Hungary

The following report was published by the U.S Department of State, Bureau of European and Eurasian Affairs on June 29, 2017. It is reproduced in full below.

With a population of 9.8 million, Hungary has an open economy and GDP of approximately $120 billion. Hungary has been a member of the European Union (EU) since 2004, and fellow member states are its most important trade and investment partners. Macroeconomic indicators are generally strong: the economy grew by 2% in 2016; growth is expected to increase to at least 3% in 2017, based on increasing domestic demand and exports and the resumption of disbursements of EU development funds; the government has kept the deficit below 2.5% of GDP since 2013, thereby avoiding the intrusive EU monitoring mechanism, and has lowered public debt from more than 80% in 2010 to 74% in 2016. All three major ratings agencies upgraded Hungary’s sovereign debt to investment grade in 2016.

Hungary’s central location and high-quality infrastructure have made it an attractive destination for Foreign Direct Investment (FDI). Between 1989 and 2016, Hungary received approximately $80 billion in FDI, mainly in the banking, automotive, software development, and life sciences sectors. The EU accounts for 79% of all in-bound FDI; the United States is the largest non-EU investor. The GOH actively encourages investments in manufacturing and high-value added sectors, including research and development centers, and service centers. The GOH industrial strategy targets biotechnology, information and communications technology, software development, the automotive and defense industries, and health tourism as priority sectors for growth. To promote investment, at the start of 2017 the GOH lowered corporate tax to 9% and labor tax to 22% in these sectors, among the lowest rates in the EU.

Despite these advantages, Hungary’s regional economic competitiveness has declined in recent years. Since early 2016, multinationals have identified shortages of qualified labor, specifically technicians and engineers, as the largest obstacle to investment in Hungary. In certain industries, such as media and retail, unpredictable, sector-specific tax and regulatory policies have favored national and government-linked companies. Additionally, persistent corruption and cronyism continue to plague the public sector. Since 2010, Hungary has dropped in Transparency International’s (TI) Corruption Perceptions Index, placing 24th out of 28 EU member states in 2016. Also in 2016, the GOH withdrew from the Open Government Partnership (OGP), a transparency-focused international organization, after refusing to address the organization’s concerns about transparency and good governance. The EU has criticized bankruptcy proceedings for being unfriendly to remediation, leading to a very low average recovery rate of 40 cents on the dollar, compared to the OECD average of 72 cents per dollar. Additionally, some executives in Hungarian subsidiaries of U.S. multinationals have noted that the GOH’s strong anti-migrant rhetoric and actions have negatively affected board members’ views of Hungary, making it more difficult for the subsidiaries to obtain approval for new investments.

The 2015 implementation of the Advertising Tax and a similar new tax on tobacco products has raised concerns with some businesses that indirect expropriation may be possible through discriminatory taxation that disproportionately affects a given company with the intent to force a firm to accept a buy-out by a domestic firm. The EU investigation into the Advertising Tax and subsequent backtracking suggests that the EU is able to enforce marketplace non-discrimination and illegal state aid rules by implementing injunctions. In 2014 and 2015 the GOH introduced taxes which targeted multinational retail chains. In both instances, the EU found the new levies to be discriminatory and obligated the GOH to repeal them. In early 2017, press reported on draft GOH proposals which would again implement new restrictions and taxes on foreign retail chains.

In September 2016, PM Orban told an international audience of the Krynica Economic Forum in Poland that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Through windfall taxes, the financial transaction tax, and rescue schemes designed to ease burdens of foreign currency mortgage holders, analysts say the GOH has pushed several foreign-owned banks to sell off their Hungarian business units. German-owned MKB, GE-owned Budapest Bank, and Citi’s retail banking operation have sold their operations to the GOH or other Hungarian investors.

Table 1

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Hungary maintains an open economy and its high-quality infrastructure and central location are features that make it an attractive destination for investment. Attracting FDI is an important priority for the GOH, especially in manufacturing and export-oriented sectors. In other sectors, including banking and energy, however, government policies have resulted in some foreign investors selling their stakes to the government or state-owned enterprises. Hungary was a leading destination for FDI in Central and Eastern Europe in the mid-nineties and the mid-two-thousands, with annual FDI reaching over $6 billion in 2005. The pace of FDI inflows slowed in subsequent years as a result of the 2008 global financial crisis and increasing competition for investment from other countries in the region. In 2016, net FDI amounted to $4.6 billion while total gross FDI amounted to $84 billion.

As of 2016, the Hungarian Central Bank (MNB) calculates investment positions by ultimate controlling parent investors (which defines an investment made by a U.S. company operating for example in Germany or in any other country as a U.S. investment), in addition to figures on immediate investors made by a country. As a block, in 2014, the EU accounted for 79% of all FDI in Hungary in terms of direct investors and 58% in terms of ultimate controlling parent investors. In terms of ultimate controlling parent investors, Germany is the largest investor, followed by the United States, Ireland, Austria, France, the United Kingdom, Italy, the Netherlands, and Japan. As ultimate controlling parent investor, U.S. firms account for 19% of total investments, second only to Germany. As direct investor, U.S. firms are the largest non-EU investor, holding 2% of all FDI stock, amounting to $1.7 billion. The majority of U.S. investment falls within automotive, software development, and life sciences sectors. Approximately 400 companies of U.S. origin are established in Hungary, although the figure is closer to 800 if representation offices, sales offices, and sole proprietorships owned by U.S. citizens are considered.

The GOH in 2010 implemented a number of tax changes to increase Hungary’s regional competitiveness, including a reduction of the personal income tax rate to 16% in 2010 and 15% in 2016, the reduction of business income tax rates to 9% in 2017. The GOH offset these rate reductions with a series of “crisis taxes," large tax increases targeting specific industries. Through the combination of these actions, the GOH was able to maintain the budget deficit below 3% of GDP and exit the EU’s excessive deficit procedure (EDP). (Hungary was under the EU’s EDP procedure at the time of EU accession in 2004. The Commission lifted the EDP in 2013, after the GOH budget deficit fell to less than 3% of GDP for two consecutive years.)

Many foreign companies have expressed displeasure with the unpredictability of Hungary’s tax regime, and its retroactive nature, speed, and volume of legal and tax changes. They have also complained that the GOH introduced many recent tax measures with little or no consultation with the affected businesses. Some companies operating in Hungary have also claimed that recent “crisis taxes" are inconsistent with EU regulations as they target industries dominated by foreign firms and fail to reflect the actual costs of regulating the affected sectors. Both the EU and the IMF have requested the gradual phasing out of the sectoral taxes, observing that they distort competition, reduce foreign investment and economic growth, and adversely offset the economic benefits of cuts in personal and corporate tax rates.

Ongoing crisis taxes, along with other regulatory measures and fees implemented in 2010-2012, targeted the banking, energy, telecommunications, and retail sectors. In 2014, Parliament approved a series of new, progressively-tiered taxes that disproportionately penalized foreign businesses in the tobacco, retail, and media industries, while simultaneously favoring Hungarian companies.

The 2014 Advertisement Tax levied a one-time, retroactive tax on revenue, rather than profit. Tax experts and Hungarian MPs noted that the law, which had several tax brackets, included a 50 % levy on all revenue over $80 million, a provision clearly designed to hit German-owned TV group RTL Klub - the only firm that fell into the top tax bracket and notably the most prominent independent voice in the broadcast media landscape. RTL turned to the European Commission to challenge the law. In March 2015, the EC launched an in-depth investigation and implemented a suspension/ injunction which prohibited Hungary from applying progressive rates, determining that the tax was discriminatory and in breach of EU rules on illegal state aid and on competition. The EC has released the injunction and the GOH has complied with the ruling, introducing a flat 5.3 % tax on all advertisement revenue in May 2015.

