2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report

Openness To, and Restrictions Upon, Foreign Investment

Hungary maintains an open economy, and attracting foreign investment remains a priority for the Hungarian government. According to the National Foreign Trade Office (previously the Hungarian Investment and Trade Development Agency), "foreign direct investment (FDI) has been crucial in boosting economic performance and remains the driving force behind Hungary's economic success, fueling its strong export growth and significantly increasing productivity." With approximately USD 90.9 billion in FDI since 1989, Hungary has been a leading destination for FDI in Central and Eastern Europe although the pace of inflows have slowed down since the 2008 global crisis and some recent measures have resulted in a reduction in its relative advantage over regional competitors. Germany is the most significant country of origin with 22 percent of all FDI, followed by Austria (14 percent) and the Netherlands (13 percent). The United States is the largest non-European investor at 4 percent of FDI. The automotive industry, software development, and life sciences receive the highest amount of capital investment. FDI inflow in 2008 reached Euro 4.8 billion, however due to the global financial crisis, it dropped to Euro 1.38 billion in 2010 as companies became more cautious about committing capital to large investments. There are approximately 200 U.S.-origin companies in Hungary, although the figure is closer to 800 if representation, sales offices, and sole proprietorships owned by Hungarians with dual US citizenship are considered.

Hungary's high-quality infrastructure, its labor force, and its central geographic location are often cited as features that make it an attractive destination for investment. In 2010, the government passed a number of tax changes, including reductions in personal income and business tax rates in order to increase Hungary's regional competitiveness. The National Foreign Trade Office touts Hungary as a particularly well suited location for research and development centers; manufacturing facilities; and service centers, and believes that considerable opportunities exist in the biotechnology; information and communications technology; software development; renewable energy; automotive; and tourism sectors.

Despite Hungary's advantages, some businesses complain that obstacles and disincentives to investment remain, including a lack of transparency and predictability; reports of corruption, particularly in the government procurement sector; and barriers related to excessive red tape. Despite reductions in business and personal taxes, Hungary's new government in June 2010 announced the introduction of “crisis taxes” targeting banking, energy, telecommunications, and large retail sectors. Manufacturing was not targeted. Originally unveiled as three-year, limited duration, and extraordinary measures, the “crisis taxes” were meant to shore up the government budget until more long-term, structural changes were made. Many foreign companies have expressed displeasure with the unpredictability of Hungary’s tax regime, the retroactive nature of some of the tax measures, and the speed and volume with which the government is introducing new economic measures and changes. In December 2010, fourteen European companies filed a complaint with the European Commission, maintaining that the taxes discriminated against foreign firms in favor of domestic companies. The IMF has also criticized the taxes, stating, “the levies are difficult to justify on economic grounds as they discriminate among sectors and send negative signals about the government’s attitude towards foreign investment, which is critical for Hungary.” Many critics have claimed that the taxes will have the adverse effect of reducing foreign investment and economic growth, and will offset economic benefits of recently approved cuts in personal and corporate tax rates.

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Index/Ranking

Year

Rank

Hungary Result

Scale

Transparency International Corruption Perception Index

2011

54/178

4.6

From 1 to 10, most corrupt = 1

Heritage Economic Freedom

2011

51/183

66.6

From 1 to 100, most free = 100

World Bank Doing Business

2012

51/183

n/a

Out of 183 countries and territories

World Economic Forum Competitiveness Report

2011/2012

48/139

4.4

The higher the score the more competitive

IMD World Competitiveness Yearbook

2011

47/59

58.918

From 1 to 100, most competitive = 100
100.000

Economic Recovery

Hungary’s emergence from the 2008/2009 global financial crisis has been impacted by the Euro crisis and some of its domestic economic policy, with the government’s expected growth rate of 1.5 percent for 2011 and falling to 0.5 percent in 2012. Hungarian exports, however -- particularly to Germany -- are substantial and Hungary maintains a trade and current account surplus. As the result of several large scale investments, particularly in the automotive sector, there is a strong increase in manufacturing investment in 2010. Recently enacted reductions in personal and corporate income tax rates are intended to help stimulate domestic consumption and attract investment especially in the manufacturing sectors. Profitability in certain sectors, e.g. telecommunications, energy, retail, and banking, has been reduced by the so-called crisis taxes, but the government has pledged to reduce the special bank tax by 50% in 2013 and in 2014 replace it with an EU-wide bank tax which puts a much smaller burden on banks. The unemployment rate declined from 11.4% in 2009 to 10.8% in 2011, although the employment rate in Hungary remains well below the OECD average.

