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International Company Relocation Opportunities: Hungary
The estimated population of Hungary is 9.9 million. It’s a market driven and open economy, with a GDP of $120 billion. The country joined the EU in 2004, and its significant investments and key trading partners are also EU member states.
In 2016, the Hungarian economy was sustained and raised by 2 percent, while its macroeconomic indicators are trending positive. In 2017, growth was projected to increase by 3 percent, based on the increase in exports, the growing domestic demand, and the restarting of disbursement of the EDF. However since 2013, the government of Hungary has maintained the shortfall at no more than 2.5 percent of the GDP, thus avoiding the European monitoring mechanism.
It lowered government debt from 80 percent in 2010 down to 74 percent in 2016. It was upgraded by three main credit agencies in 2016 to investment grade.
Hungary has a very advantageous geographical position and advanced infrastructure that draws in foreign investments. The country has received $80B in FDI from 1989 to 2016, primarily in automotive, banking, life sciences, and software development sectors.
The U.S is the major non-EU investor and 79% of the country’s FDI inflows are from the EU. The Hungarian government strongly encourages investing in added high value industries, manufacturing, as well as service and R&D centers.
The industrial strategy of the GOH sets out a plan to boost growth in the following sectors: health tourism, automotive/defense industries, software development, ICT, and biotechnology. Corporate and labor taxes on these sectors have been lowered to 9% (corporate tax) and 22% (labor tax) in order to promote investments in the beginning of 2017.
In the past few years, the competitiveness of the Hungarian region has weakened in spite of its assets. Since 2016, foreign investors have recognized the hindrance to investments in Hungary was the shortage of skilled labor, particularly engineers and technicians.
Regulatory and tax policies in some industries like retail and media favored Government linked corporations. Furthermore, the government and public sector are still afflicted by relentless cronyism and corruption in the country. Among 28 member states of the EU, Hungary is ranked 24th in 2016’s Corruption Perceptions Index reported by TI.
The partnership of the Hungarian government with the OGP ended in 2016, after the government refused to undertake the issue of good governance and transparency. The European Union condemned Hungarian bankruptcy rules for being unpropitious in taking remedial action resulting in a low rate of recovery of 0.40/dollar, unlike the average OECD recovery rate of $0.72/dollar.
Moreover, according to some administrators of American multinational companies, the Hungarian government steps up the anti-immigrant rhetoric which adversely affects board members due to the government’s views and actions. As a result, it has been inconvenient and unfavorable for companies to get approval for a new investment.
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Hungary’s 2015 advertisement tax and taxes over tobacco has generated concerns among businesses that potential expropriation activities may be indirectly enforced through discriminatory tax provisions that could excessively impact a firm and be forced to agree on a buyout offered by a local firm. The investigation of the European Union on the advertisement tax as well as the backtracking attested the European Union is capable of enforcing a nondiscriminatory marketplace and unlawful state aid regulations through the enforcement of injunctions.
The Hungarian government presented taxes intended to target multinational retailers during 2014 and 2015. The EU identified the regulations as biased and obliged the Hungarian government to revoke them. In 2017, the press exposed a draft of ongoing government bids that could potentially create new limitations and levies on foreign retailers.
During the Krynica Economic Forum held in Poland in 2016, Hungary’s Prime Minister Viktor Orban stated 50% of media, retail, energy, and banking sectors must be managed by Hungarians. Through the windfall profits tax, the rescue schemes and FTT were designed to relieve lenders of currency mortgage owners from abroad.
However, some analysts note the government forced some foreign banks to put their business units on sale. The retail banking operation of Citi, MKB Bank (Germany), and General Electric’s Budapest Bank have vended their business operations in Hungary and their investors.
- Hungary is ranked as the 57th least corrupt nation out of 176 countries in 2016’s Corruption Index reported by Transparency International.
- Hungary is ranked 41st among 190 economies in doing business in 2017, reported by the World Bank.
- Hungary is ranked 33rd among 128 countries and economies in 2016’s Global Innovation Index.
Openness and Restrictions on Foreign Investment
FDI policies: Hungary keeps an open economy as well as an excellent infrastructure. Its central locations turn it into an ideal investment destination. Attracting foreign direct investors is a priority as important as the GOH, particularly in the export sector and manufacturing. However, in other areas such as energy and banking, Hungary’s policies lead to a number of foreign capitalists selling their shares to state owned companies or to the government.
The country was a prominent FDI destination in Eastern and Central Europe between the mid-90’s and 2000, with the yearly FDI reaching more than $6 billion last 2005. The FDI momentum slowed down in the following years due to the global financial situation in 2008 and the heightened competition for international investment with other counties within the region. The net FDI in 2016 reached $4.5 billion and the total FDI gross is at $80 billion.
In 2006, the central bank of Hungary (MNB) estimated investment positions with the main controlling parent company on top of the figures on direct investors created by the country. In 2014, Hungary had a 79% total FDI in line with direct investments and a 58% share on UCP investors.
In accordance with UCP investors, the biggest investor was Germany, next to the US, and followed by France, Austria, Ireland, the UK, Italy, Japan, and the Netherlands. US firms have a total of 19% of investments, ranking second to Germany. They are the biggest non EU capitalists, having 2% of the total FDI share.
Most of their investments are in the area of life science, automotive, and software development. Approximately 400 US companies started in Hungary, though the number could be as high as 800 if sales offices, representation offices, and US citizen owned establishments are included.
The GOH implemented several tax changes in 2010 to raise the country’s regional competitiveness. This includes reductions in personal taxes from a 16% rate in 2010 to a 15% rate in 2016, and a reduced corporate tax of 95% in 2017.
Hungary used “crisis taxes” which target specific industries to offset rate reductions. With these measures, the government managed to keep its budget deficit at less than 3% of the GDP and leave the European Union’s EDP (where Hungary is part of the procedure since the accession of the EU in 2004). The EDP was lifted in 2013 when the budget deficit of Hungary dropped to 3% GDP for 2 years in a row.
A lot of international companies are complaining of the uncertainty of the tax regime in Hungary along with its retroactive disposition, speed, and the extent of legal tax changes. Companies opposed the government starting many tax actions with minimal to no discussions with afflicted businesses. Some establishments that operate in Hungary claimed the new “crisis taxes” are not in agreement with EU policy since they target businesses controlled by international firms and don’t show the true cost of managing affected areas. Both the IMF and the EU requested to slowly get rid of sectoral taxes, noticing they alter the competition, weaken economic development and international investments and unfavorably outweigh the economic advantage of corporate and personal tax rate cuts.
The current crisis taxes, together with other fees and regulatory measures, target the energy, banking, retail, and telecommunications sectors. The parliament approved an array of new, progressive taxes that excessively penalize foreign companies in the area of retail, media and tobacco industries but continuously favors Hungarian corporations.
Tax Advertisement in 2014 imposed taxes on revenues, not on company’s profits. Hungarian authorities, together with tax experts, reminded companies of certain tax brackets. There was a 50 percent tax on revenues exceeding 80 million USD, which affected a German-operated media group called RTL Klub. This is the only company which is part of the top earning companies and has been known to have independence in broadcasting media corporations.
The RTL asked assistance from the EU Commission because of the tax policy. In 2015, the European Commission initiated an investigation regarding the issue raised by the RTL and enforced a temporary suspension of imposing taxes depending on revenues.