A 2014 health contribution tax and food retail chain supervisory fee also targeted large foreign firms, including Philip Morris, Tesco, Spar, and Auchan. The EC determined in July 2015 that the tobacco and retail taxes gave unfair advantage to companies with smaller turnover, suspended the implementation of the taxes, and initiated infringement procedures against Hungary. In response, the GOH reversed the food retail chain supervisory fee and restored the flat tax in November 2015. In addition, the EC determined in February 2016 that Hungary’s 2014 retail law, which requires retail companies with over $53 million in annual sales to close down if they report two consecutive years of losses, was discriminatory and violated the freedom of establishment. The EC subsequently launched an infringement procedure, which is still ongoing.

The GOH has also levied special taxes on energy companies in recent years. Although the energy crisis tax was phased out in January 2013, the GOH simultaneously raised the “Robin Hood tax" - a levy on energy companies’ earnings - from 11% to 31%, which is paid in addition to the corporate tax. As the corporate tax rate decreased to 9% in 2017, the effective tax currently stands at 40%.

The GOH also launched a public utility tax in 2013 on water and sewer pipelines, natural gas, heat and electricity lines, and telecommunication lines. The GOH has failed to fulfill pledges made in early 2015 to decrease the telecom tax, a move expected to improve the business climate; no modification have been made to date.

The GOH has committed to gradually phasing out special bank taxes, but will maintain the 2013 Financial Transaction Tax imposed on cash withdrawals from bank offices and ATMs, and money transfers from bank accounts, even though the banking sector as a whole posted significant losses until 2016.

The GOH has publicly declared that reducing foreign bank market share in the Hungarian financial sector is a priority. Accordingly, GOH initiatives over the past several years have targeted the banking sector and reduced foreign participation from about 70% before the financial crisis in 2008 to just over 50% by the end of 2016. In addition to the 2010 bank tax and the 2012 financial transaction tax levied on all cash withdrawals, new regulations in 2015 obligated banks to retroactively compensate borrowers for interest rate increases on certain consumer loans, even though these increases were spelled out in the original contract with the customer, and were permitted by Hungarian law.

The GOH later mandated that banks that issued loans denominated in foreign currencies convert the outstanding balances to Hungary’s domestic currency, the Forint, following a fixed, sub-market exchange rate. While Parliament softened the law by using a balanced spot rate for currency exchange that was more in line with market exchange rates, the law caused billions of dollars in losses to banks, with heavy exposure to foreign currency-denominated mortgages. These regulations affected the lending capacity and balance sheets of several banks so severely that banks required major recapitalization in order to meet Hungarian capital reserve requirements.

On the positive side, as of 2016, as part of a previous agreement with the European Bank for Reconstruction and Development (EBRD), the GOH reduced its onerous bank tax from 0.53% to 0.31% on 2009 balance sheets, and pledged to lower it further until 2018.

The GOH defends its sectoral targeting with political and populist rhetoric. Prime Minister Orban told supporters during a March 2014, rally that Hungary had proved its strength by battling the world of money, a reference to Hungarian regulation of the banking sector. Other GOH officials have publicly criticized investors in targeted sectors for earning “excessive profits" although the GOH has offered no definition of what constitutes “excessive profits."

While the pharmaceutical industry is competitive and profitable in Hungary, multinational pharmaceutical companies complain of numerous financial and procedural obstacles. Specifically, pharmaceuticals complain of high taxes on pharmaceutical products and operations, prescription directives that limit a doctor’s choice of drugs, and obscure tender procedures that negatively affect the competitiveness of certain drugs. Pharmaceutical firms have also taken issue with GOH moves to weigh the cost of pharmaceutical procurement as more important than efficacy when issuing tenders for public procurement.

The GOH continues to cultivate foreign investors in manufacturing for export and has not yet targeted those sectors with punitive taxes. However, some U.S. firms involved in high-volume export have reported they are often under audit by the Hungarian Tax and Customs Authority. These audits generally take a week or more and involve an auditor visiting the business and requesting reports and paperwork to corroborate VAT reimbursements and tax declarations. VAT reimbursements are often delayed as a result of these audits, resulting in substantial cost - VAT is 27% in Hungary on most products. Additionally, firms report that auditors apply a strict liability system with regard to errors. Human error, including calculation mistakes or using the wrong form, can result in fines worth several hundred dollars per infraction. At the end of 2015, the GOH announced plans to transform the National Tax and Customs Authority (NAV) into a streamlined, more efficient organization that would focus on high-risk areas and customers, and fast-track companies with proper internal controls in lower risk sectors. Although NAV has cut 10 % of its staff and tax revenues have increased, there is a general consensus that there is still room for improvement in NAV’s dealing with its customers.

Multinational executives in manufacturing and technical fields identify labor shortages as the single largest obstacle to investment. Hungary’s highly-qualified labor force presents an important competitive advantage. However, as Hungarians increasingly seek work abroad, shortages of highly-educated and skilled labor are negatively affecting growth in certain regions and industries. In addition, declining OECD Program of International Student Assessment (PISA) scores - a global exam measuring abilities in math and comprehension - may signal that the workforce is losing its ability to learn new skills and adapt to changing labor market conditions. Other obstacles include a persistent lack of transparency and predictability, reports of corruption and favoritism (particularly in GOH procurement and construction), and excessive red tape.

The GOH established the Hungarian Trade and Investment Agency (HITA) in 2011 to encourage foreign companies to invest in Hungary, facilitate bilateral trade, and support the activity of Hungarian small and medium sized enterprises (SMEs). In 2014, HITA was split into HIPA, which encourages and supports inbound FDI, and the Hungarian National Trading House (MNKH), which promotes Hungarian exports abroad. Both HIPA and the MNKH are currently under the authority of the Ministry of Foreign Affairs and Trade (MFAT). HIPA offers company and sector-specific consultancy, recommends locations for investment, acts as a mediator between large international companies and Hungarian firms to facilitate supplier relationships, organizes supplier training, and maintains active contact with trade associations. Its services are available to all investors. For more information, see: https://hipa.hu/main

Starting in 2012, the government has concluded a number of strategic agreements with selected large investors and business representations. To date, the total number of such agreements is 79, including with the American Chamber of Commerce. The government provides individual tax preferences to such partners within EU limits, which cap tax allowances. In 2017 the government additionally established a Competitiveness Council, chaired by the Minister of Economy, that includes representatives from multinationals, chambers of commerce and other stakeholders to increase Hungary’s competitiveness. For more information, see: http://www.kormany.hu/en/ministry-for-national-economy

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign ownership is permitted with the exception of some “strategic" sectors including defense-related industries and farmland.

According to the Land Law, passed in 2013 and entered into force on May 1, 2014, only private Hungarian citizens or EU citizens resident in Hungary with a minimum of three years of experience working in agriculture or holding degree in an agricultural discipline can purchase farmland. Eligible individuals are limited to purchasing 300 hectares (741 acres). All others may only lease farmland; non-EU citizens and legal entities are not allowed to purchase agricultural land. All farmland purchases must be approved by a local land committee and Hungarian authorities, and local farmers and young farmers must be offered a chance to purchase the land first before a new non-local farmer is allowed to purchase the land. For those who do not fulfill the above requirements or for legal entities, the law allows the lease of farmland up to 1200 hectares for a maximum of 20 years. The GOH has invalidated any pre-existing leasing contract provisions that guaranteed the lessee the first option to purchase, provoking criticism from Austria and Austrian farmers. Austria has reported the change to the EC, which initiated an infringement procedure against Hungary in October 2014. In March 2015, the EC launched another infringement procedure against Hungary concerning its restrictions on acquisitions of farmland.

Since 2012, the GOH has invested in state-owned enterprises with the objective of lessening the participation of foreign-owned competitors, especially in the energy sector. Foreign investors interested in financial institutions and insurance companies must officially notify the GOH of their intentions, but do not need advance authorization. Foreign financial institutions may operate branches and conduct cross-border financial services in Hungary, in keeping with OECD commitments. Currently, foreign firms control 66% of the manufacturing sector, 90% of the telecommunications sector, and 35% of the energy sector. The private sector currently produces about 80% of Hungary’s economic output.