In October 2008, the European Union (EU), the International Monetary Fund (IMF), and the World Bank provided Hungary with a Euro 20 billion stabilization package. The new Fidesz government, which won a historic two-thirds majority in the April 2010 parliamentary elections, subsequently declined to negotiate a follow-on Stand-by Arrangement with the IMF, noting that it had the ability to meet its current and short-term financing needs through market financing. The government has committed to continued deficit reduction, maintaining the previous government's deficit targets for 2010, although the 2011 target was only met using one-off measures such as transferring mandatory private pension fund assets and employee contributions from the Public Pension Fund and taxes on certain service sectors.

While welcoming the government's commitment to continued deficit reduction (particularly given Hungary's high debt to GDP ratio, which reached 80.1 percent in November 2011), many outside observers, including international credit-rating agencies, have criticized the government's failure to enact structural reforms as a more fiscally sustainable way to meet budget targets, rather than through short-term tax increases and one-off measures. Other actions, including suspending payments into the private pillar of the pension system (which makes it financially disadvantageous for most beneficiaries who choose to remain in the private pillar of the pension system) and eliminating the independent Fiscal Council budget watchdog agency, have also drawn widespread criticism. In 2010, the three major credit rating agencies reduced their ratings on Hungarian bonds to the lowest investment grade, with two ratings agencies announcing further downgrades, to junk status, in late 2011, and the third to junk status in early 2012. New foreign currency loans have largely disappeared from the market, but many companies and households still have high exposure to foreign currency loans. In wake of the recent downgrades and negative outlook, however, the government has once again turned to the EU and IMF and is hoping to conclude a credit arrangement. Negotiations are expected to start in the first quarter of 2012.

At the end of 2011, the government also reached an agreement with banks to address the issue of foreign currency denominated household loans. It is estimated that half of Hungary’s household debt (USD 26.5 billion) is in Swiss francs. The agreement contains provisions to assist those most in need, by offering government rentals, interest and exchange rate subsidies, or conversions to forint loans, depending on the debtor’s financial solvency. Part of the agreement also eliminates the bank tax in 2014 (replacing it with an EU-wide bank tax) and provides incentives to banks to increase lending to SMEs and for the financing of EU projects.

The Ministry of Economy has started structural reforms intended to address medium and long-term fiscal concerns. In addition, the government hopes that its recent cuts in the personal and corporate income tax rates will be able to spur longer-term growth, in the hope that it would have a positive effect on its budget.

Framework for Foreign Investment

Since 1989, Hungary has undergone a dramatic transformation from a centrally planned economy to an open, pro-business economy. In 2004 it became a member of the European Union. The Hungarian Constitution guarantees private ownership, right of enterprise, and freedom of competition. In November 2010 Parliament moved to restrict tax and budgetary matters from the Constitutional Court’s purview. Parliament drafted a new Constitution that came into force on January 1, 2010. Financial markets are highly developed and smoothly operating, and reflect a level of sophistication indicative of an early reformer in the region.

The Ministry of Economic Affairs established the ITDH (Investment and Trade Development Agency in Hungary) in 1993 to help companies make major investments in the country. On January 1, 2011, ITDH’s economic development responsibilities were transferred to the Hungarian Investment and Trade Development Agency(HITA) operating under the Minister of National Economy. The size of HITA is smaller than the former ITDH. The government has a National Development Program II (NDPII) for channeling EU development funds and the Smart Hungary investment incentive program, aimed at facilitating investments in key areas for development, especially in less developed regions.

The Investors’ Council is intended to operate as a mechanism to maintain Hungary's economic competitiveness and attractiveness to foreign investors. Co-chaired by the Minister of Economy, the American Chamber of Commerce, the German Hungarian Chamber of Commerce, the Hungarian Joint Venture Association, the Hungarian Association of International Investors, and the Permanent Commission of EU Chambers, it is made up of the 100 largest investors. The Investor’s Council was dormant for several years, but has been re-activated since March, 2011. A substantial body of laws protects foreign investment in Hungary, provides national treatment and enables profit repatriation. The most important are the 1988 Law on Business Organizations, as amended in 1997 (no. CXLIV), the 1990 Law on Enterprise, the 1992 law on transforming state companies into economic associations, the 1990 and the 1996 Competition Laws, and the 1995 Privatization Law. Other important laws include the 1991 Law on Bankruptcy, the Law on Securities, and the 1994 Law establishing the Commodity Exchange. Legislation is uniform for all investors regardless of their origin. Institutions and procedures are in place to ensure compliance with legislation and competition rules. The applicability of these laws extends without differentiation to domestic and foreign investors.