The European Commission determined there was a possible discrimination on how Hungary collects taxes from companies and a violation of rules created by the EU in terms of competition. Hungary’s government eventually complied and agreed with the decision of the EC to have a standard rate of 5.3 percent applicable to all advertisement revenues during the second quarter of 2015.
In 2014, a food chain fee and health-related tax was introduced. It aimed to collect from huge firms like Tesco, Philip Morris, Auchan, and Spar. The European Commission noticed tobacco taxes did not result in fair treatment to companies which have relatively smaller revenues. This made Hungary suspend their tax policies and cases were filed because the government violated certain procedures.
After these circumstances, Hungary decided to eradicate food chain fees and implemented a standard tax rate in the latter part of 2015. After a year, the European Commission concluded the retail policy of Hungary had violations and loopholes which led to some retail businesses to close their operations even when they earn more than 53 million USD in yearly sales as long as they claim to have losses for 2 consecutive periods. Due to these inconsistencies, the European Commission initiated a serious look on it up to present.
Hungary’s government designated a tax on energy firms during the last several years. Though the GOH removed the crisis tax in 2013, Hungary increased the “Robin Hood”, which implements taxes on energy firms’ income that range between 11-31 percent. In 2017, the rate of corporate tax was changed to 9%, lower than previous years. Currently, the tax rate remains at 40 percent.
Hungary also introduced a utility tax (includes sewer and water pipelines, heat and electrical lines, natural gas, and telecoms). In 2015, the GOH was not able to lessen taxes for telecommunications which was anticipated to develop the telecoms industry. There have been no revisions made up to present.
The government pledged to moderately remove special taxes on banks, but would still apply transaction taxes approved in 2013 on cash withdrawal transactions from ATMs and banks (including bank transfers). This was enforced even if the entire banking industry had declared multiple losses up to 2016.
Hungary informed the public they are reducing the presence of foreign banks in the market in the financial industry as a way of prioritizing domestic banks. In addition, the government formed policies which focused on the banking industry and on the reduction of foreign business presence from 70 percent prior to the crisis in 2008 to 50 percent before 2016 ended.
In terms of taxes on banks and financial transactions made in 2010 and 2012 (respectively), new policies were implemented which obliged banks to compensate their customers the high interest rates on consumer debts, even if there was a previous stipulation signed by both parties when the loan was approved. The GOH made an exception to implement it using the law.
Hungary eventually obliged banks to convert the current balance to its local currency which follows a fixed rate. While the Parliament became lenient in terms of policies, it resulted in huge financial losses to most banks. These policies led some banks to review capitalization to meet the required amount set by the government.
In 2016, Hungary made a positive move when the GOH decided to reduce the duty tax from 0.52 percent to 0.32 percent. It also had plans of reducing it further up to 2018. This was the agreement with the EBRD.
Hungary defended issues related to targeting certain sectors using political influence. PM Orban informed his supporters while on a protest in 2014 that the country has proven its growth by having stable governance in terms of regulating financial institutions. Few officials have criticized businesses in certain sectors due to earning “unreasonable profits” even if there were no specific guidelines to why they defined it that way.
The pharmaceutical industry in Hungary is profitable and highly competitive. Most companies in the business rant loopholes on procedural and financial matters. To be specific, these businesses have issues due to higher taxes on their operations and products; doctors have limited prescriptions in terms of drug choice, and vague policies which affect their ability to compete in the market negatively. Pharmaceutical companies raised the issue with the government in order to get financial assistance. They claimed it is more important they deliver efficient results to end users than anything else.
Hungary is still working with foreign companies on improving the export industry and has no details on imposing taxes with those businesses yet. Some US companies have noted those high volume exports were audited by the Customs and Tax Authority in Hungary.
Audits normally would take at least 7 days to be conducted by an auditing team which visits the firm and requests paperwork to calculate VAT and other tax matters. The reimbursement of VAT is delayed due to the result of the audits which are a significant cost.
Most products in Hungary have 27% VAT. Companies confirmed these auditors implemented strict guidelines if found having data errors.
Simple errors such as using an incorrect form or mistakes on calculation may result in penalties per instance which would cost a hundred dollars. Before 2015 ended, the government released a statement about their plan to change the National Customs and Tax Authority to a more reliable agency which would mainly focus on areas that are high risk in nature, while quickly servicing companies which have low risk factors and customers. Although they have reduced the number of staff in the agency, and revenues on taxes have significantly increased, they still pledge to continue improving their principles particularly with consumers.
Top management officials in technical and manufacturing industries noticed shortages on the workforce as their biggest concern in the business. Those highly skilled individuals are considered their assets in terms of competition.
A number of high skilled Hungarians moved abroad for employment which led to a shortage of competitive workforce in some industries and locations. This had a negative impact in the country. It has been known the OECD Project for International Assessment for Student scores drastically declined which resulted in a lack of new skills in different fields. Other reported hindrances were a lack of predictability and transparency, favoritism, red tape, and corruption practices.
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Hungary formed the Investment and Trade Agency to invite foreign businesses in the country, participate in trade and show support on the activities of medium and small-scaled businesses in 2011. The Hungarian Investment Promotion Agency was designated to work on incoming Foreign Direct Investments, and the National Trading House was tasked to promote Hungary’s export business abroad. Both agencies are part of the Department of Trade and Foreign Affairs.
HIPA works with companies relating to consultancy depending on their type of sector, works as mediator to improve business relationships, responsible in training the suppliers, gives recommendations on locations for businesses, and communicates with different trading industries. Their services are offered to all businesses.
The GOH made strategic stipulations with certain large corporations and other businesses. Currently, the number of stipulations is 79 (which includes the US Commerce Chamber). Hungary submits tax preferences to any partners as long as it is within the guidelines of the EU. It basically has a cap on tax allowances. The GOH formed a council on competitiveness managed by the Department of Economy which has at least one representative from different sectors, stakeholders, and commerce chambers in order to improve the competitiveness of Hungary.
Restrictions on Foreign Affairs and Policies on Private Properties
Foreign investors may own properties provided they meet the guidelines of “strategic” areas which include farmlands and defence-associated sectors.
In 2013, a Land Policy was passed and took effect in 2014 which allows EU nationals or Hungarians who reside in Hungary that have 3 years of work experience in Agriculture to acquire farmland. These qualified individuals are restricted from purchasing a land bigger than 300 hectares.
Non-EU nationals are prohibited from acquiring farmland. Agricultural land purchases need to go through a district land office and the Hungarian government authorities. Young and local farming individuals have the opportunity to purchase farmland before a non-local farming investor is given the chance to buy the property.
Applicants which do not meet requirements are allowed to lease an agricultural land up to 12 hundred hectares (20 years max). Hungary removed pre-existing contract policies on leasing which assure the lessee an opportunity to make a purchase that made Austria criticize those provisions. Austria reached out to the European Commission regarding the changes which led to an infringement case versus Hungary in 2014. In 2015, the European Commission formed another case versus Hungary regarding its limited policies on purchasing agricultural lands.
Hungary has been investing in government-owned properties since 2012 with the intention of reducing foreign-owned businesses specifically involving energy sources. Foreign businesses interested in insurance and financial industries are required to inform the authority of their interest, but need no authorization in advance.
Foreign financial industries may perform business in Hungary as long as it follows the guidelines of the OECD. At present, foreign corporations take control of the manufacturing industry with 66%, of telecommunications with 90% and of energy sources by 35%. Private sectors are responsible for contributing to the country’s economic aspect with about 80 percent.