In September 2016, PM Orban told an international audience of the Krynica Economic Forum in Poland that at least half of the banking, media, energy, and retail sectors should be in Hungarian hands. Through windfall taxes, the financial transaction tax, and rescue schemes designed to ease burdens of foreign currency mortgage holders, analysts say the GOH has pushed several foreign-owned banks to sell off their Hungarian business units. German-owned MKB, GE-owned Budapest Bank, and Citi’s retail banking operation have sold their operations to the GOH or other Hungarian investors. In 2014, press reported that Austria’s Raiffeisen Bank and Italian-owned CIB considered exiting the market. Raiffeisen’s situation has since stabilized and the financial sector has returned to profitability. In 2014-2015 the GOH also established control over the locally owned network of savings cooperatives. These developments, along with the government’s existing holdings (including state ownership of savings cooperatives) bring state participation in the financial sector to nearly 60%, including EximBank, the Hungarian Development Bank, and the Clearing House. In commercial banking, state participation is below 50%.

Ownership of companies in Hungary is highly concentrated. It is common for one or two stockholders to have a controlling stake in large corporations. Crossholdings are common and the independence of directors sometimes difficult to establish.

Business Facilitation

The registration of business associations is compulsory in Hungary. Firms must contract an attorney and register online with the Court of Registration. Registry courts must process applications to register limited liability and joint-enterprise companies within 15 workdays, but the process usually does not take more than three workdays. If the Court fails to act within the given timeframe, the new company is automatically registered. If the company chooses to use a template corporate charter, registration can be completed in a one-day fast track procedure. Registry courts provide company information to the Tax Office (NAV) eliminating the need for separate registration. The Court maintains a computerized registry and electronic filing system and provides public access to company information. The minimum capital requirement for a limited-liability company is HUF 3,000,000 ($10,800); for private limited companies HUF 5,000,000 ($17,900), and for public limited companies HUF 20,000,000 ($71,400). Foreign individuals or companies can establish businesses in Hungary without restrictions.

Further information on business registration and the business registry can be obtained at the Company Information Service: http://ceginformaciosszolgalat.kormany.hu/index

Outward Investment

The stock of total Hungarian investment abroad amounted to 7.9 billion Euros in 2016. Outward investment is mainly in manufacturing, services, finance and insurance, and science and technology. The GOH neither promotes nor restricts investment abroad.

2. Bilateral Investment Agreements and Taxation Treaties

Hungary and the United States do not have a bilateral investment treaty (BIT).

Hungary has bilateral investment treaties that the following countries: Albania, Argentina, Australia, Austria, Azerbaijan, Belgium, Bosnia and Herzegovina, Bulgaria, Canada, Chile, China, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, India, Indonesia, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Lithuania, Luxemburg, The former Yugoslav Republic of Macedonia, Malaysia, Moldova, Mongolia, Morocco, The Netherlands, Norway, Paraguay, Poland, Portugal, Romania, Russian Federation, Serbia, Singapore, Slovakia, Slovenia, South Korea, Spain, Sweden, Switzerland, Thailand, Tunisia, Turkey, Ukraine, United Kingdom, Uruguay, Uzbekistan, Vietnam and Yemen.

For a full list of treaties containing investment provisions that are currently in force, see http://investmentpolicyhub.unctad.org/IIA/CountryBits/94#iiaInnerMenu

Bilateral Taxation Treaties

Hungary has tax treaties that eliminate many aspects of double taxation with the United States and the following other countries: Albania, Australia, Austria, Azerbaijan, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Estonia, Finland, France, Georgia, Germany, Great Britain, Greece, Hong Kong, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kuwait, Latvia, Lithuania, Luxembourg, The former Yugoslav Republic of Macedonia, Malaysia, Malta, Mexico, Moldova, Mongolia, Morocco, The Netherlands, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Serbia, Singapore, Slovakia, Slovenia, South Korea, South Africa, Spain, Sweden, Switzerland, Taiwan, Thailand, Turkey, Tunisia, Ukraine, Uruguay, Uzbekistan and Vietnam.

Negotiations were concluded in 2010 to revise Hungary’s current tax treaty with the United States; this is currently awaiting U.S. Senate ratification.

In January 2014, Hungary signed a Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement with the United States to improve international tax compliance through mutual assistance in tax matters and the automatic exchange of tax information. The United States and Hungary have also signed a totalization agreement that will eliminate double social security taxation and fill gaps in benefits for workers that have divided their careers between the two countries.

3. Legal Regime

Transparency of the Regulatory System

For foreign investors, the most relevant regulations stem from EU directives and the laws passed by Parliament to implement these. Laws in Parliament can be found on Parliament’s website ). Legislation, once passed, is published in a legal gazette and available online at www.magyarkozlony.hu. The GOH can issue decrees which also have national scope, but they cannot be contrary to laws enacted by Parliament. Local municipalities can create local decrees, limited to the local jurisdiction.

The GOH infrequently invites interested parties to comment on draft legislation. Civil organizations have complained about a loophole in the current law that allows individual MPs to submit legislation and amendments without public consultation compulsory for legislation submitted by GOH institutions. The average deadline for submitting public comment is often very short, usually less than one week. The Act on Legislation and the Law Soliciting Public Opinion, both passed by Parliament in 2010, govern the public consultation process. The laws require the GOH to publish draft laws on its webpage and to give adequate time for all interested parties to give an opinion on the draft. However, implementation is not uniform: the GOH has not solicited public comments on several laws, such as a draft law on the Central Bank, the changes in disability pensions, the law on higher education, or the Land Law of 2013.

As noted, companies in industries affected by crisis taxes have complained repeatedly that the business sector was not consulted before new taxes were announced, and that the GOH failed to take into account industry views.

According to a study done by the Corruption Research Center Budapest (CRCB), since 2010 the annual average number of new laws passed by Parliament has increased, while the average time spent debating new laws in Parliament decreased significantly. In 2011-2012, the number of laws amended within a year of Parliamentary approval quadrupled compared to the period of 2006-2008. CRCB noted that the increase in amendment activity may result from the lack of time devoted to adequately consulting on and debating new laws. The study also revealed that the GOH published preparatory documents - including impact studies and public consultation process summaries - for less than half of the laws passed in the 2011-2014 period. The analysis points out that the accelerating lawmaking process in Hungary since 2010 has had negative effects on the stability of the legal environment and the overall quality of legislation.

In November 2015, a new Public Procurement Act came into force to implement an EU directive. While the bill was initially an improvement over the legacy law, Parliament diluted the conflict of interest provisions that excluded family members of GOH officials from public tenders. According to a subsequent amendment, passed by Parliament in a fast-track procedure, only family members living in the same household as the official in question are prevented from bidding. Despite opposition criticism, the Act is now considered to be generally in line with EU rules and is in force.

Examinations by transparency advocates of public tender statistics indicate that companies with strong GOH connections have an advantage in public tenders over private market players. Multinationals complain of favoritism in public sector business and note that their market share in government projects in Hungary is markedly lower than in neighboring countries. Companies operating in sectors with subsidies and price controls also appear to be affected by insufficient transparency and responsiveness in the setting of prices and subsidies.

According to Transparency International (TI)’s National Integrity Study, systemic corruption adds as much as 20-25 % to the costs of GOH procurement. A Freedom House study estimated that only 10 % of GOH procurements are transparent. GOH procurement reform is a major topic of discussion among foreign chambers of commerce and business entities. These groups have provided their suggestions to the GOH for inclusion into draft legislation.

Parliament passed s a whistleblower protection law in 2013. According to TI, the law lacks adequate protections. For example, the law provides whistleblowers protection only if they act within six months after the discovery of impropriety. The law also stipulates that whistleblowers must exhaust all formal reporting channels before whistleblowing, a process which routinely takes more than six months.

Hungarian financial reporting standards are in line with the International Accounting Standards and the EU Fourth and Seventh Directives. The Accounting law requires all businesses to prepare consolidated financial statements on an annual basis in accordance with international financial standards.

