Hungary is located in the centre of Europe, practically any European country may be reached in twenty-four hours by road - or rail transportation. There are direct flights from Budapest to all European capitals and to New York, Bangkok etc. The Danube river plays an important role as an inexpensive transport route for destinations to Western- and Eastern Europe. The Mediterranean and the Middle East may be reached through the port of Trieste of Italy.
The Hungarian Parliament has passed hundreds of new legal rules since the first democratic election, many of them concern business activity.
By 1996 all the important issues of foreign investment and joint ventures had been covered by new legislation and today the harmonisation of the Hungarian legal rules with the rules of the European Union is in progress.
There are two main legal rules governing the area of the foreign investments in Hungary : Act VI 1988 on Economic Associations, and the Act XXIV of 1988 on Foreign Investments.
The preamble of the Foreign Investments Act summarises its main aims:
- to improve the international economic co-operation between Hungary and foreign investors,
- to promote the importation of direct participation of foreign operating capital into the Hungarian economy,
- to increase technical improvement in Hungary, and
- to ensure non-discriminatory national treatment for foreign investors.
In order to achieve these goals, the law removes bureaucratic obstacles before foreign investors. It allows foreigners to acquire shares in existing Hungarian companies, to establish joint ventures, or to establish companies which are entirely foreign owned. The joint venture may operate in the form of an economic association with or without legal personality.
FULL PROTECTION OF INVESTMENTS
The law guarantees a discrimination-free and national treatment for associations/companies with foreign participation.
The investment of foreign investors enjoy full protection and security in Hungary. Any losses that an investor may suffer due to nationalisation, expropriation, or other measures of equivalent effect shall be fully compensated at real value, without delay, and the compensation shall be paid in the currency in which the investment took place. In case of infringement of law, review of the action may be requested from the court.
NO PERMIT REQUIRED
No permit or license is required for investment by foreigners, any foreign person or foreign firm with or without legal entity may invest in Hungary. The investment may be made by acquisition of a stake/shares in an existing company or by establishing a new joint venture with a Hungarian or foreign partner. One or more foreign investor may establish a wholly foreign owned venture as well.
According to Hungarian rules, a foreigner is a person whose permanent address is abroad, or a company the registered office of which is abroad.
If the investor is a foreign entity it must be properly registered according to its domestic laws.
FORMS OF COMPANIES ?
Starting up a business in Hungary is relatively cost-effective for foreign investors.
According to Act No VI of 1988 on Economic Associations there are six legal forms of companies:
- Unlimited partnership (kozkereseti tarsasag-kkt)
- Deposit (or limited) partnership (beteti tarsasag-bt)
- Union (egyesules)
- Joint enterprise (kozos vallalat-kv)
- Limited liability company (korlatolt felelossegu tarsasag-kft)
- Company limited by shares (reszvenytarsasag-rt)
The foundation of a company shall be notified to the court of registration for registration and for publication. In Hungary the limited liability company and the company limited by shares are the most popular legal form of joint ventures.
1. Limited Liability Company (LTD)
(korlatolt felelossegu tarsasag-KFT)
The limited liability company is an economic association established with a primary capital comprising predetermined primary stakes, in which the liability of members vis-a-vis the company extends to providing the primary stake and other pecuniary contributions as eventually defined in the articles of association. Members shall not be liable for the obligations of the company.
The amount of the primary capital may not be less than one million Forints (which is about 6500 US$), and the share of one member may not be less than 100.000 Forints. To establish a limited liability company the primary capital may be contributed in cash -at least 30% of the capital but not less than 500.000 Forints. The rest of the primary capital may be contributed in kind. At the time of establishment at least half of the cash and all the contribution in kind must be made available.
2. Company Limited by Shares
(reszvenytarsasag-RT)
Company limited by shares is the other form of company which is suitable especially for medium and large companies.
The registered share capital may not be less than 10 million Forints (about 65.000 US$). There may be different kinds and classes of shares in the company, but foreigners may only own registered shares. If a foreigner acquires other kinds of shares, he is obliged to transfer the shares to registered shares within three months, or within one year in case of succession.
At the establishment of a share company at least 30% of the share capital shall be contributed in cash, but not less than 5.000.000 Forints. The rest of the primary capital may be contributed in kind.