In 2016, Prime Minister Orban released a statement to the Krynica Economic Conference held in Poland. He said 50% of the media, banking, retail, and energy sectors must be managed by Hungarians.
Windfall and financial transaction taxes are designed to help issues of foreign mortgage owners. There are analysts who claim Hungary even made some foreign banks sell their Hungarian investment portfolios.
German-owned MKB, Citibank’s retail businesses, and Budapest Bank have turned over their services to Hungary or to Hungarian investors. There was a press release in 2014 saying Raiffesen Bank and Italy’s bank CIB thought of leaving the market.
Raiffesen has been a great contributor in terms of the financial sector’s stability and profitability. In 2015, Hungary took control of a local network of cooperatives. These improvements brought 60% participation of state-owned enterprises to the financial industry, which includes the Development Bank of Hungary, the Clearing House, and Eximbank. State-owned properties involvement is not above 50 percent.
The ownership of businesses in Hungary has been using a strategic approach to focus in a single market or industry. Only 1 or 2 shareholders have the ability to control stakes in large businesses. Crossholdings are in practice and it is challenging to establish independence in terms of decisions made by directors.
Registratering businesses in Hungary is mandatory. Companies must coordinate with a lawyer and file for registration online. Courts are responsible for the registration of applications from the LLC and joint-business corporations.
The regular process may take 15 business days, but the actual processing time takes no more than 3 business days. If the process takes longer than the timeframe, the Court automatically registers the business.
A company has the option to utilize a template business charter. Doing so would reduce the time to process the registration to one day. Registry courts endorse the entity’s info. to the Tax Authority Office to prevent any issues on registration.
Registry Courts are maintaining a computerized registration and filing process and provide access to the public regarding the company’s information. Foreign investors or firms may establish their business in the country with no limitations.
Outward investment: Hungary’s total investments overseas amounted in 2016 about 8 billion euros worth of stock. Outward investments focused on services, manufacturing, insurance, finance, and technology. Hungary does not participate in promoting or restricting investments overseas.
Bilateral Business and Tax Agreements
The US and Hungary did not form a bilateral business treaty. Hungary formed bilateral treaties with these countries: Argentina, Albania, Austria, Australia, Belgium, Azerbaijan, Bosnia, Bulgaria, Chile, Canada, Croatia, China, Cyprus, Cuba, Denmark, Czech Republic, Finland, Egypt, Germany, France, India, Greece, Indonesia, India, Kazakhstan, Jordan, Latvia, Kuwait, Lithuania, Lebanon, Malaysia, Luxembourg, Mongolia, Moldova, The Netherlands, Morocco, Paraguay, Norway, Portugal, Poland, Russia, Romania, Singapore, Serbia, Slovenia, Slovakia, Spain, South Korea, Switzerland, Sweden, Tunisia, Thailand, Ukraine, Turkey, UK, Uzbekistan, Uruguay, Yemen, Vietnam, and Macedonia.
Bilateral taxation agreements: Hungary has formed tax treaties intended to remove double tax charges with the US and these countries: Australia, Albania, Azerbaijan, Austria, Belgium, Belarus, Brazil, Canada, Bulgaria, Croatia, China, Denmark, Czech Republic, Cyprus, Estonia, Egypt, France, Finland, Germany, Georgia, Great Britain, Hong Kong, Greece, India, Iceland, Ireland, Indonesia, Italy, Israel, Kazakhstan, Japan, Latvia, Kuwait, Luxembourg, Lithuania, Malta, Malaysia, Moldova, Mexico, Morocco, Mongolia, Norway, The Netherlands, Philippines, Pakistan, Portugal, Poland, Russia, Romania, Singapore, Serbia, Slovena, Slovakia, South Africa, South Korea, Sweden, Spain, Taiwan, Switzerland, Tunisia, Turkey, Uruguay, Ukraine, Vietnam, Uzbekistan and Macedonia.
Agreements were set in 2010 in response to change present tax conditions with the US. The revision is still pending for the US Senate’s approval.
In 2014, Hungary approved the Foreign Tax Compliance Law along with the US to enhance foreign tax compliance by coordinating with tax issues and the tax exchange process. Hungary and the US have agreed to remove double taxes on social security and establish strong benefits for the workforce which they previously had issues with.
The Legal System
Regulations and transparency: From the perspective of international investors, the policies of the European Union and the legal framework designed by the government to enforce them are the origins of the most significant laws. Once these laws are passed, they become available online and documented in a law journal. The Hungarian state may implement protocols on a national level, but these policies can never contradict the laws set forth by the Parliament. Domestic laws imposed by local towns are restricted to district jurisdictions.
The Hungarian government rarely encourages attracted parties to participate in discussions of drafted laws. Civil groups have criticized a loophole in existing regulations that permits specific MPs to propose laws and amendments devoid of public deliberation, as mandated by legislative bodies in Hungary.
On average, the deadline to submit public commentary is usually very short, taking less than a week. In 2010, the Parliament enacted the Bill on Legislation as well as the bill on Soliciting Public Opinion, two laws designed to oversee the public deliberation procedure and compel the Hungarian government to make draft legislation accessible online, as well as provide ample time for interested groups to present commentaries on the proposed laws.
However, this legal initiative is not consistent. Hungary’s government has yet to petition for public opinion on various laws, including a draft bill on higher education, the 2013 Land Legislation, as well as the law involving Hungary’s National Bank.
Businesses operating in industries impacted by economic crises have repeatedly lamented the lack of initiative on the part of the GOH to consider the financial sector’s opinions and consult them prior to the announcement of new tax laws.
A study conducted by the CRCB or Corruption Research Centre Budapest in 2010 showed an increase in the Parliament’s yearly average on enacting new legislations, while the time spent discussing new laws have significantly decreased, on average.
Within the succeeding year, the total figure of the amended laws after less than twelve months of obtaining approval from the Parliament surged four times compared to those created between 2006 and 2008. It was concluded the rise in modified regulations could be the direct result of insufficient time spent discussing and consulting the proposed bills.
The Hungarian government was also found to have published summary reports on public deliberation procedures and impact studies for only a small portion of the proposed legislation passed between 2011 and 2014 – introductory documents that prove years of hasty law-making processes have adversely impacted the legislative climate and the general stability and quality of laws.
The Law on Public Procurement was passed in November of 2015 in order to execute a European Union protocol over improving the legacy legislation. The Parliament, has weakened the law’s provision on conflicts of interests involving the exclusion of state officials’ family members.
Subsequent legal changes – hastily approved by the Parliament – now stipulate the bidding process is only restricted to family members of the officer in question with whom he lives with in the same house. The opposition has criticized the Act. It nevertheless became an existing policy considered congruent with European Union protocols.
Advocacy groups for state transparency have analysed public data, which suggests enterprises with considerable government connections have enjoyed partisan advantages over private entrepreneurs in public biddings. Foreign investors have accused the GOH of instigating favouritism within the business sector, and argued that, compared to neighbouring states, their shares in government business ventures in Hungary are glaringly lower, and that companies involved in sectors that have price controls and subsidies in place seem equally impacted by inadequate responsiveness and transparency in matters concerning subsidies and prices.