International Regulatory Considerations

As an EU Member State, all EU regulations are directly applicable in Hungary, even without further domestic measures. If a Hungarian law is contrary to EU legislation, the EU rule takes precedence. As a whole, labor, environment, health, and safety laws are consistent with EU regulations. Hungary follows EU foreign trade and investment policy and all trade regulations follow EU legislation. Hungary participates in the WTO as an EU Member State.

Legal System and Judicial Independence

The Hungarian legal system is based on continental European (German-French and Roman law) traditions. Contracts are enforced by ordinary courts or - if stipulated by contract - arbitration centers. Investors in Hungary can agree with their partners to turn to Hungarian or foreign arbitration courts. Apart from these arbitration centers, there are no specialized courts for commercial cases; ordinary courts are entitled to judge any kind of civil case. The Civil Code of 2013 applies to civil contracts.

The Hungarian judicial system includes four tiers: district courts (formerly referred to as local courts) and courts of public administration and labor; courts of justice (formerly referred to as county courts); courts of appeal; and the Curia (the Hungarian Supreme Court). Hungary also has a Constitutional Court that reviews cases involving the constitutionality of laws and court rulings. Post expressed concerns - along with numerous other experts and commentators - with the 2013 4th Amendment of the Hungarian Constitution, which limited the ability of the Constitutional Court to review the constitutionality of amendments of the Constitution and certain other laws.

Although the GOH has criticized court decisions on several occasions, ordinary courts still operate independently and judicial procedures are generally fair and reliable. Businesses report frustrations with the length of time required by civil court legal proceedings. The GOH expects to improve the speed and efficiency of court proceedings with a new Civil Procedure Code which enters into force in January 2018.

Laws and Regulations on Foreign Direct Investment

Hungarian law provides strong protections for property and investment. The Hungarian state may only expropriate property in exceptional cases where there is a public interest; any such expropriations must be carried out in a lawful way, and the GOH is obliged to make immediate and full restitution for any expropriated property, without additional stipulations or conditions.

The Foreign Investment Act of 1988 is the main law protecting investors. It grants full protection to the investments and businesses of non-Hungarian resident investors and guarantees that non-Hungarian investors will be treated in the same manner as Hungarian investors. The Act also contains a repatriation guarantee under which foreign investors are free to remit profits and investment capital to their home country in the event of partial or complete termination of their enterprise.

A substantial body of other laws also protects foreign investment, provides equal treatment under Hungarian laws, and enables profit repatriation. Institutions and procedures are in place to ensure compliance with legislation and competition rules. Most important are the Civil Code of 2013, which includes legislation on business organizations; the 1996 Competition Law; the 1995 Privatization Law; and the 1992 law on transforming state companies into economic associations. Other significant laws include the 1991 Law on Bankruptcy, the Law on Securities, and the 1994 Law establishing the Commodity Exchange Legislation. These laws do not differentiate between domestic and foreign investors, treating all investors equally. Commercial law in Hungary is well developed; however, most analysts see both a need to continue to revise the corporate legal code and to improve the judicial and administrative capacity for enforcing it.

There is no primary website or “one-stop shop" which compiles all relevant laws, rules, procedures, and reporting requirements for investors.

Competition and Anti-Trust Laws

The Hungarian Competition Authority, tasked with safeguarding the public interest, enforces the provisions of the Hungarian Competition Act. Since EU accession in 2004, EU competition law also binds Hungary. The Competition Authority is empowered to investigate suspected violations of competition law, order changes to practices, and levy fines and penalties. According to the Authority, since 2010 the number of competition cases has decreased, but they have become more complex. Out of more than 100 cases over the past year, only a few minor cases pertained to U.S.-owned companies.

Expropriation and Compensation

Hungary’s Constitution provides protection against expropriation, nationalization, and any arbitrary action by the GOH except in cases of extreme national security concern. In such cases, immediate and full compensation is to be provided to the owner. There are no known expropriation cases where the GOH has discriminated against U.S. investments, companies, or representatives. There have been some complaints from other foreign companies within the past several years that expropriations have been improperly executed, without proper remuneration. Parties involved in these cases turned to the legal system for dispute settlement. Recently, the GOH bought out certain foreign investors in the energy sector - remuneration appeared to be sufficient and there were no known complaints about the agreed purchase price.

The 2015 implementation of the Advertising Tax and a similar new tax on tobacco products has raised concerns with some businesses that indirect expropriation may be possible through discriminatory taxation that disproportionately affects a given company with the intent to force a firm to accept a buy-out by a domestic firm. The EU investigation into the Advertising Tax and subsequent backtracking suggests that the EU is able to enforce marketplace non-discrimination and illegal state aid rules by implementing injunctions. In 2014 and 2015 the GOH introduced taxes which targeted multinational retail chains. In both instances, the EU found the new levies to be discriminatory and obligated the GOH to repeal them. In early 2017, press reported on draft GOH proposals which would again implement new restrictions and taxes on foreign retail chains.

Dispute Settlement

ICSID Convention and New York Convention

Hungary is a signatory to the International Centre for the Settlement of Investment Disputes (ICSID Convention). Hungary is also a signatory to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).

Investor-State Dispute Settlement

Hungary has no Bilateral Investment Treaty or Free Trade Agreement with the United States. In the past few years, the number of investor-State arbitration claims against Hungary has increased. U.S. investors have been involved only in a few cases, including a recent major dispute with Hungary’s state owned energy company MVM.

International Commercial Arbitration and Foreign Courts

Hungary has accepted international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. In the last few years, parties have increasingly turned to mediation as a means by which to settle disputes without engaging in lengthy court procedures.

Investment dispute settlement clauses are usually regulated by stipulations of the investment contract. Hungarian law allows the parties to set the jurisdiction of any courts or arbitration centers. The parties can also agree to set up an ad hoc arbitration court. The law also allows investors to agree on settling investment disputes by turning to foreign arbitration centers, such as the International Centre for Settlement of Investment Disputes (ICSID), UNCITRAL’s Permanent Court of Arbitration (PCA), or the Vienna International Arbitral Centre. The Hungarian Chamber of Commerce and Industry also maintains an arbitration court, which has its own rules of proceedings ).

Bankruptcy Regulations

The Act on Bankruptcy Procedures, Liquidation Procedures, and Final Settlement of 1991, covers all commercial entities with the exception of banks (which have their own regulatory statutes), trusts, and state-owned enterprises, and brought Hungarian legislation in line with EU regulations. Debtors can only initiate bankruptcy proceedings provided that they have not sought bankruptcy protection within the previous three years. Within 90 days of seeking bankruptcy protection, the debtor must call a settlement conference to which all creditors are invited. Majority consent of the creditors present is required for all settlements. If agreement is not reached, the court can order liquidation. The Bankruptcy Act establishes the following priorities of claims to be paid: 1) liquidation costs; 2) secured debts; 3) claims of the individuals; 4) social security and tax obligations; 5) all other debts. Creditors may request the court to appoint a trustee to perform an independent financial examination. The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.

The debtor, the creditors, the administrator, or the Criminal Court may file liquidation procedures with the court. Once a petition is filed, regardless of who filed it, the Court notifies the debtor by sending a copy of the petition. The debtor has eight days to acknowledge insolvency. If the insolvency is acknowledged, the company declares if any respite for the settlement of debts is requested. Failure to respond results in the presumption of insolvency. Upon request, the Court may allow a maximum period of 30 days for the debtor to settle its debt.

If the Court finds the debtor insolvent it appoints a liquidator. Transparency International (TI) has raised concerns about the transparency of the liquidation process because a company may not know that a creditor is filing a liquidation petition until after the fact. TI also criticized the lack of accountability of liquidator companies and the impractical deadlines in the process. The EU has also criticized the Hungarian system as being rescue-unfriendly, since bankruptcy proceedings typically only recover 40 cents to the dollar, compared to the OECD average of 72 cents on the dollar. This can result in catastrophic collapses of bankrupt companies - such as the collapse of Hungary’s former national airline MALEV in 2011 - rather than orderly corporate buy-outs and restructuring efforts that permit eventual exit from bankruptcy.

