to a number of international conventions and bilateral treaties which provide for the recognition and enforcement of awards from other states.

  The Constitution

  The basic and supreme law of the Republic of Hungary is the Constitution. The Government bears the obligation of submitting to Parliament the Bills necessary for the enactment of the Constitution.

  The Hungarian Constitution regulates three classical constitutional areas: state administration (national government, local government, and organizations for the protection of rights), the listing of the fundamental rights of citizens and a Preamble.

  The Parliament

  The Hungarian Parliament is a legislative body whose range of law-making activity is extensive.

  Every Hungarian citizen at the age of 18 and over has the right to vote, and is at the same time eligible to be a candidate for elective office.

  In the Parliament legislative supervision is exercised during plenary sessions through questions and interpellations. In addition to the plenary sessions, the parliamentary committees also play a significant role in the supervision of the executive branch of government. There are also individual parliamentary control bodies, like the State Audit Office and the institution of the Ombudsman.

  Within its competence, Parliament enacts the Constitution of the Republic of Hungary; frames laws; ratifies the international treaties that are of outstanding significance for the external relations of the Republic of Hungary; elects the President of the Republic, the members of the Constitutional Court, Commissioner for Fundamental Rights, the President and Vice Presidents of the State Audit Office, the President of the Supreme Court and the General Attorney of Hungary.

  The President

  The President of the Republic is Hungary’s head of state, who is elected by Parliament by secret ballot for a term of five years. The President of the Republic may be re-elected for this office for no more than one additional term.

  The traditional rights of the head of state, also set down in the Hungarian Constitution, have been defined in relation to legislative, executive, and judicial authority, according to a system of separation of powers. His sphere of authority as regards judicial power includes the appointment of judges and the granting of individual pardons.

  The President of the Republic concludes international treaties and agreements on behalf of the Republic of Hungary. If the subject of the agreement belongs under the competence of the legislation, the prior agreement of Parliament is required for concluding the agreement.

  The Constitutional Court

  The Constitutional Court has existed as an institution in Hungary since 1989, established by Act I of the Constitution. Actually it has been functioning since January 1, 1990.

  The Constitutional Court oversees the constitutionality of legal provisions. Any law or legal measure found unconstitutional is annulled by the Constitutional Court.

  The competence of the Constitutional Court includes:

  • the ex ante examination of the constitutionality of acts of Parliament adopted but not yet promulgated;
  • review, upon judicial initiative, of laws to be applied in a specific case with regard to their conformity with the Fundamental Law;
  • review, on the basis of a constitutional complaint, of laws to be applied in a specific case or of a judicial decision with regard to their conformity with the Fundamental Law;
  • review, on the basis of a constitutional complaint, of court decisions for conformity with the Fundamental Law;
  • review laws with regard to their conformity with the Fundamental Law at the initiative of the Government, one-fourth of all Members of Parliament or the Commissioner of Fundamental Rights;
  • examine the conformity of national legislation with international treaties;
  • perform other tasks and exercise other competencies laid down in the Fundamental Law and in a implementing act.

  In the cases defined by the law, anyone may initiate proceedings at the Constitutional Court. The eleven members of the Constitutional Court are elected by Parliament. Two-thirds of the affirmative votes of the Members of Parliament are necessary for election to the Constitutional Court.

  The Constitutional Court is the only forum in Hungary whose decisions are binding on everyone.

  The Ombudsman

  In the new Constitution the name of the parliamentary commissioner has been changed to Commissioner for Fundamental Rights. The Parliament elects one ombudsman and he/she is assigned to choose his/her own deputies. The special provisions of his/her procedure – with the consideration of the emphasized protection of the fundamental rights and interests of the future generations and also of the national minorities – it is formulated in the new ombudsman act.

  The Government

  The Government consists of the Prime Minister and the government ministers. The Prime Minister is elected by a simple majority vote of the Members of Parliament. Parliament decides on the election of the Prime Minister and on acceptance of the Government program at the same time. The ministers are proposed by the Prime Minister, and appointed and relieved of their duties by the President of Hungary.

  The Government can issue decrees and also conclude international agreements in the name of Hungary.

  The establishment of ministries falls within the competence of Parliament and law defines their status. Heading each ministry is a single responsible minister who is also a member of the cabinet.