The most notable legislation protecting both foreign and domestic investors is the Foreign Investment Act of 1988. It grants full protection to the investments and businesses of non-Hungarian resident investors and guarantees that investors will be treated in the same manner as national 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.

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 continue to be complaints from foreign investors about the slow pace of the judicial system, and the need for timelier judicial due process.

Up to 100 percent foreign ownership is permitted with the exception of designated "strategic" holdings in some defense-related industries, and for non-EU citizens, farmland. Foreigners investing in financial institutions and insurance companies must officially notify the government 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 two-thirds of manufacturing, 90 percent of telecommunications, and 60 percent of the energy sector. The private sector currently produces about 80 percent of Hungary’s output.

The Hungarian State Holding Company (MNV) became the legal successor to the Hungarian Privatization and State Holding Company (APV) in 2008, and is responsible for managing and privatizing state-owned properties. With most state-owned companies now privatized, however, the pace of privatizations has slowed considerably in recent years.

Ownership in Hungary is considerably more concentrated than in the U.S. It is common for one or two stockholders to have a controlling stake in even large corporations. Crossholdings are common and the independence of directors sometimes difficult to establish.

Land-Ownership Restrictions: Under the Investment Act, a company incorporated in Hungary may only acquire real estate "required for its economic activities," but this has been broadly interpreted and has not prevented foreign entrepreneurs from engaging in property development. The 1994 Land Law restricts the purchase of land by foreigners to 6,000 square meters, but allows for leases of up to 300 hectares for a maximum of 10 years. Only private Hungarian citizens and EU citizens resident in Hungary engaged in agricultural activity can purchase farmland, while others may lease it. Restrictions on foreigners buying land were scheduled to remain in force for seven years following EU membership. In 2010 the EU granted a three-year extension of this transitional period.

Conversion and Transfer Policies

The Hungarian forint (HUF) has been convertible for essentially all business transactions since January 1, 1996. As a legal obligation of its EU membership, Hungary must eventually adopt the Euro. Hungary complies with IMF Article VIII and all OECD convertibility requirements. 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. Foreign currencies are freely available in all banks and exchange booths. In 2001, Hungary adopted an exchange rate intervention band of +/-15 percent around a benchmark rate against the Euro. In order to allow the Hungarian National Bank (MNB) to exclusively focus on its inflation target of 3 percent, in February 2008 the MNB adopted a free-floating exchange rate regime. Since that date market forces determine the HUF exchange rate to the Euro and other currencies.

Although the current government, like the previous one, notes that adoption of the Euro remains a priority, a specific target date for entry has not been set. Recent reforms have aimed to strengthen Hungary's fiscal sustainability and bring it closer to meeting the conditions required for entry into the Exchange Rate Mechanism II (ERM II), one of the "Maastricht Criteria" required for Euro adoption. The timing of Hungary's entry into the Eurozone will largely depend on the economic policies and priorities of the current government.

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.

Hungarian legislation allows for profit repatriation and re-investment. The timeframe 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 if corresponding banks are easily found. 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.

Expropriation and Compensation

A 1990 Constitutional Amendment provides protection against expropriation, nationalization, and any arbitrary action by the government except in cases of acute national concern. In such cases, immediate and full compensation is to be provided to the owner. There are no known cases where the Hungarian government has discriminated against U.S. investments, companies, or representatives in expropriation. However, there have been some complaints from other foreign companies within the past several years that expropriations have been improperly executed without proper remuneration. These cases have turned to the legal system for dispute settlement.

Dispute Settlement

Hungary’s judicial system underwent significant changes due to legislation passed in 2011 and effective as of January 1, 2012. Parliament renamed several courts and added a new court, the court of public administration and labor. Presently, 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 renamed Supreme Court). Hungary also has a Constitutional Court that reviews cases involving the constitutionality of legal regulations and court rulings.

Hungary also established the National Court Administration Office (OBH) and invested significant authority in the OBH President. The OBH President is nominated by the Hungarian President, approved by a two-thirds Parliamentary majority and serves a nine-year term. Under the revised judicial system, the OBH President’s responsibilities include judicial appointment recommendations, court leadership decisions and caseload distribution. Additionally, the new Constitution was amended to allow the OBH President and the Prosecutor General to choose the venue for specific cases in order to ensure timely proceedings. Domestic and international observers have criticized the new structure for undermining judicial independence, claiming that the powers of the OBH President are unchecked and allow for the politicization of the courts. Critics have also claimed that the combined authority of the OBH President and the Prosecutor General to chose court venues violate the right to a fair trial.