Bankruptcy in itself is not criminalized, unless it is made in a fraudulent way, deliberately, and in bad faith to prevent the payment of debts.

4. Industrial Policies

Investment Incentives

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 10 million Euro, or $11 million). The incentives are designed to benefit investors who establish manufacturing facilities, logistics facilities, regional service centers, R&D facilities, bioenergy facilities, or those who make tourism industry investments. Incentive packages may consist of cash subsidies, development tax allowances, training subsidies, and job creation subsidies. The incentive system is compliant with EU regulations on competition and state aid and is administered by the Hungarian Investment Promotion Agency (HIPA) and managed by the Ministry of National Development (MND).

Foreign Trade Zones/Free Ports/Trade Facilitation

Foreign trade zones were eliminated as a result of the EU accession. The Ministry of National Economy had plans to nominate customs free zones, but currently there seems to be little demand.

Performance and Data Localization Requirements

Nationals of EU/EEA countries can work in any job in Hungary without a visa or work permit. Third-country nationals (nationals of non-EU/EEA countries) need a visa or a residency permit to live and work in Hungary and employment may be restricted in certain professions. In certain economic sectors, third-country nationals are only given a work permit if the employer is unable to find local worker to fill the job. The recent labor shortage, however, has forced the GOH and employers to seek foreign workers, mostly in Ukraine. Individuals who are given refugee status in Hungary are allowed to work without a work permit. The number of work permits issued for third-country nationals is limited by law, but in the past years this limit was well above the actual number of registered third-country employees. Residency and work permits are issued by the Immigration Office and the local labor offices

Performance requirement incentives are available to all enterprises registered in Hungary, regardless of the nationality of owners or location of incorporation, and they are applied on a systematic basis. Performance requirements, such as job creation or investment minimums, can be imposed as a condition for establishing, maintaining, or expanding an investment. There is no requirement that investors must purchase from local sources, but the EU Rule of Origin applies. The GOH imposes a 100% offset requirement for defense sector investments over one billion forint ($3.5 million). Investors are not required to disclose proprietary information to the GOH as part of the regulatory process. Foreign IT providers do not need to turn over source code or provide access to encryption. To comply with EU rules, the GOH no longer grants tax holidays based on investment volume.

5. Protection of Property Rights

Real Property

Hungary maintains a reliable land registry, which provides public information for anyone on the ownership, mortgage, and usufruct rights of the real estate or land parcel. Secured interests in property (mortgages), both moveable and real, are recognized and enforced but there is no title insurance in Hungary.

According to the Land Law of 2013 only private Hungarian citizens or EU citizens resident in Hungary with a minimum of three years of experience in agriculture, or holding a degree in an agricultural field, can purchase farmland. The law allows the lease of farmland up to 1200 hectares for a maximum of 20 years. There is no restriction for purchase or lease of non-farmland properties.

Hungarian law allows acquisitive prescription for unoccupied real property if the user of the property occupies it continuously for at least 15 years.

Intellectual Property Rights

Hungary has an adequate legal structure for protecting intellectual property rights, although it lacks deterrent-level sentences for civil and criminal IPR infringement cases. There has been no new major IPR legislation passed over the past year. According to some representatives of the pharmaceutical and software industries, enforcement could be improved if the Prosecution Office were to establish specialized units to combat IPR violations. The most common IPR violations in Hungary include selling counterfeit goods, the sale of imported counterfeit pharmaceuticals, and Internet-based piracy. Most counterfeit goods sold in Hungary are of Chinese origin.

In 2016, authorities seized $4.7 million worth of counterfeit goods, a drop from the previous year’s $5.6 million.

Hungary acceded to the European Patent Convention in 2003 and has accordingly amended the Hungarian Patent Act. Hungary is a party to the WTO Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement and most other major international IPR agreements, including the most recent World Intellectual Property Organization (WIPO) copyright Treaty and the WIPO Performance and Phonograms Treaty. It is also a party to the EU Information Society Directive, and implemented the EU Enforcement Directive in 2005.

The United States and Hungary signed a Comprehensive Bilateral Intellectual Property Rights (IPR) Agreement in 1993 that addresses copyright, trademarks, and patent protection. A subsequent industrial property and copyright law entered into force on July 1, 1994, that significantly strengthened the domestic patent system. A Copyright Law passed in June 1999 made necessary technical changes required by the WTO TRIPS Agreement.

The 1993 IPR agreement recognizes an exclusive right to authorize the public communication of works, including the performance, projection, exhibition, broadcast, transmission, retransmission, or display of these works. It also requires that protected rights be freely and separately exploitable and transferable (contract rights), and recognizes an exclusive right to authorize the first public distribution, including import, for protected works.

Trademarks may be granted for any product-distinguishing sign capable of being graphically represented. They are issued for ten years and are renewable. The Hungarian Intellectual Property Office (HIPO) is in charge of patent revocation and trademark invalidity proceedings, while all disputes related to the infringement of IPR fall under the jurisdiction of the courts.

In July 2010, the U.S. Patent and Trademark Office and HIPO launched a pilot program to facilitate patent recognition between the United States and Hungary. Due to the pilot’s success, in April 2012 the USPTO and HIPO signed a Memorandum of Understanding to streamline and expedite patent recognition further. More details about this Patent Processing Highway (PPH) program can be found on USPTO’s website at www.hipo.gov.hu/English/szabadalom/pph/.

In January 2011, the Tax Office and the Customs and Finance Guard were merged into one single agency (NAV) and given jurisdiction over IPR enforcement. NAV is a member of HENT, and also works closely with the Business Software Alliance (BSA). In January 2011, the NAV created a special cyber-crime unit to better address Internet IPR infringements.

Hungary is not listed in USTR’s Special 301 Report or the notorious market report.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/.

Resources for Rights Holders

Embassy Point of Contact for IPR issues:

Gregory Meier

Economic Officer

+36 1 475 4104

meiergj@state.gov

Local lawyers list: https://hu.usembassy.gov/u-s-citizen-services/attorneys/

6. Financial Sector

Capital Markets and Portfolio Investment

The Hungarian financial system offers a full range of financial services with an advanced information technology infrastructure. The Hungarian Forint (HUF) has been fully convertible since 2001, and both Hungarian financial market and capital market transactions are fully liberalized. The Capital Markets Act of 2001 sets out rules on securities issues, including the conversion and marketing of securities. As of 2007, separate regulations were passed on the activities of investment service providers and commodities brokers (2007), on Investment Fund Managing Companies (2011), as well as on Collective Investments (2014), providing more sophisticated legislation than those in the Capital Markets Act. These changes aimed to create a regulatory environment where free and available equity easily matches with the best investment opportunities. The 2016 modification of the Civil Code removed remaining obstacles to promote collection of public investments in the course of establishing a public limited company.

The Budapest Stock Exchange (BSE) re-opened in the summer of 1990 as the first post-communist stock exchange in the Central and East European region. In 2004, after conversion from a legal entity to a business association, the Vienna Stock Exchange and an Austrian consortium acquired 68.8% of the BSE. In November 2015, the Hungarian National Bank bought these shares and obtained controlling ownership in the BSE. Since 2010, the BSE has been a member of the Central and Eastern Europe (CEE) Stock Exchange Group. In 2013 the internationally recognized trading platform Xetra replaced the previous trading system. Currently, the BSE has 40 members and 62 issuers. The issued securities are typically shares, investment notes, certificates, corporate bonds, mortgage bonds, government bonds, treasury bills, and derivatives. In 2015, the Budapest Stock Exchange had a market capitalization of $18 billion, and the average monthly equity turnover volume amounted to $1.5 billion. The most traded shares are OTP Bank, Richter Gedeon, MOL, Magyar Telekom and FHB Mortgage Bank

All three major rating agencies - Standard and Poor’s (S&P), Moody’s and Fitch - upgraded Hungary’s sovereign debt to investment grade in 2016.