Also in a share company at the time of establishment at least half of the cash and all the contribution in kind must be made available.
According to a recently published draft of proposal on new companies law the required minimum capital for the establishment of Limited Liability Company and of Company Limited by Shares will be raised to 3.000.000.- HUF in case of a Limited Liability Company and to 50.000.000.- HUF in the case of a Company Limited by Shares.
WHAT KIND OF ECONOMIC ACTIVITY MAY BE PERFORMED IN HUNGARY?
A foreign enterprise or an association with foreign participation may perform any economic activity in Hungary, except for activities prohibited or limited by law. The explanatory note of the Law on Foreign Investments that there are no economic sectors closed to foreigners. Limitations and prohibitions may only apply according to international practice in cases of very important national and defence interests. Such limitation may be that a certain percent of the company must be owned by Hungarians or that some strategic state owned company shall not be or may be only partially privatised.
Some business activities require official permission by law e.g. auditing, travel agency, gambling, trading with precious metals etc. There are also some business activities that may only be practised in certain legal forms e.g. insurance companies, banks may only operate in the legal form of a company limited by shares .
There are some business activities for which a state franchise is required to operate. In Hungary it is called the Concession .
The main field businesses where Concessions are required are as follows:
- Transportation
- Telecommunication
- Mining
- Production and sale of drugs a psycho tropic materials
- Organising and operating gambling etc.
As far as Concessions are concerned foreign investors are considered as fully equal to Hungarian investors and they may conclude Concession Contracts with the same terms, conditions and chances as Hungarian investors, just like in any other business area. Concessions may only be obtained by means of a tender for a maximum of 35 years. The detailed rules of the Concessions are defined in the tender and in the Concession Act.
HOW SHALL THE CONTRIBUTION OF THE FOREIGN PARTY BE PAID
The investment of the foreign party may be made in cash or in kind. The cash contribution of the foreign investor shall be paid in a freely convertible currency.
Any negotiable assets with real pecuniary value, or any intellectual property such as know-how or licenses or any right of pecuniary value (trade names for example) may be an in-kind contribution. Any means or equipment necessary for production or any means or equipment necessary for providing services by the association can also be an in-kind contribution.
A member providing a contribution in kind shall be liable to the economic association for five years from the date of the provision of the contribution for that the value of his contribution corresponds to the value designated in the articles of association at the time the contribution was provided.
LOCAL TRADE - FOREIGN TRADE
In the domestic market, all kinds of transactions are free from any official interference, but the rules prohibiting unfair economic activity, and the rules relevant to the quality of commodities and services apply. Pricing is free except for a few class of goods and services where official price has been established by a legal provision.
Any company may enter into foreign trade. There is no permission required to engage in foreign trade activity, and it can be pursued by an enterprise irrespective of the nature of its basic activity. A registration is necessary which is made on the basis of a statement by the association that it will perform foreign trade.
REAL ESTATE
A Company may acquire the ownership of real estate (with the exception of agricultural land) necessary for its economic activity.
FOREIGN CURRENCY TRANSACTIONS
The assets of the Company shall be indicated in Forints and the books of the Company shall be kept in Forints.
A foreign member's cash distribution, made in freely convertible currency, may be retained in the company's account in the currency of contribution. A company involved in foreign trade may have foreign currency account.
The transfer of Foreign currency abroad to pay invoices from abroad is not restricted.
Amounts owed to the foreign party from the Hungarian enterprises, dividends, profit may be freely without any permission required transferred abroad in the currency of the investment or according to the instructions of the foreign party.
INSOLVENCY
In case of lasting insolvency, the provisions of the Hungarian compulsory liquidation procedure apply. After meeting the debts of the Company, amounts due to the foreign party may be freely transferred abroad in the currency of the original investment or according to the instructions of the foreign party, provided that the enterprise possesses the necessary amount due the foreigner in Forints or in hard currency.
LABOR LAW
The investor will find in Hungary a highly qualified labour force, at a relatively low cost. Any Hungarian citizen or a resident having a valid working permit may be employed. The leading officials, managers and members of the Supervisory Board may also be foreign persons. Such officials must not necessarily be employees of the company and having working permit.
The information in this newsletter is correct to the best of our knowledge and belief at the time of going to public. It contains only basic information and specific advice should be sought, however, before investment and other decisions are made.