  The Government takes the necessary measures to ensure public law and order and public security, participates in the determination of foreign policy as well as concludes international agreements on behalf of the Government of Hungary.

  In its own sphere of functions the Government issues decrees and passes resolutions which are signed by the Prime Minister. In the performance of their functions, the Prime Minister and the members of the Government may issue decrees. No decree and resolution of the Government may be contrary to the law and any decree of the Prime Minister and the members of the Government must not be contrary to any law or any Government decree and resolution.

  The Local Municipality

  The territory of the Republic of Hungary consists of administrative units including the capital and 19 counties. Local municipality means autonomous and democratic management of local affairs by the communities concerned and exercise of local public authority. The members of the representative body are elected for a term of four years.

   

  THE HUNGARIAN JUDICIAL SYSTEM

  Based on the Constitution of Hungary and on Act CLXI of 2011 on the Organization and Administration of the Courts, in Hungary justice is administered on a four-level system by the Curia, the regional courts of appeal, the county courts (including the Municipal Court of Budapest) and the local courts. First instance jurisdiction in most matters rests with the local courts, effecting the principle that the overwhelming part of the cases shall be settled at the local level, within the easiest reach of the parties. Appeals against the decisions of the local courts may be submitted to the county courts (and the Municipal Court), which thus function mainly as appellate courts, however, in cases specified by law (e.g. in civil cases with a minimum value of HUF 10 million and criminal cases with a sentence up to life imprisonment) they have first instance jurisdiction. The territorial competence of the local and country courts is determined by and identical with the areas of public administration. The regional courts of appeal hear the appeals lodged against the decisions of the local and county courts. There are five courts of appeal throughout the country in Budapest, Szeged, Pécs, Debrecen and Győr. Taking over the task of examining appeals, the regional courts of appeal significantly contributed to the reduction of the backlog of cases before the Curia and as a result the Curia is nowable to concentrate on its main function of ensuring the uniform application of law and examining applications for the review of final judgments as extraordinary remedy.

  The areas of jurisdiction indulge criminal, civil and administrative law. Administrative judgments prevail within the framework of normal courts, which according to existing regulations must review the legality of administrative actions. Their jurisdiction is related to the application of the law; that is, judges do not make the law.

  The Curia of Hungary sets guidelines based on principles for the judicial work of every court. The directives and decisions in questions of principle of the Supreme Court are binding on all courts of the country. They are accessible on the web in Hungarian.

  The European Court of Justice

  The European Court of Justice (ECJ) is the supreme court of the European Union in matters of European Union law. Its function is to interpret EU law and ensure its equal application across all EU member states, including Hungary, under Article 263 of the Treaty of the Functioning of the European Union (TFEU).

  The ECJ gives rulings on cases brought before it. The types of cases are as follows:

  • interpreting the law (preliminary rulings) – national courts of EU countries are required to ensure EU law is properly applied, but courts in different countries might interpret it differently. If a national court is in doubt about the interpretation or validity of an EU law, it can ask the Court for clarification. The same mechanism can be used to determine whether a national law or practice is compatible with EU law.
  • enforcing the law (infringement proceedings) – this type of case is taken against a national government for failing to comply with EU law. Can be started by the European Commission or another EU country. If the country is found to be at fault, it must put things right at once, or risk a second case being brought, which may result in a fine.
  • annulling EU legal acts (actions for annulment) – if an EU act is believed to violate EU treaties or fundamental rights, the Court can be asked to annul it – by an EU government, the Council of the EU, the European Commission or (in some cases) the European Parliament.
    Private individuals can also ask the Court to annul an EU act that directly concerns them.
  • ensuring the EU takes action (actions for failure to act) – the Parliament, Council and Commission must make certain decisions under certain circumstances. If they don’t, EU governments, other EU institutions or (under certain conditions) individuals or companies can complain to the Court.
  • sanctioning EU institutions (actions for damages) – any person or company who has had their interests harmed as a result of the action or inaction of the EU or its staff can take action against them through the Court.

  The Court of Arbitration

  The court of arbitration is an independent court, which authorization derives from the agreement concluded by the business parties if the jurisdiction of the arbitration court for the cases of debates is stipulated in the agreement. The scope of the stipulation of the arbitration court is very wide, especially if the case has an international relation.

  The agreement of the Parties regarding the stipulation of the arbitration court must be put down in writing. The arbitration clause is included either in the original contract or drafted in a separate agreement.