Money and Banking System

The Hungarian banking system has strengthened over the past two years, and the capital positon of banks is adequate. Following several years of deleveraging after the 2008 crisis, the banking system is mainly deposit funded. Customer deposits account for roughly 60% of banks’ total liabilities. In 2016, the loan-to-deposit ratio decreased to 85% from 130% in 2012, and the ratio of non-performing loans (NPLs) decreased to 7% from 18% in the same period. The banking sector became profitable in 2016 after several years of losses. In 2016, the return on equity was 8.8%, up from a record low of negative 14% in 2012. The largest bank in Hungary is OTP Bank, which is Hungarian-owned and controls 25% of the market, with approximately $29 billion in assets. All rules on hostile takeovers are straight-forward and non-discriminatory.

Ever since the privatization of State-owned banks in the mid-1990s, foreign banks have operated in Hungary. However, the proportion of foreign banks has declined from about 70% of total assets to about 50% after the GOH bought several foreign banks, including MKB in 2014, Budapest Bank in 2015, and a part of Erste Bank in 2016. Hungarian banks have an extensive network of correspondent banking relations.

Hungary has a modern two-tier financial system and a developed financial sector, although some regulatory issues have arisen as a result of the Central Bank’s (MNB) 2013 absorption of the Hungarian Financial Supervisory Authority (PSZAF), which was the financial sector regulatory body. Between 2000 and 2013, the PSZAF served as a consolidated financial supervisor, regulating all financial and securities markets. PSZAF, in conjunction with the MNB, managed a strong two-pillar system of control over the financial sector, producing stability in the market, effective regulation, and a system of checks and balances. When the MNB absorbed PSZAF and took over all of its functions, including customer protection, this regulation system was weakened. A Hungarian State Audit Office (SAO) report published in April 2015 determined that the MNB’s consolidation of financial regulation undermined the system’s ability to provide effective enforcement. In March 2015, insolvency, lax regulations, and alleged embezzlement resulted in the failure of three brokerage firms (Buda-Cash, Quaestor, and Hungaria Ertekpapir), resulting in a total loss of over $1.2 billion, close to 1% of Hungary’s GDP. At the end of 2015, Parliament passed legislation to tighten control over brokerage firms’ operations as well as increase banks’ contribution to the fund established to compensate investors.

GOH policies have reduced access to credit for businesses. Recent regulations restrict foreign currency loans to only those that earn income in foreign currency, in an effort to eliminate the risk of exchange rate fluctuations. Additionally, the MNB lowered the loan-to-deposit ratio, forcing banks to restrict lending to firms in riskier sectors. Foreign investors continue to have equal - if not better - access to credit on the global market, with the exception of special GOH credit concessions such as small business loans. Markets for direct finance are thin. Hungary’s banking taxes are the highest in Europe.

There are no rules preventing a foreigner or foreign firm from opening a bank account in Hungary. Valid personal documents (i.e. passport) is needed and as of 2015, when FACTA was signed, a declaration whether the individual is a U.S. citizen. Banks have not discriminated against U.S. citizens in opening bank accounts based on FATCA.

Foreign Exchange and Remittances

Foreign Exchange

The Hungarian forint (HUF) has been convertible for essentially all business transactions since Jan. 1, 1996, and foreign currencies are freely available in all banks and exchange booths. Hungary complies with all OECD convertibility requirements and IMF Article VIII. Act XCIII of 2001 on Foreign Exchange Liberalization lifted all remaining foreign exchange restrictions and allowed free movement of capital in line with EU regulations. Market forces determine the exchange rate of the HUF to the Euro and other currencies.

According to Hungary’s EU accession agreement, it must eventually adopt the Euro once it meets the relevant criteria. The GOH has not prioritized adoption of the Euro, and a specific target date for adoption has not been set. Recent reforms aim to strengthen Hungary’s fiscal sustainability and lower the budget deficit to below 3% of GDP, which brings Hungary closer to meeting the Maastricht criteria. Other conditions include a low inflation rate, stable currency, and putting public debt on a declining trajectory until it reaches 60% of GDP. Hungary’s public debt amounts to 74.4% of GDP and is declining at an extremely slow pace.

Short-term portfolio transactions, hedging, short and long-term credit transactions, financial securities, assignments and acknowledgment of debt may be carried out without any limitation or declaration. While the Forint remains the legal tender in Hungary, parties may settle financial obligations in a foreign currency. Many Hungarians took out mortgages denominated in foreign currency prior to the global financial crisis, and suffered when the Forint depreciated against the Swiss Franc and the Euro. Despite strong pressure, the Hungarian Supreme Court ruled that there is nothing inherently illegal or unconstitutional in loan agreements that are foreign currency denominated, upholding existing contract law. New consumer loans, however, are denominated in Forints only, unless the debtor receives regular income in foreign currency.

Hungarian legislation allows for profit repatriation and re-investment and there are no obstacles to conversion of funds into any currency. The exchange rate of the Forint fluctuates freely against the Euro and other foreign currencies. The Central Bank monetary policy targets inflation and does not have an official exchange rate target. However, through monetary policy instruments, it indirectly influences the exchange rate.

Remittance Policies

There is no limitation on the inflow or outflow of funds for remittances of profits, debt service, capital, capital gains, returns on intellectual property, or imported inputs.

The timeframes for remittances are in line with the financial sector’s normal timeframes (generally less than 30 days), depending on the destination of the transfer and on whether corresponding banks are easily found.

Sovereign Wealth Funds

Hungary does not maintain a sovereign wealth fund; however, in 2011, Hungary nationalized $14.6 billion of private pension funds, creating the Pension Reform and Debt Reduction Fund, supervised by the State Debt Management Agency (AKK). By 2015, the Pension Reform and Debt Reduction Fund was exhausted. Transparency watchdogs complained that only half of the nationalized sum was included in the central budget.

7. State-Owned Enterprises

Since the 1990s there has been considerable privatization of former State-owned enterprises (SOEs), primarily in strategic sectors such as energy and transportation. Since 2010, the GOH has reversed this trend by making new investments in machinery production and the energy and telecommunications sectors, with the number of SOEs increasing.

As of 2017, there are approximately 500 SOEs. The state holds majority ownership in approximately two thirds of them. In addition, there are a large number of municipality-owned companies. A 2011 law on national assets lists the SOEs of strategic importance, which are to be kept in state ownership ); as of April 2017 there were 66 such companies. There is no officially published, complete list of SOEs, but the State Asset Manager MNV has a list of companies under its control on its webpage. The list does not cover all publicly owned companies: http://mnv.hu/felso_menu/tarsasagi_portfolio/mnvportfolio

Major SOEs include the National Asset Management Company (MNV), Magyar Posta, state energy company MVM, Hungarian State Railways (MAV), state gambling monopoly Szerencsejatek, National Infrastructure Development Company (NIF), car manufacturer RABA, and state owned banks MKB and Budapest Bank. The GOH has a 25% stake in hydrocarbon company MOL.

In principle, the same rules apply to SOEs as to privately owned companies in most cases, but in practice they often enjoy preferential treatment from certain authorities. Since mid-2012, the GOH has made it more difficult for foreign-owned energy companies to operate in the Hungarian market. The GOH has publicly stated its interest in nationalizing some private energy firms. In 2013, the GOH purchased E.ON’s wholesale and gas storage divisions and RWE’s retail gas company, Fogaz. In 2014 and 2015, the GOH acquired other energy companies. The last foreign-owned gas retail company, Italian ENI’s Tigaz, announced in June 2015 that it would exit the market. By the end of 2016, state-owned Fogaz became the only remaining retail gas utility provider in Hungary. The Press has reported that the GOH intends to take over the electricity and the heating retail markets as well.

OECD Guidelines on Corporate Governance of SOEs

Hungary adheres to OECD Guidelines on Corporate Governance as well as to EU rules on SOEs. The Hungarian National Asset Management Company is the state asset manager.