A climate of systemic corruption contributes to over 20-25 percent of unnecessary government expenditure in Hungary, according to the Study of National Integrity and Transparency International, while a Freedom House investigation concluded only an estimated ten percent of the GOH budget is transparent. The rehabilitation of government procurement in Hungary has been the subject of a massive debate within the foreign financial and commercial sector, who has proposed their comments should be included in new drafted laws.
Transparency International stated the Parliament’s whistle-blower protection bill signed in 2013 provides insufficient protection, as the law only grants such security if whistle-blowers come out and cooperate within 6 months of revealing the offense. It also requires whistle-blowers to have fully exhausted all possible formal means and channels of reporting prior to whistleblowing, a procedure that often takes over 6 months.
Hungary’s guidelines regarding financial reportage is consistent with the European Union’s 4th and 7th Protocol as well as the Standards of International Accounting, with the latter mandating companies to prepare yearly financial reports congruent with international business guidelines.
Proposals on International Law
Hungary is a participant in the World Trade Organization and a member of the European Union. All EU laws – even those devoid of further local statutes – are directly approved by the country. In their entirety, environment, safety, labour, and health laws that adhere to EU policies and EU protocols take precedence over any Hungarian regulations that stand contrary to them. Hungary complies with the European Union’s guidelines on investment regulations and international trade, and EU laws govern all existing trade policies.
Judicial autonomy and legislative structure: Hungary has patterned its legislative framework on continental Europe’s legacy (Roman, French-German tradition). Local courts implement contracts or via arbitration centres if contractually stipulated. Investors and their partners can collaborate in determining whether to consult foreign or local arbitration courts. Specialized courts are non-existent on purely commercial cases, and domestic courts reserve the right to decide on any civilian case, as applicable under the 2013 Civil Code.
Local courts operate autonomously and often involve competent and fair judicial determinations, despite the occasional government criticism. The duration of legal proceedings as mandated by the civilian court can be frustrating to entrepreneurs, although the Hungarian state vows to accelerate the efficiency and speed of court proceedings via the recently signed 2018 Code of Civil procedure.
Foreign Direct Investments: Policies and Regulations
Hungary has competent securities in place for the protection of investments and properties. The GOH may seize property only in certain exceptional circumstances involving public interest, and it is mandatory to execute such expropriations legally, with full and immediate compensation for every confiscated property and independent of any additional prerequisites.
Investors may invoke the 1988 Foreign Investment Law in seeking legal protection, especially foreign entrepreneurs operating and investing in Hungary, who have guaranteed fair legal treatment as local investors. The Law also contains provisions securing repatriation of foreign investors’ investments and remittance capital for liberal transference abroad in cases when their companies discontinue operations in Hungary partly or completely.
Hungary does not have a major online database of relevant regulations, procedures, laws, or reporting prerequisites for investors.
Anti-trust regulations and competition: Hungary’s Competition Authority is mandated to safeguard the national interest and to implement stipulations of the country’s Competition Law. Hungary became a member of the EU in 2004, which makes EU competition laws applicable to Hungary.
The CA investigates all allegations of competition policy offenses, penalties, tax fines, and order amendments to procedures. The total figure of competition trials has decreased since 2010, albeit being more complex than before. Out of one hundred cases reported in the previous year, just a handful of minor incidents are linked to United States enterprises.
Compensation and Property Seizure
Unless a national security threat exists, the Constitution of Hungary guarantees protection against nationalization, expropriation, and any despotic government practices. If such abuses of power are enforced, the victim is granted full and immediate compensation.
The GOH has not been known to conduct expropriation nor discriminate against American companies, representatives, or investments, although incidents of foreign entities being expropriated through illegal measures and without due compensation have been reported within the last years. The parties involved have entered a dispute settlement in court.
The GOH recently purchased certain international investors within the energy department. There have been no complaints reported and compensation seemed to have been fair and adequate.
Taxes over tobacco products and the tax law on Advertising were enforced in 2015, generating some concerns among entrepreneurs who implied a potential expropriation activity could be indirectly implemented via prejudiced tax laws, which could then impact the business sector disproportionately and compel companies to agree on a buy-out proposed by a local firm.
The investigation of the European Union on the Advertising Tax as well as the backtracking that followed proved the European Union is capable of implementing abusive government aid regulations and non-discriminatory marketplaces via the enforcement of injunctions. During 2014-2015, Hungary established taxes intended to target multinational retail merchants, and in both cases, the EU determined the regulations to be prejudiced and unfair, and obliged Hungary to reverse them. In 2017, however, the media revealed new draft government proposals were underway that could potentially create new limitations and tariffs on foreign commercial companies.
New York and ICSID Conventions: The Hungarian state is a member of both the ICSID Convention and the New York 1958 Convention.
Government investor dispute resolution: Hungary does not have obligations under the Treaty on Bilateral Investment nor has any agreements on Free Trade with the U.S. There was an increase in government-investor arbitration cases and claims made against Hungary within the last period of years, with some American investors being involved in several cases, which include a recently reported massive dispute with MVM, Hungary’s government-owned energy firm.
International courts and foreign commercial arbitration: Due to Hungary’s acceptance of foreign arbitration between state-investor dispute cases that yielded unsuccessful results, there has been an increase within the past few years in companies engaging in mediation strategies in the hopes of resolving disputes without the complications of lengthy court proceedings.
Investment contracts typically stipulate regulations over clauses in dispute resolution of investments. Hungarian regulations permit parties to establish the legal scope of any arbitration or court centres, as well as accepting a decision to create ad-hoc mediation courts.
Investors are also allowed by law to decide to resolve investment conflicts via a turnover to international arbitration centres, including the Vienna Centre for International Arbitral, the PCA governed by UNCITRAL, and the ICSID (International Centre for the Settlement of Investment Disputes. Hungary‘s Department of Industry and Commerce has established its own arbitration court that implements its own procedural regulations.
Policies on Insolvency
The 1991 Law on Liquidation Procedures, Final Settlement, and Bankruptcy Procedures governs all commercial enterprises except SOEs and banking institutions, which enforce their own legal guidelines, eventually making Hungary’s legislation congruent with European Union regulations. A debtor is only permitted to initiate insolvency proceedings as long as he/she has not attempted to seek insolvency protection in the last three years. He/she must invoke a settlement discussion with all involved creditors within ninety days of filing for insolvency protection.
Creditors must grant majority consent in order to proceed with settlements. If this was not accomplished, liquidation may be ordered by the court. The Insolvency Law outlines the claims payment guidelines in order of priority:
- Liquidation expenditures;
- Secured debt;
- Individual claims;
- Tax duties and social security;
- All remaining debts.
The court may designate a trustee upon the creditor’s request to execute an autonomous financial review. The trustee is empowered to confront any concluded contract made within a year prior to insolvency on grounds of conflicting interests.
The Criminal Court, the debtor, administrator, and the creditor may submit requests for liquidation procedures in court, which then informs the debtor in writing and provides him/her a duplicate petition letter once the petition has been submitted, regardless of the party who initiated it.
The debtor is given 8 days to declare bankruptcy, and once accomplished, the company may request a declaration of any applicable respite for debt settlement. Bankruptcy is presumed if there was no response provided, and the court can permit a total of thirty days to submit the request for debt settlement.
The court designates a liquidator once it has determined the debtor to be bankrupt. However, the debtor, might be unable to know of any liquidation petition filed by a creditor until it is completed, a process that Transparency International considers disturbing. It mounted concerns regarding the whole process’ transparency.