  If the Parties have concluded the agreement regarding the stipulation of the arbitration court, they cannot later change the scope of competence of the arbitration court to the scope of competence of the ordinary court. If they decide still so as described above, the ordinary court will dismiss the case.

  The Arbitration Act describes three general conditions regarding the stipulation of the arbitration clause:

  • firstly that one of the contracting parties must run an entertainment,
  • secondly that the Parties must have disposal over the subject of the proceeding, and
  • thirdly – as mentioned above – that the stipulation must put down in writing.
  • There are some sorts of litigation where the stipulation of the arbitration court is invalid. This kind of lawsuits can be found first of all in the legal field of family law and administrative law.
  • The number of the judges must be odd. The Parties can choose together the judges, so they have the chance to choose those judges, which are expert regarding the subject of the case. It is a commonly used method that one-one Party chooses one-one judge and the judges chosen by the Parties select the third judge.
  • The arbitration court procedure is similar to the ordinary court procedure, as there is an action, a counter-action, hearing of the witnesses and experts etc.
  • The effect of the judgment of the arbitration court is also the same as the effect of the judgment of the ordinary court, as the Parties are bound by the provisions implied therein.
  • However, it is not possible to appeal against the judgment, only the annulment of the judgment can initiate before the ordinary court in certain cases.
  • As the proceeding of the arbitration court is not public, the business relations and business interests of the Parties remain untouched by the public.

  INVESTMENT CLIMATE

  Incentives for Foreign Investors

  The Hungarian Government provides different types of incentives for foreign investors setting up business in Hungary. All incentives granted are in line with EU incentive standards.

  Incentives and grants are allocated on case-by-case basis following negotiations between the investor and the government. All incentives granted are in line with the EU incentive standards. Performance requirement/incentives are available to all enterprises registered in Hungary, regardless of the nationality of owners or location of incorporation, and applied on a systematic basis.

  To comply with European Union rules, the government of Hungary no longer grants tax holidays based on investment volume. Hungary has a well developed incentive system for investors, the cornerstone of which is a special incentive package for investments over a certain value (typically over EUR 10 million).

  The incentives are focused on investors establishing manufacturing facilities, logistics facilities, regional service centers, R&D facilities, bio-energy facilities, or tourist facilities. Incentive packages may consist of cash subsidies, development tax allowances, training subsidies, and job creation subsidies.

  Foreign Direct Investments

  In Hungary Foreign Direct Investments (FDI) flow started in the late 1980’s and showed a stable volume until 2004. Since Hungary joined the EU, FDI moved to a higher level and plays an important role in the very open Hungarian economy. With approximately USD 90 billion in FDI since 1989, Hungary has been a leading destination for FDI in Central and Eastern Europe over the past several years. Germany is the most important country of origin with 22 percent of all FDI, followed by Austria (14 percent) and the Netherlands (13 percent). The United States is the largest non-European investor at 10 percent of FDI. The Ministry of Economic Affairs established the ITDH in 1993, and this agency continues to help companies looking to make major investments in the country. ITDH has set up a “one-stop-shop” service for potential large investors.

  Banking and Financing

  With increasing demand from foreign and domestic corporate clients for simple and rapid services, more financial institutions are providing universal banking, which ranges from straightforward lending to investment banking and securities trading. Most foreign firms tend to access local credit and capital markets through home-country financial institutions that have opened branches in Hungary. The services industry is concentrate in Budapest with large SSCs from Morgan Stanley, Black Rock, Deutsche Bank, Erste Bank, Commerzbank and Citibank to name a few.

  Under the EU’s “single passport” principle, a financial services provider authorized in one EU member state is free to provide that service anywhere else in the EU. EU-based financial institutions are not required to establish a local subsidiary or branch; they are only required to register with the Hungarian Financial Supervisory Authority.

  Hungary EU-harmonizing reforms have created a financial environment where virtually all capital related institutions, products, and services can be found. The Hungarian Forint has been fully convertible for all financial transactions since 2001, and both the Hungarian financial market and capital market transactions are fully liberalized.