According to a 2015 study conducted by Transparency International (TI) Hungary, SOEs scored 61 points on a scale of 100 with regard to meeting transparency obligations in terms of data published on their websites, integrity, codes of ethics, and internal control systems. TI noted that although there was a considerable improvement compared to the previous survey in 2013, none of the SOEs reviewed during their study was in full compliance with transparency and disclosure requirements as mandated by Hungarian law.

Privatization Program

In the 1990’s, the privatization of state owned enterprises (SOEs), including the energy sector, manufacturing, food processing, and chemistry, ushered in a significant period of change. This policy has stopped in recent years as most SOEs have already been privatized, and in fact the trend has reversed since 2010 as the state has taken more ownership or de facto control in certain sectors, including energy and public utilities. In the financial sector, foreign ownership decreased from 80% before 2010 to slightly over 50% in 2016. PM Orban has publicly announced that the GOH aims to own more than 50% of banks operating in Hungary.

8. Responsible Business Conduct

Hungary encourages multinational firms to follow the OECD Guidelines for Multinational Enterprises which promotes a due diligence approach to responsible business conduct (RBC). The government has established a National Contact Point (NCP) in the Ministry of National Economy for stakeholders to obtain information or raise concerns in the context of RBC. The Hungarian NCP has organized events to promote OECD Guidelines among the business community trade unions, government agencies and NGOs. For more information, see: http://mneguidelines.oecd.org/ncps/hungary.htm

The government is in the process of formulating a National Action Plan on Businesses and Human Rights, in the context of its participation in the UN Working Group on Business and Human Rights. The OECD National Council oversees all of Hungary’s OECD related activities, including that of the Hungarian NCP. It includes all of the ministries, the Central Statistics Office, the Hungarian Atomic Energy Authority, the Hungarian Intellectual Property Office, the National Tax and Customs Administration, the National Research, Development and Innovation Office, the National Media and Infocommunications Authority, the Hungarian State Treasury, the Hungarian Competition Authority, and the MNB. According to a survey conducted by CSR Hungary - the country’s largest CSR forum - 55% of businesses have a CSR policy and 44 % of businesses think that CSR increased their competitiveness. According to Nielsen Global Omnibus research, over 60% of Hungary’s adult population prefers companies committed to CSR, exceeding the 54% average in the EU.

9. Corruption

Hungary has legislation in place to combat corruption; the Criminal Code penalizes corruption. Giving or accepting a bribe is a criminal offense, as is an official’s failure to report such an incident. Penalties can include confiscation of assets, imprisonment, or both. Since Hungary’s entry into the EU, legal entities can also be prosecuted. Conflict of interest legislation prohibits members of parliament from serving as executives of state-owned enterprises. An extensive list of public officials and many of their family members are required to make annual declarations of assets, but there is no specified penalty for making an incomplete or inaccurate declaration. It is common for prominent politicians to be forced to amend declarations of assets following revelations in the press of omission of ownership or part-ownership of real estate and other assets in asset declarations. Politicians are not penalized for these omissions. According to critics, the implementation of criminal rules penalizing corruption is more problematic since the Prosecution Office is reluctant to prosecute cases with links to high level politics.

The Hungarian Ministry of Justice and the Ministry of Interior are responsible for combating corruption. There is a growing legal framework in place to support their efforts. Hungary is a party to the OECD Anti-Bribery Convention and has incorporated its provisions into the penal code, as well as subsequent OECD and EU requirements on the prevention of bribery. In May 2015, the GOH passed a new national strategy on combating corruption for the period 2015-2018, and the new criminal code (effective July 2013) introduced stricter rules for corruption-related crimes. Critics claim that the program aims to increase GOH influence over NGOs and the private sector as opposed to combating high-level corruption, and that the responsible ministries have done little to stem corruption generally. Parliament passed the Strasbourg Criminal Law Convention on Corruption of 2002 and the Strasbourg Civil Code Convention on Corruption of 2004. Hungary is a member of GRECO (Group of States against Corruption), an organization established by members of the Council of Europe to monitor the observance of their standards for fighting corruption.

In 2011, the GOH set up the National Protection Service (NPS), an agency designed to fight against corruption within the law enforcement and state administration under the supervision of the Ministry of Interior. NPS is responsible for investigations into corruption, as well as conducting background clearances of law enforcement, intelligence, and NAV employees. As part of the Prosecution Office’s reform in 2011, a special Anticorruption Division was created in the Central Investigative Chief Prosecutor’s Office. On Jan. 1, 2012, the Anticorruption Division increased the number of prosecutors specializing in high-profile corruption cases from eight to thirty-five; this did not lead, however, to a perceptible increase in high-profile corruption prosecutions.

In December 2016, the GOH withdrew its membership in the international anti-corruption organization the Open Government Partnership (OGP). Following a letter of concern by transparency watchdogs to OGP’s Steering Committee in summer 2015, OGP launched an investigation into Hungary and issued a critical report. The OGP admonished the GOH for its harassment of NGOs and urged it to take steps to restore transparency and to ensure a positive operating environment for civil society. The GOH - only the second member state after Azerbaijan to be reprimanded by the organization - rejected OGP report conclusions and proceeded to withdraw from the organization.

Recently the GOH has amplified its attacks on NGOs - including transparency watchdogs - accusing them of acting as foreign agents and criticizing them for allegedly working against Hungarian interests. This anti-NGO rhetoric endangered the continued operation of anti-corruption NGOs crucial to promoting transparency and good governance in Hungary. In April, 2017 the GOH introduced legislation to Parliament that many civil society activists fear will place undue restrictions on NGOs, including compelling organizations to register as “foreign funded" if they receive funding from international sources.

Transparency International (TI) is active in Hungary. TI’s 2016 Corruption Perceptions Index rated Hungary 57th out of 176 countries (1st being best). Among the 28 EU members, Hungary ranks 24th. TI has noted that state institutions responsible for supervising public organizations were headed by people loyal to the ruling party, limiting their ability to serve as a check on the actions of the GOH. After the GOH amended the Act on Freedom of Information in 2013 and 2015, TI and other watchdogs commented that data on public spending remained problematically difficult to access.

Post is aware of several ongoing, low-profile corruption cases against public officials in the GOH; however, the GOH does not typically publicize such cases. GOH data related to combating corruption is published annually, but does not include specific information on cases and investigations. Transparency watchdogs and opposition political parties note that the GOH publicizes cases against opposition politicians and former GOH officials, but ruling party-affiliated officials are more often removed quietly. In one notable exception, authorities launched an investigation in 2016 against a governing party MP, who was videotaped accepting a bribe in relationship with the distribution of EU funds. Prosecutors pressed charges against him on suspicion of budget fraud and other crimes in 2017. The GOH typically cites data protection laws as the reason for the lack of publicity regarding ongoing investigations and cases; however, this policy hampers transparency and makes it difficult for watchdog organizations to judge the effectiveness of GOH actions to combat corruption.

While public procurement legislation is in place and complies with EU requirements, private companies and watchdog NGOs expressed concerns on public procurements in Hungary. According to their criticism, public procurement in practice lacks transparency and is characterized by uneven implementation of anti-corruption laws, and rife with cronyism and favoritism. Non-GOH organizations, the business community, and foreign governments share many of these concerns, and maintain an ongoing dialogue with the GOH to improve conditions. In addition, observers have raised concerns about the appointments of Fidesz party loyalists to the heads of quasi-independent institutions like the Media Council and the State Audit Office. The Public Procurement Act of 2015 initially included broad conflict of interest rules on excluding family members of GOH officials from participating in public tenders, but Parliament later amended the law to exclude only family members living in the same household. While considered in line with the overarching EU directive, the law still leaves room for subjective evaluations of bid proposals and tender specifications that could potentially be tailored to favored companies.