The TI has criticized the unreasonable process deadlines set forth by liquidator companies as well, along with their deficient accountability. The average OECD insolvency proceeding recovers seventy-two cents on the dollar, but under Hungary’s legal system, it recovers only forty cents/dollar. The European Union condemned Hungary’s system and stated it was hostile to bankruptcy rescue efforts. It directly contributes to the massive financial destruction of bankrupt entities – as in the 2011 case of MALEV, Hungary’s previous national airline company – instead of facilitating in organized restructuring efforts and commercial buy-outs that enable the inevitable exit from insolvency.
Insolvency is not a criminal activity, unless pursued through fraudulent means and with intentions to avoid debt repayments.
Investment stimulus: Hungary facilitates investments through a highly competent incentive framework, for which the major feature is a specific stimulus package over a specific market price (usually over ten million Euros or eleven million USD). The stimulus is intended to encourage investors operating in logistics and manufacturing facilities, Research and Development, those who profit from tourism industry stimulus, and district service centres.
Stimulus packages may include development tax funds, cash subsidies, employment creation subsidies, and training subsidies. The tax system adheres to EU laws on state funds and competition. It’s governed by HIPA, and supervised by the MND.
Trade Management, Free Ports, and International Trade Zones
Since its accession to the European Union, Hungary’s international trade zones have been eliminated. The National Economy Minister is considering the designation of customs free areas, but there is currently very little demand for them.
Productivity and prerequisites on data localization: Hungary allows workers from the EEA and EU nations to work in the country without a work permit or visa, while workers from non-EEA/EU nations (third-countries) need a residency permit or visa in order to reside and find employment. Their employment is potentially limited to certain professions.
Third-country workers are only granted a work permit in some economic districts if the company failed to secure the job with a local employee. However, due to recent a shortage in labour, the Hungarian government and employers were compelled to pursue foreign employees, primarily from the Ukraine.
Workers with refugee status do not need a work permit in order to work. Local labour agencies and the Department of Immigration are tasked to issue work and residency permits, and despite legal restrictions placed on the volume of employment permits granted to third-country workers, within the past few years they proved to be well beyond the total number of documented third-country workers.
All registered companies in Hungary can take advantage of productivity requirement incentives, which are all provided on a regular basis, regardless of company location or the nationality of the business-owner. Productivity requirements, on the other hand, such as investment minimums and employment creation, may be enforced to encourage the maintenance, expansion, and establishment of investments.
It is not mandatory for investors to procure from local providers, but they are subject to the European Union’s Rule of Origin. The Hungarian government implements an offset prerequisite of 100 percent for investments in the defense sector worth approximately 1 billion Forint or three and a half million USD.
The GOH cannot compel investors to divulge proprietary information on the grounds of fulfilling legal requirements. International IT providers are not required to grant encryption access or surrender source codes. The Hungarian government, pursuant to EU directives, no longer provides tax holidays determined via investment volume.
Security of Freedom of Property
Real property: Public land information in Hungary is accessible to everyone, and the state keeps a creditable database of land mortgage, ownership, and land parcel or real estate usufruct rights. Hungary offers no insurance on land titles. However, real and mobile mortgages (secured property interests) are acknowledged and implemented.
Purchasing farmland is restricted to private EU citizens and Hungarian nationals who hold an agricultural field degree or have at least 3 years of agriculture experience, as stipulated in the 2013 Land Law. Approximately 1200 hectares of farmland can be leased for up to twenty years, and no legal limitations exist for the lease or purchase of urban or non-farmland resources.
Hungary’s Land Law also permits prescriptive acquisitions of real estate property if the individual or entity has interminably occupied the vacant property for a minimum of fifteen years.
IP rights: Despite the lack of deterrent-level convictions for criminal and civilian intellectual rights violations, Hungary maintains a competent legal system for the protection of IP Rights. No major recent IPR regulations have been approved within the previous year, and some software and pharmaceutical industry representatives noted the potential for improving law enforcement if the Dept. of Prosecution sets up specialized groups to battle IPR crimes.
Some common intellectual rights violations include online piracy and selling counterfeit products and pharmaceuticals. It is important to note most sold counterfeit products originated from China. Approximately 5.5 million USD worth of counterfeit products were seized by authorities in 2015, and about 4.7 million USD in 2016.
Hungary became a participant in the World Trade Organization’s TRIPS agreement. It acceded in 2013 to Europe’s Patent Convention and entered into agreement with other leading foreign IPR contracts, which include the recently launched WIPO copyright agreement and its Phonograms and Performance Treaty. Hungary is also part of the Information Society Drive of the European Union, and in 2005, executed its Enforcement Directive.
1993 saw Hungary and the U.S. approving the Comprehensive Bilateral IPR Agreement to address patent, trademarks, and copyright protection. It was followed by a copyright and industrial property regulation that took effect on the 1st of July 1994, considerably strengthening the local patent framework. In June of 1999, The Copyright Law was approved, pursuant to the agreement with WTO TRIPS and its requirement of making important technical modifications.
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The IPR Agreement of 1993 acknowledged the exclusive freedom to permit works for public communication, such as exhibition, display, transmission, performance, retransmission, and projection of said works. The agreement also compels the protection of free expression of these rights and that they be independently transferable and exploitable. It acknowledges the right to allow the importation and public distribution of protected works and rights..
Trademarks are renewable and issued for 10 years, and all types of product- distinguishing signage that can be graphically presented may be trademarked. HIPO facilitates proceedings of invalid trademarks and the revocation of patents, while IPR-related infringement disputes are subject to court jurisdiction.
HIPO and the United States’ Trademark and Patent Office initiated a pilot project in July of 2010 to supervise the recognition of patents between Hungary and the U.S. The success of the pilot gave way to a signed memorandum agreement in April of 2012 between HIPO and the USPTO, which aimed to further accelerate and streamline patent recognition. The USPTO’s online site offers more information about the PPH project.
IPR enforcement became subject to NAV, an agency that resulted from a merger between HIPO and the USPTO and was approved in January of 2011. The NAV coordinates with the BSA and is also a constituent of HENT. NAV launched an exclusive cyber-crime operative group within the same period with the aim of addressing online IPR violations.
The infamous market review and the Special 301 Review of the USTR do not list Hungary.
Portfolio investments and capital markets: Hungary’s commercial industry provides a wide array of financial products and services, as well as advanced IT systems. The HUF (Hungarian Forint) has been convertible starting with 2001, and Hungary’s capital market affairs and financial regime are completely liberalized.
The 2001 Law on Capital Markets established policies related to marketing, conversion, and security concerns. Subsequent laws were set forth in 2007 to oversee entities managing investment funds (2011), commodities brokers (2007), and Collective Investment (2014), which compared to the Law on Capital Markets, provided more complex regulations.
These modifications were designed to establish a legal climate where great investment opportunities match easily with accessible and free equity. The 2016 amendments to the Civil Code have eliminated remaining hindrances to support efforts in public investment collections in the process of setting up a public limited enterprise.
In 1990, The BSE was re-opened and became the first accessible stock exchange operating in Eastern and Central Europe after the Communist era. A consortium in Austria and the Vienna Stock Exchange were converted in 2004 from a constitutional entity to a commercial enterprise. They purchased 68.8 percent of the Budapest Stock Exchange.
Hungary’s National Bank purchased these shares in November of 2015 and acquired ownership and control of the BSE, a constituent of the CEE since 2010. The former trading regime gave way to the internationally known Xetra in 2013.
