Doing business in Hungary
Hungary is a landlocked country in East-Central Europe in the Carpathian Basin. Hungary joined the EU on 1 May 2004, in consequence the country owns harmonised legal environment complied with EU standards.
Thanks to the geographical position of the country and the constantly developing infrastructure, Hungary has highlighted position in international trade-routes including main waterways. Most of the goods are transported on the almost 2,000 kilometres of motorway and expressway – Hungary has the highest density of motorways in Europe – and on the approximately 7,700 kilometres long rail network. Hungary is clearly above the EU average, with over 20% of goods transported by rail. Besides shipping and rail transport aviation is becoming increasingly important. Being the largest airport of Hungary the Budapest Ferenc Liszt International Airport has been significantly expanded in recent years, with almost 15 million passengers and over 140,000 tons of freight traffic annually it is one of the leading airports in the east of the EU.
The Hungarian economy is characterized by manufacturing industry and the automotive industry plays an explicit role within it. In recent years, more and more plants of large international automobile manufacturers have been opened or expanded. Among others, Mercedes, BMW and Opel as well as suppliers such as Bosch and Knorr-Bremse have been producing in Hungary. Other significant industry sectors are the electrical and electronics industry, the pharmaceutical industry and medical technology, as well as the ICT sector with several shared service centres. As Hungary is traditionally an agricultural country the food industry has a high priority in the economy. Tourism plays an important role, Budapest, Lake Balaton other parts of the country are visited by more and more tourists year by year.
The Hungarian education system is increasingly focusing on foreign languages, therefore there are many employees who own that language proficiency which makes them internationally competitive in the job market. Usually English or German is taught as a first foreign language at Hungarian schools, besides most schools enable students to pick up a second or third foreign language. The language skills of the younger population are significantly better than those of the older population, who mostly only speak Hungarian.
Hungary is a strongly export-oriented country. After a slump caused by the global economic crisis in 2008, the economy has been coming back to life, in 2018 goods worth around 105 billion euros went abroad which corresponds to 87% of the GDP. More than three quarters of the exports went to the EU, whence more than a quarter passed to Germany alone, additionally more than a quarter of the imported goods came from Germany. Therefore, it is not surprising that Germany is by far the most important trading partner of the country.
In 2018 economic growth was 4.8%. The GDP was € 13,528, which corresponds to 33.1% of the German value. The unemployment rate was 3.8% in 2018. On average the labour costs are around a third to a quarter of the German level. However, the costs are heavily dependent on the concerned sector, the position and the geographical location. The sharp increase in labour costs has been observed over the last few years. This is partly due to the increase in the public sector wages and the minimum wage, partly as a result of the shortage of skilled workers in various areas.
The government is making efforts to simplify formal economic processes as well as to increase the competitiveness of small, medium-sized and large companies through a wide range of different investment incentives. The government also encourages foreign investors to come to Hungary or to expand in Hungary by making both repayable and non-repayable subsidies available. The financial source of these subsidies is funded by the Hungarian government or the EU. In the case of granting funding, the place of the business must be chosen at an early stage of the process. As there is a strong gap between the developed West and the structurally weak East and South of the country, in the economically strongest region around the capital Budapest hardly any funding is granted.
Besides subsidies tax incentives are implemented too. In 2017, corporate tax was reduced to 9%, which is the lowest in the EU. In 2019, there was further relief for employers by reducing employer social security contributions to 17.5%. Moreover, a further cut is expected until 2022.
In general, the Hungarian labour law is very employer friendly. It offers adequate protection of workers’ rights but at the same time allows high degree of flexibility. For instance, this flexibility is reflected in the new overtime regulations have been in place since 2018. According to the mentioned regulation, the legally permissible number of overtime hours was increased from 250 to 400.
As being the constitution, the Fundamental Law is the foundation of the legal system of Hungary. The Fundamental Law and legal regulations are binding on everyone as the country based on civil law. In accordance with the principles of market economy the freedom of enterprise is declared by Article M of the Fundamental Law. Act V of 2013 on the Civil Code is the primary act of corporate law in Hungary. In the past Act IV of 2006 on Business Associations was the main act of corporate law, yet the Civil Code lays down the fundamental regulations and mandatory rules by regulating legal entities, corporate law and the types of business associations.
Act V of 2006 on Public Company Information, Company Registration and Winding-up Proceedings (Company Procedures Act) governs the procedures on founding, implementing changes in data and winding up of Hungarian associations. The registration of companies in Hungary is necessary as they come into existence only after the registration by the competent Hungarian Court of Registration. The Company Procedures Act regulates the whole process as well as the simplified procedure in the case that using a template in the annex of the relevant regulation of Ministry of Justice. The constitutive documents must be drafted and countersigned by a Hungarian registered attorney. The executive officer of the company shall request the registration through legal representation and the proceeding is fully electronic.
Business associations may be founded by non-resident and resident natural persons and legal persons, provided that they suit the concerning legal requirements. The Civil Code lays out an exhaustive list of the legal forms of companies that can operate in Hungary and all these types are qualified as legal persons.
There isn’t minimum initial capital requirement in a General Partnership (Kkt.) and in a Limited Partnership (Bt.). The main difference between the two forms is, that in a Bt. at least one member’s liability is limited while at least one member’s – general partner – liability is unlimited. In contrast, in a Kkt. all of its members liability is joint and unlimited for the obligation of the partnership. Considering creditor protection reasons there is no chance to accumulate the unlimited liability, since individuals already bearing a joint and unlimited liability in another company, a Kkt., a Bt. and in addition a single-person company are excluded from the general partnership of a company. Under Civil Code, a Limited Liability Company (Kft.) can be established with a minimum amount of initial capital, to be exact it is HUF 3,000,000 now, ensured by its founders. As its names shows, in a Kft. its members are not responsible for the liabilities of the company, which means that apart from few specified cases the members private property cannot be touched. The most strictly regulated corporate form is the Company Limited by Shares which divide into two forms named Private Limited Company (Zrt.) and Public Limited Company (Nyrt.). The Civil Code determinates the minimum of the share capital, which in a Zrt. is at least HUF 5,000,000 while in the case of a Nyrt. is HUF 20,000,000.
Branch office and foreign office are two forms which may ensure the presence of foreign companies in Hungary. Under the Company Procedures Act, both forms must be registered by the competent Hungarian Court of Registration.
In some cases, typically companies with an interest in financing, insurance or capital market activities, the law may require a special permit from the adequate authority for the foundation of a business. Where authorisation by the authority is required by law to initiate a certain economic activity, the business association can be founded and registered, although it may only begin the activity in question when in assets of the authorisation. Activities related to certain qualification may only be pursued by companies if there is at least one person among its members, employees who satisfies the qualification requirements set out in the legal regulations.