  The Hungarian Forint (HUF) has been fully convertible for all transactions since 2001, a final step in a decade-long liberalization process. A government decree lifted all remaining foreign exchange restrictions and allowed free movement of capital, in line with EU regulations. Businesses and private individuals have free access to foreign exchange enjoying all advantages and disadvantages of the local currency and foreign exchange fluctuation. Foreign exchange rules allow Hungarian residents to open forint and foreign currency accounts abroad without applying for permission from the National Bank of Hungary, and foreign companies may hold foreign currency without restrictions.

  The National Bank of Hungary (NBH) is the central bank and a member of the European System of Central Banks (ESCB). The NBH and the members of its decision-making bodies perform their duties and carry out their obligations independently from the government. With the exception of the European Central Bank, the NBH (and the members of its decision-making bodies) may not ask for or follow instructions from the government, the institutions and bodies of the European Union, the governments of other EU Member States or any other institution or body.

  A commercial bank may only operate in Hungary as company limited by shares (Rt.) or as branch office of a foreign bank. A permit from the National Bank of Hungary (MNB) is required before a commercial bank may be established and the commencement of operations in Hungary is allowed. In the case of a branch office of a foreign bank, a license for banking activities issued by its foreign authority is also required. The Financial Enterprises Act determines the range of financial services that commercial banks may provide.

  The MNB oversees the banking system, as well as the capital, insurance and pension fund markets. As a member of the supervisory community of the European Union and in an integrating financial market, the MNB

  • ensures reliable, continuous and transparent operation of the financial markets;

  • strengthens confidence in the financial markets;

  • promotes the development of financial markets based on fair competition;

  • protects the legitimate interests of market participants;

  • supports the reduction of consumers’ risks by providing access to adequate information;

  • actively participates in eliminating financial crime.

  Since Hungary’s accession to the EU, credit institutions registered in another Member State of the EU may engage in cross-border services.

  A banking account at a commercial bank is required to register and run a company in Hungary. Wire transfers are used for over 80 percent for payment transaction, and new customers are sometimes required to pay in advance. A letter of credit is often used for more significant and high-value first transactions before mutual trust develops between partners. Credit cards are also used but mostly for individual purchases. The largest commercial banks in Hungary are: OTP – Hungarian Savings Bank, Takarékbank, Hungarian Foreign Trade Bank (MKB), Citibank, Commercial and Credit Bank (KHB), Budapest Bank, Erste Bank, Commerzbank, Raiffeisen Bank, UniCredit Bank, CIB Bank.

  Trade and Imports

  Tariff assessment and all other customs procedures take place at the first port of entry into the EU. However, Hungary still collects the Value Added Tax (VAT) on all goods with Hungary as a final destination.

  The Integrated Tariff of the Community, referred to as TARIC (Tarif Intégré de la Communauté), is designed to show various rules applying to specific products being imported into the customs territory of the EU or, in some cases, when exported from it. To determine if a license is required for a particular product, check the TARIC. The TARIC can be searched by country of origin, Harmonized System (HS) Code, and product description on the interactive website of the Directorate-General for Taxation and the Customs Union. The online TARIC is updated daily.

  Many EU Member States maintain their own list of goods subject to import licensing. For example, Hungary’s restricted “Import List” includes goods like arms/military equipment, explosives and pyrotechnic products, security paper, uranium, radioactive isotopes, etc. The import list indicates code numbers, applicable restrictions, and the agency that will issue the relevant license.

  Goods presented to customs are covered by a summary declaration, which is lodged once the goods have been presented to customs. The customs authorities may, however, allow a period for lodging the declaration, which cannot be extended beyond the first working day following the day on which the goods are presented to customs. The summary declaration can be made on a form corresponding to the model prescribed by the customs authorities. However, the customs authorities may permit the use, as a summary declaration, of any commercial or official document that contains the particulars necessary for identification of the goods. It is encouraged that the summary declaration be made in computerized form.

  Goods temporarily imported into Hungary must be kept in a bonded warehouse until re-export. Customs authorities determine the period within which these goods must be re-exported or assigned a new customs-approved treatment or use. The maximum period the goods may remain under temporary importation status is 24 months, although customs authorities may shorten or extend this. A temporary import shipment does not have to be re-exported in total. Any portion of the shipment destined for the domestic or EU market, however, is subject to duties and VAT at the time of importation.

  The structure of exports is shifting towards high value-added goods, since most foreign direct investment has been in sectors such as machinery, computers, telecommunications equipment, electrical and electronic goods, and transport equipment.