The BSE currently comprises of sixty-two issuers and forty members. Certificates, shares, corporate bonds, investment notes, government and mortgage bonds, derivatives, and treasury bills were typically issued securities. As of 2015, the BSE has an average of 1.5 billion USD in monthly investment turnover quantity, and 18 billion USD worth of market capitalization. The OTP Bank, MOL, Richter Gedeon, FHB Mortgage Bank, Richter, and Magyar Telekom are frequently traded shares.
The sovereign debt of Hungary was updated in 2016 to investment grade by all three leading rating agencies – Fitch, Moody’s, and S&P (Standard and Poor’s).
Currency and Financial System
Hungary’s banks have an adequate capital position, and the country’s financial system has been invigorated over the last two years. After the financial crisis in 2008 and the subsequent period of deceleration, customer deposits mostly funded the banking industry.
Customer deposits contribute to nearly 60 percent of the overall liabilities of banks. The ratio of loan-deposits was 130 percent in 2012, eventually dropping to 85 percent in 2016, while NPLs (Non-performing loans) went down by 7 percent from a 18 percent ratio.
After a few years of deficit, the financial industry recovered in 2016 and became productive. Equity returns were at 8.8 percent after four years of a record-low ratio of -14 percent. The OTP Bank is Hungary’s largest state-owned bank, controlling a quarter of the marketplace and with assets worth roughly 29 billion USD. Takeover regulations are impartial and straightforward.
Foreign banking firms have been doing business in Hungary since the mid 90’s, when government-owned banks were undergoing a period of privatization. Starting with 2014 until 2016, after the Hungarian state purchased MKB, the Budapest Bank, and a portion of the Erste Bank respectively, along with a number of other foreign banks, these their overall assets dropped from approximately 70 percent to nearly 50 percent. Banks in Hungary enjoy a wide network of symbiotic banking alliances.
Hungary’s financial system is modern and two-tiered, with a progressive commercial sector, despite legal concerns that came about after Hungary’s Central Bank (MNB) acquired PSZAF, its authoritative financial and regulatory management body, in 2013.
The PSZAF acted as the centralized financial authority that governs all securities and financial markets. Together with the MNB, it manages a formidable two pillar regime of power over the commercial industry, overseeing market stability, as well as competent legislations and auditing systems.
The MNB occupied all of the PSZAF’s functions, which include customer protection, ultimately weakening its regulatory system. In April of 2015, Hungary’s SAO (State Audit Office) published a report that indicated the MNB’s merging of financial policies had impaired the system and rendered it impotent to enforce its regulations effectively.
In March of 2015, three brokerage companies (Hungaria Ertekpapir, Buda-Cash, and Quaestor) have lost more than 1.2B USD in profits due to lenient laws, bankruptcy, and suspected embezzlement, equivalent to nearly one percent of the country’s GDP. The parliament approved a bill shortly before the year ended, aimed to tighten regulations and the management of brokerage companies and their operations, and compensate financiers by increasing the bank’s fund contribution.
Hungary’s regulations provide limited credit accessibility to entrepreneurs. Most recently, laws were created restricting foreign currency credits or loans to those earning salaries in foreign currencies with the aim of mitigating potential inconsistency to the exchange rate.
In addition, the MNB decreased the ratio of loan-deposit transactions, discouraging banks from lending to businesses in high-risk sectors. Except for small business credits and exclusive GOH loan concessions, foreign investors tend to enjoy a relatively privileged credit access to the world market. Direct finance industries have smaller markets. Hungary has the highest banking tariffs in Europe.
A multinational company or any foreign national are not legally restricted from establishing a Hungarian bank account. Requirements include legitimate personal documents, such as passports, and an individual’s assertion of his or her U.S citizenship, as mandated by FACTA when it was passed into law in 2015. There have been no reports of Hungarian banks employing discriminatory measures on American citizens who plan to open a FATCA-based bank account.
Remittances and Foreign Exchange
Foreign exchange: Hungary’s currency (the Forint) has been part of the foreign exchange since January 1996 for all business-related transactions. Foreign currencies have been present and can easily be found in all exchange shops and banks.
The country has been compliant with OECD requirements in terms of convertibility and the IMF Article VIII. In 2001, an Act on Foreign Currency Liberalization removed the remaining restrictions on foreign exchange and permitted businesses free movement following the guidelines set by EU regulations. Economic stability has an impact on determining the strength of the currency rate of Hungary versus other currencies and the Euro.
Based on the joint-agreement with the EU and Hungary, it needs to eventually use the Euro as soon as it observes the guidelines. Hungary did not prioritize adopting the Euro currency and no specific date on when to start using it was set.
Reforms are intended to help strengthen the fiscal sustainability of Hungary and reduce the deficit to around 3 percent of GDP. Other criteria include a stable currency, a lower inflation rate, and the decline of the public debt percentage to 60 percent of GDP. The public debt of Hungary amounted to 74% of GDP but showed a decline at a very slow rate.
Hedging, long and short-term loan transactions, assignments, financial securities, short-period portfolio transactions and debt acknowledgment can be completed with no restrictions and declarations. Even though Hungary’s currency is mainly used as a form of payment, individuals may still use foreign currency as they settle financial matters.
Home loans were taken out by several Hungarians before the global economic crisis in foreign currencies which led to a depreciation of the Forint versus the Euro and Swiss Franc. Hungary’s Supreme Court released its statement that there were no violations or illegal processes seen in loan stipulations related to foreign exchanges, and therefore, the existing contract policy is still imposed. Forints are used in new personal loans unless the consumer receives income in a different currency.
The legislative body of Hungary allows the restoration of businesses and there have been no restrictions in terms of converting the money to a foreign currency. The Forint has been fluctuating versus other currencies and the Euro.
One of the policies of the Central Bank is to address inflation. It has no particular exchange rate concerns. However, through certain financial policies, it also indirectly affects the rate of foreign exchange.
Remittance policies: In terms of debt services, capital gains, capital, inflow and outflow of remittances, intellectual property gains, and some foreign inputs, the GOH does not implement any restrictions on these aspects.
The processing time for remittances is following the guidelines set by the financial sector which is more likely less than a month, depending on the location of the receiver and if the receiving banks can easily be identified.
Sovereign wealth fund: The GOH does not find sovereign wealth funds significant. In 2011, the GOH acquired 14.6 billion USD worth of pensions from private companies which led to forming a Reform on Pension and Reduction of the Debts Fund. This was managed by the State Debt Management Office. In 2015, the Reform of Pension was used. A Transparency group stated 50 percent of the acquired sum was reported in the national budget.
In 1990, previous state-owned sectors we privatized, specifically in strategic areas like transportation and energy. However, Hungary reversed the approach in 2010 by creating new businesses in the production of machineries and telecommunications, as well as energy sources.
There were around 500 state-owned enterprises in 2017. The GOH manages the majority of businesses with at least 2/3 of it. A great number of municipally-owned businesses were also reported to be increasing.
In 2011, a policy on national properties was mentioned as one of the significant goals of state-owned enterprises, which was aimed to be owned by the government. There were about 66 companies acquired by the state in April 2017. No official list of state-owned enterprises were presented. However, the State Assets Office has a webpage that provides a list of businesses under its supervision.