State corruption is also high on the list of EC and U.S. concerns with Hungary. The EC Anti-Fraud Office (OLAF) has high indices of fraud in EU-funded projects in Hungary and has levied fines and withheld development funds on several occasions. In March 2016 the European Commission (EC) suspended $134 million in European Regional Development Fund subsidy payments from the previous 2007-2013 funding cycle to Hungary due to numerous irregularities in Hungary’s procurement system. In December 2016, after completing an investigation into the construction of the EU-funded Budapest M4 metro line, OLAF discovered that contracts valued at more than $1 billion had been affected by corruption and determined that Hungary should return $240 million to the EU. In October 2014, the U.S. Department of State barred several Hungarian officials and persons from entry into the United States under Presidential Proclamation 7750 due to corruption that adversely affected U.S. interests.

TI and other anti-corruption watchdogs have highlighted EU-funded development projects as one of the largest sources of corruption in Hungary; a TI study found indices of corruption and overpricing in up to 90 % of EU-funded projects. A 2016 study by CRCB based on public procurement data from 2009-2015 revealed that the massive influx of EU funds reduced competition and increased levels of corruption risk and overpricing in public procurements. According to the study, EU-funded tenders perform poorly with regard to corruption risks, competitive intensity, and transparency, compared with Hungarian-funded tenders. Besides their positive impact on GDP growth and development, EU funds in Hungary contribute to the system of political favoritism and fuel crony capitalism, the study concluded.

Resources to Report Corruption

GOH Office Responsible for Combatting Corruption:

National Protective Service

General Director Zoltan Bolcsik

Phone: +36 1 433 9711

Fax: +36 1 433 9751

E-mail: nvsz@nvsz.police.hu

Transparency International Hungary:

1055 Budapest

Falk Miksa utca 30. 4/2

Phone: +36 1 269 9534

Fax: +36 1 269 9535

E-mail: info@transparency.hu

U.S. Embassy Budapest Anti-Corruption Point of Contact

Gregory Meier

Economic Officer

1054 Budapest

Szabadsag Ter 12.

Phone: +36 1 475 4104

E-mail: MeierGJ@State.Gov

10. Political and Security Environment

Although the GOH’s political rhetoric is often unhelpful for investors and the overall business climate, the security environment is relatively stable; violent crimes are reasonably low while street crimes are the most frequently reported crimes in the country.

In January 2014, an unknown assailant bombed a CIB BANK branch in Budapest. No one was injured. The perpetrator of this attack has not been found and the motive behind the attack remains unknown. Italian banking firm Intesa Sanpaolo owns CIB.

In September 2016, a nail bomb attack in downtown Budapest injured two police officers, just a few days before a controversial national referendum on immigration. The suspected perpetrator - a Hungarian national with no ties to any terrorist organization - was caught a few weeks later. The motivation behind the attack is still unknown.

Despite violent protests in 2006, political violence has not been common in Hungary. The transition from communist authoritarianism to capitalist democracy was negotiated and peaceful, and free elections have been held consistently since 1990.

11. Labor Policies and Practices

Hungary’s civilian labor force of 4.4 million is highly-educated and skilled. Literacy exceeds 98% and about two-thirds of the work force has completed secondary, technical, or vocational education. Hungary is particularly strong in engineering, medicine, economics, and science training, although emigration of Hungarians from these sectors to other EU member states has increased over the past few years. Multinationals also observe that Hungarian vocational institutions and universities need to adapt to changes in the market place at a faster pace. An increasing number of young people are attending U.S. - and European-affiliated business schools in Hungary. Foreign language skills, especially in English and German, are becoming more widespread, yet Hungary still has the lowest level of foreign language proficiency in the EU. According to 2017 data of the EC, only 37 % of the working-age Hungarians speak at least one foreign language, while the EU average is 66%.

Hungary’s unemployment rate decreased from a peak of 11.8 % in March 2010 to 4.3% by January 2017, lower than the EU average of 8.1%, and the OECD average of 6.1 %. Hungary’s employment rate for the population aged 15-64 years was 64.0 % in December 2015, slightly lower than the EU average of 65.6% and the OECD average of 66.3%. Analysts note, however, that official labor and employment figures include part-time workers, as well as public workers and Hungarians working abroad. Unofficial sources estimate these groups could represent as much as 10% of the official labor force. Hungarians collecting certain unemployment benefits must participate in a small number of hours of part-time public work - reducing the unemployment numbers as well (some critics say artificially). The unemployment program has employed approximately 208,000 people each year, with some seasonal fluctuations. As the rate of unemployment has declined, certain sectors have begun to face shortages of skilled and highly-educated employees, which the government is attempting to address by increasing the minimum wage over the next three years and by offering programs to facilitate public workers seeking employment. Regional differences in employment opportunities also affect the labor market. Shortages of skilled workers, particularly in the IT, financial, and manufacturing sectors, are more acute in the northwest and central regions of the country. East of the Danube, unemployment levels are above average, even though the cost of labor is lower. Wages in Hungary are significantly lower than those in Western Europe, despite the recent increase in minimum wage. Average Hungarian labor productivity is lower than the EU average, but greater than that of other Central and Eastern European economies.

To boost employment, in 2013 the GOH launched a job protection program that promotes the employment of unskilled workers, women returning from maternity leave, and those under 25 or above 55 years of age. In cooperation with business and vocational schools, in 2015 the GOH also launched a hands-on training system designed to improve employment opportunities for young people. Labor market analysts, however, argue that this program hinders education in basic competencies such as reading comprehension and mathematics, topics for which Hungarian students have fared poorly in OECD Program for International Student Assessment (PISA) surveys. They also claim that the program reduces students’ ability to adapt to requirements of a changing labor market. In college and university education, the GOH is reallocating state-funded scholarships from the humanities to hard sciences and engineering with the aim of increasing the number of graduates in high demand fields. To limit the outflow of skilled labor to Western Europe, the GOH has stipulated that in order to receive state funding for higher education, students must sign a contract agreeing to work in Hungary for a set number of years. In 2016, the government, trade unions, and employers’ representatives signed an agreement to increase the minimum wage for unskilled workers by 15% and for skilled workers by 25% in 2017. In 2018, these figures will further increase by 8% and 12%, respectively. The deal also included lowering the payroll tax and business tax to offset companies’ increased labor costs. The GOH is also considering facilitating the employment of workers from neighboring countries, primarily ethnic Hungarian minority communities in those countries.

A new Labor Code came into force on July 1, 2012. While the basic legal framework was not modified, it introduced some significant changes to increase labor market flexibility and to boost labor force participation. The new law transferred some of the collective bargaining rights from trade unions to work councils. (Although work councils have a similar mission to those of labor unions, each firm has its own work council, thus lacks the collective reach of an industry-wide trade union.) Hungary’s trade union membership rate, currently about 15% (the EU average is 25%), is expected to fall as a result. Hungary has ratified all eight ILO core conventions.

An amendment to Hungary’s Higher Education law regarding the operation of foreign universities in Hungary was passed by Parliament in a fast-track procedure in April 2017. The law is widely viewed as an attack on Central European University (CEU), an institution founded by George Soros. Soros is a persistent critic of the Fidesz government and finances several human rights and pro-democracy organizations through his Open Society Foundation. The amendment includes a provision obliging universities from third countries to have a campus in their countries of origin and an intergovernmental agreement between Hungary and the other country of accreditation, provisions which only CEU currently lacks. As of June 2017 the legislation was under the review of Hungary’s Constitutional Court; the European Commission had also launched an infringement proceeding. If implemented, the legislation could potentially cause currently established academic institutions to leave Hungary. Observers cite the new law as an example of the government’s willingness to craft legislation to silence its critics.

12. OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) has operated in Hungary since October 1989, offering U.S. investors financing through direct loans or guarantees, political risk insurance, and capital for private equity funds. OPIC’s financial support ranges from small micro financings to large infrastructure project loans.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

Table 3: Sources and Destination of FDI

Table 4: Sources of Portfolio Investment

14. Contact for More Information

Gregory Meier

Economic Officer

Embassy Budapest

+3614754101

meiergj@state.gov

Tags

Bureau of Economic and Business Affairs Bureau of European and Eurasian Affairs Hungary

Source: U.S Department of State, Bureau of European and Eurasian Affairs