Major state-owned enterprises include Magyar Posta, the National Asset Management Office, the State Railways, Szerencsejatek gambling monopoly, the National Infrastructure Company, the RABA car manufacturing company, and other state-owned financial institutions like Budapest Bank and the MKB. Hungary has 25% ownership of MOL (a hydrocarbon company).
The same policies apply to state-owned enterprises like private-owned businesses, but in essence, SOEs have certain privileges from a few authorities. The GOH made it challenging for energy companies which are foreign-owned to do business in Hungary, in 2012.
Hungary released a statement that they are interested in acquiring private-owned energy companies. The government was able to purchase the gas storage of ON’s and Fogas (retail gas firms).
From 2014 to 2015, the country took over some energy companies. It was reported the only remaining foreign-owned retail gas company, ENI’s Tigaz, was due to leave the market in June of 2015. Before 2016 ended, Fogaz, a company owned by the state, was the sole retail gas provider in the country. A press release was issued stating Hungary has the intention to take control of the electricity and retail markets as well.
Guidelines of the OECD on the corporate management of SOEs: The GOH complies with the OECD Guidelines and the EU’s policies on SOEs.
Based on a study in 2015 done by Transparency International, SOEs earned 61 points over 100 in regards to transparency, which involved their integrity, data released in the media, code of ethics, and the internal management system. Transparency International said an improvement was evident unlike the last survey done in 2013. During their research, no SOEs made an effort to review policies and compliance relating to disclosure requirements and transparency even if it was required by the law.
Privatization programs: SOEs’ privatization in 1990 included manufacturing, energy sources, chemistry, and food processing. It paved way to a significant change in the economy. This provision was not implemented in previous years since the majority of SOEs have been privatized.
In fact, there was a complete reverse of the events in 2010 since the GOH took over the ownership of a few sectors like public utilities and energy sources. With regard to the financial industry, foreign ownership dropped from 80% to 50% in 2010 to 2016. Prime Minister Orban announced Hungary has plans to own over 50% of financial institutions in the country.
Responsible Business Practices
The GOH encourages large corporations to observe the guidelines set by the OECD for Multinational Corporations which focus on due diligence practice in order to maintain responsible business practices. Hungary formed the National Contact Office in the Office of National Economy for shareholders to solicit information and raise issues for the benefit of responsible business practices.
The National Contact Point established activities for the business community to promote awareness of OECD guidelines. It involves all government agencies, NGOs, and trade unions.
The GOH formed a plan of action on Human Rights and Businesses, in relation to the idea of participating with the UN for the same cause.
The OECD Council monitors all OECD events, which include the National Contact Point. Aside from the NCP, it also involves the Statistics Office, all ministries, Energy Authorities, the Intellectual Property Agency, the National Research Office, the Innovation and Development Agency, National Customs and Tax Administration, the Infocommunications and Media Agency, the State Treasury, the MNB, and the Competition Authority. Based on a survey made by Hungary’s CSR, 55 percent of businesses involve CSR policy, 44 percent of businesses consider CSR to have a significance in terms of competitiveness. Nielsen Global’s research also found out that about 60 percent of the adult population in Hungary prefers firms which have a commitment to CSR activities which exceed 54 percent compared to the EU.
Hungary’s Criminal Code prohibits corruption and bribery. Bribes and facilitation payments to public officials are considered illegal and failing to report bribery is criminalized.
Consequences or punishments for bribery cases could be imprisonment, seizure of assets, or both. Corporate prosecutions has been implemented after Hungary became a member of the European Union.
The conflict of interest law forbids parliament members from being part of the board of directors of SOEs. Public officers and their family members are obliged to disclose their assets annually.
However, there are no specific sanctions applied for noncompliance or undeclared assets. Usually, eminent politicians are compelled to alter declared assets after the media exposure of exclusion of real estate ownership or fractional ownership as well as other declared assets.
There are no sanctions for the omission of assets of politicians. The enforcement of criminal rules punishing corruption has been challenging due to the unwillingness of the Office of the Prosecutor to arraign cases connected to high politics, according to analysts.
The Ministry of Interior and the Ministry of Justice in Hungary are accountable for fighting corruption, and there is a legal system established to sustain their efforts. The country is signatory to the OECD Convention on Combatting Bribery and has integrated its stipulations into its criminal or penal code, including subsequent demands of the EU and the OECD on bribery prevention.
In 2015, the government approved a national anti-corruption strategy for the 2015 to 2018 period, while the 2013 criminal code presented stringent anti-corruption rules. Analysts assert the platform will make the GOH more influential than private sectors and NGOs as averse to fighting grand corruption. The government approved the 2002 Criminal Law Convention on Corruption as well as the 2004 Civil Law Convention on Corruption. Hungary has a membership to GRECO, a group established by the European Council to track the compliance of their guidelines for combatting corruption.
In 2011, the Hungarian government established the NPS. The NPS is an agency that targets anti-corruption on state administration and law enforcement, supervised by the Minister of Interior. The agency is in charge of providing investigative expertise on corruption cases and administering background checks on intelligence, NAV and law enforcement employees.
An Anti-Corruption Division was formed in the Central Investigating Chief Prosecutor’s Office, in response to 2011’s Prosecutors Office Reforms. In the beginning of 2012, the Anti-Corruption Division added more prosecutors concentrating on high level cases of corruption, from 8 to 35. However, it does not increase the prosecutions of high level corruption cases.
In the latter part of 2016, the Hungarian government revoked its membership with the OGP after transparency watchdogs sent the OGP Steering Committee a concern letter in 2015. An investigation in Hungary was launched by the OGP followed by a critical review. The Hungarian government was advised by the OGP to take actions to re-establish transparency as well as to support civil society improvements. After Azerbaijan, Hungary was the second EU member state to be chastised by the OGP after the rejection of the conclusion report. It had then revoked its membership with the organization.
The Hungarian government recently intensified its condemnation on nongovernmental organizations and transparency watchdogs by condemning them of serving foreign interests. The campaign against NGOs threatened the ongoing anti-corruption operation as well as the country’s good governance and transparency promotion. The foreign agent registration and funding restrictions for NGOs was the law introduced to the parliament in 2017.
Transparency International is operational in Hungary. The country is ranked as the 57th least corrupt nation out of 176 nations in 2016’s Corruption Perceptions Index reported by Transparency International. It’s ranked 24th out of 28 member states of the EU.
According to TI, state institutions are accountable for managing public organizations that were supervised by people with fervent loyalty to the political ruling party, restricting their capability to perform their role as a watchdog on the government. Watchdogs and the TI stated government spending data was still hard to access even though the government had revised the Freedom of Information Act in 2013 and in 2015.
There are some uninterrupted cases of low level corruption against several public officers. However, the government does not expose such cases. Data and information related to anti-corruption is disseminated by the government yearly, except explicit information on corruption cases including its investigations.
Opposition parties and Transparency watchdogs indicated the government exposed cases against former government officials and opposition politicians. However, political ruling party officials are often quietly removed.
In 2016, an investigation was launched against a ruling party Member of the Parliament who was caught on a videotape receiving a bribe related to EU funds distribution. In 2017, prosecutors made an official accusation against him with regards to suspicious budget fraud, including other criminal cases. The government implies the Data Protection Act as the cause of absence of publicity of ongoing cases and investigations. However, the policy obstructs transparency, making it tough for organizations of watchdogs to assess and evaluate the efficiency of government actions in fighting corruption.
NGO watchdogs and private companies expressed their concerns on issues in the public procurement sector despite the implementation of the Public Procurement Act and compliance to EU requirements. Based on their censure, transparency in public procurement is inefficient and is categorized by the unbalanced enforcement of laws against corruption, as well as prevalent favoritism and cronyism.
Nongovernmental organizations, foreign governments, and the business community have the same concerns and uphold an ongoing negotiation with the government to resolve the situation. Moreover, spectators brought up concerns regarding the appointments set to quasi-independent organizations by the loyalists of the Fidesz party, same as with the State Audit Office and Media Council.
The 2015 Public Procurement Act primarily encompassed comprehensive rules on conflicts of interest regarding prohibiting members of the family of a public official from joining public tenders. However, the parliament revised the act to prohibit only members of the family who live together in one household. With comprehensive EU directives, there are still opportunities for assessments of tender specifications and bid proposals that could possibly be adjusted to preferred companies.
Government corruption in Hungary is correspondingly elevated on the U.S and EU anti-corruption report. There is a high index of fraud and corruption in the country’s European Union funded projects. Hungary has levied or paid charges and had its development funds withheld on some occasions.
In 2016, the EC terminated $134 million in ERDF subsidy payments to Hungary from the foregoing funding cycle (2007 to 2013) due to corruption in the country’s procurement system. OLAF found that contracts with more than $1B in value were corrupted after the completion of the investigation on the Budapest Metro Line M4 construction funded by the EU in 2016.
Hungary was identified to give back to the EU $240 million in funds. The United States Department of States forbids some officials and personalities from Hungary to enter in the U.S. under Presidential Proclamation 7750 because of corruption that negatively affected the national interests of the United States.
Anti-corruption agencies and Transparency International have emphasized European funds and grants for development in Hungary as the biggest source of corruption, after a study by TI showed a high index of corruption as well as overvaluing in as much as 90% of European Union funded projects.
In a 2016 CRCB study, the 2009 to 2015 data on public procurement showed the substantial inflow of European Union funds reduced competition, as well as elevated the level of corruption and overrating in public procurements. EU funding works performed incompetently in terms of corruption risks, transparency, and competitive intensity, compared to Hungarian funding works, based on the study. Aside from the positive effect on economic growth, EU funding programs in Hungary have contributed to a crony capitalism and political favoritism system, according to the study.
Security and Political Environment
Hungary’s political approach is sometimes not helpful to businesses in general. However, security in the country is quite stable. Crimes relating to violence are low, but street crimes have been reported as the most repeated offenses in Hungary.
In 2014, a bombing incident took place and targeted CIB Bank’s Budapest branch. No individual was reported to be injured. The people or person behind the crime and the motive were not identified.
In 2016, another bomb attack occurred in Budapest which injured policemen right before the discussion on the national referendum about immigration arguments. The GOH was able to identify a suspect who was captured after a few days. However, the motives to the bombing incident still remain unknown.
In 2006, a lot of protests happened, but violence relating to Politics in Hungary is not common. For instance, the transitioning stages of an authoritarian form of government to the democratic type were peaceful, and since 1990, the election process has been reported as a smooth process.
Labour Practices and Policies
Hungary’s total workforce of highly-skilled and educated people is around 4 million. Based on their rate of literacy, it exceeds 98 percent and 2/3 of the workforce has finished secondary, vocational, or technical education.
Their core education focuses on economics, medicine, science, and engineering. Hungary still had a strong foundation even though over the past years, some Hungarians prefer to work abroad or in other EU states. Large firms noticed Hungary needs to improve its flexibility in terms of competition in the community.
Recently, a number of young students were reported to attend US and European business institutes in the country. Foreign languages, like German and English, have become part of their subjects, but the country still gets the lowest rate in terms of proficiency within EU member states. Based on the European Commission’s data in 2017, 37 percent of working Hungarians speak a foreign language, compared to the EU which is at 66 percent.
The country’s unemployment rate has decreased to 4.3 percent from the previous rate of 11.8 percent in 2010. In January 2017, it was even lower than the EU which had an average of 8.1 percent and an average of 6 percent to that of the OECD.
The employment rate of Hungary for people aged 15 to 64 years reached 64 percent during the last quarter of 2015 which was a bit lower than the average of the EU which had 65.6 percent and a percentage of 66.3% from the OECD. Statistics included those citizens who work as part timers and overseas as per official labour data. An estimated 10 percent of the population belong to these groups.
Those nationals who are receiving unemployment benefits are required to at least spend a certain number of work hours to work for the government. Approximately 200,000 people received the benefits from government-funded unemployment programs.
While the unemployment rate has shown a decline, some businesses started to lack high-skilled workers. The GOH started to address this issue by making an adjustment to the minimum salary of workers for the next few years through offering jobs to those who are looking for employment.
One of the opportunities they observed is the regional differences which affect the competitiveness of workers in the labour force. The shortage of high skilled workers from the financial, IT, and manufacturing industry is mostly seen in the central and northwest parts of Hungary.
In terms of wages, Hungary’s rate is lower compared to other countries in Europe despite the government’s efforts to increase their wages. Hungary’s labour productivity has a lower rate than the average output in the EU but has a higher rate than other Eastern and Central European countries.
In 2013, Hungary established a job security program which encourages the unskilled workforce, women who recently gave birth, and workers aged below 25 and more than 55. The GOH coordinated with vocational schools and businesses in 2015 to launch job training to pave the way to improving job opportunities, especially for young individuals.
However, some analysts argue the approach compromises the person’s skills in mathematics and comprehension in which some subjects were previously identified to have been scored poorly on by Hungarian students. The program also did not have any topics addressing the workers’ competitiveness in the labour market.
The GOH approved financial assistance to both university and college education. It allocated scholarships to produce the desired number of high skilled workers in different industries. To reduce the number of Hungarians seeking employment abroad, the country made an agreement to make the students sign a document stating they are willing to work for the government for a certain period of time.
The GOH gathered employers’ authorized persons and trade unions, and made them sign a stipulation to increase wages for minimum rate earners by 15 percent for unskilled employees and by 25 percent to those who are high skilled in 2017. These percentages increased in 2018 by 8 percent and 12 percent, respectively.
The agreement was to reduce taxes on business and payroll since there was an increase of labour costs. Hungary started to consider employing foreign workers from other countries which have ethnic Hungarian groups.
In 2012, a new Labour Policy was formed. The new policy introduced significant revisions in order to strengthen the workforce and flexibility in competing with different sectors in society.
It modified a few of the existing rights like collective bargaining and was endorsed from trade groups to labour councils. Trade unions in Hungary have 15 percent in terms of membership and the EU has an average of 25 percent.
The GOH made changes in laws of Higher Education, particularly those institutions owned by foreign investors which were approved during the second quarter of 2017. The policy was criticized and considered to be an attack on the Central European University.
The law obliged educational institutions from third world countries to establish a school in their respective country and form an agreement between them and their accrediting country. On June 2017, the same policy was reviewed by the country’s Constitutional Court.
The EC had even formed an investigation regarding the issues. If it will be implemented, the legislative body’s decision could make reputable universities leave the country. Some people say the legislation was formed to silence the government’s critics in order to enforce their agenda.
OPIC and insurance investment programs: The US OPIC started its operations in the country since 1989. It offers US investments direct loans or guarantees, insurance on political risks, and capital investments for private businesses. OPIC’s market targets the consumer and private financing to large project loans.