The Act on Bankruptcy Procedures, Liquidation Procedures and Final Settlement of 1991, amended several times, covers all commercial entities except banks (which have their own regulatory statutes), trusts, and state-owned enterprises to bring Hungarian legislation in line with EU regulations. Bankruptcy proceedings can only be initiated by the debtor provided he/she has 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 settlement plans. 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 independant financial examination. The trustee has the right to challenge, based on conflict of interest, any contract concluded within 12 months preceding the bankruptcy.

Liquidation procedures may be filed with the court by the debtor, the creditors, the administrator, or the Criminal Court. Once a petition is filed, regardless of who filed it, the Court notifies the debtor by sending him a copy of the petition. The debtor has 8 days to declare whether he acknowledges insolvency. If accepted, the company decalres if any respite for the settlement of debts is requested. Failure to respond to this shall result in the insolvency being presumed. 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 shall, in the decree, appoint a liquidator. The Liquidation Decree shall be published in the Company Gazette. The Court shall notify the competent tax and customs authorities, the health insurance administration agency, the pension insurance administration agency and all payment service providers carrying the debtor’s accounts, of the insolvency. There has been some concerns raised about the transparency of the liquidation process, in light of the fact that a company may not know that a creditor is filing a liquidation petition until after the fact.

Hungary has accepted binding international arbitration in cases where the resolution of disputes between foreign investors and the state is unsuccessful. There are domestice arbitration bodies within the Hungarian Chamber of Commerce, the Ministry of Labor, and local municipal governments. Hungary is a member of the International Center for the Settlement of Investment Disputes (ICSID). Hungary is also a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. In the last few years mediation has become a tool of increasing importance for dispute settlement to avoid lengthy court procedures.

Performance Requirements/Incentives

Performance requirement/incentives are available to all enterprises registered in Hungary, regardless of the nationality of owners or location of incorporation, and applied on a systematic basis. To comply with European Union rules, the government of Hungary no longer grants tax holidays based on investment volume.

Eligibility for incentives is regulated by GOH Decree 163/2001, as amended by 241/2002, in accordance with EU regulations. Incentives can be received by tendering procedures for: (1) research and development, employment, training; (2) economic sectors; or (3) regions. The government defines an intensity indicator for incentives, which is the maximum value of the total of various incentives in proportion to the present value of the investment. This can be higher for less developed areas or for small and medium sized enterprises (SMEs).

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 EURO 10 million). The incentives are focused on investors establishing manufacturing facilities, logistics facilities, regional service centers, R&D facilities, bioenergy facilities, or tourist facilities. 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 and Trade Development Agency and managed by the Ministry of Development and Economy.

Parliament enacted a new National Development Plan for 2007-2013. In the Framework of the New Hungary Development Plan (NHDP), Hungary will receive around Euro 22.4 billion from the EU. This will be complemented by the national public contribution amounting to 15 percent of the total available funding. The Hungarian government will add to this amount around 1,000 billion HUF (USD 4.3 billion). Projects using EU structural and cohesion funds will be subject to a series of requirements, including a portion of own-source financing. As these programs become implemented, the inflow of EU funds will create numerous opportunities for investment. In an attempt to ease the effects of the global financial crisis, the GOH initiated an economic stimulus package worth over Euro 5 billion for businesses, including SMEs that have been particularly affected by the unavailability of credit. In the current climate, loans have been hard to obtain even for SMEs with good credit histories, and expiring loans have been hard to renew. The package includes a Euro 1.4 billion liquidity package (micro loans, SME loans, and Hungarian Development Bank loans), a credit guarantee of over Euro 270 million, as well as interest and venture capital subsidies from the New Hungary Development Program and the New Hungary Rural Development Program. The division of EU Resources for the Sectoral Operative programs is as follows (The following figures are for 2007-2013; negotiations between the government and EU for the period 2014-2020 have also begun):

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Sectoral Operative Programs

Billion HUF

USD Billion (approximate)

Economic development

674.03

3.10

Transport

1721.47

7.92

Social Renewal

933.29

4.29

Social infrastructure

538.95

2.48

State Reform

40.61

0.18

Electronic Public Administration

99.49

0.46

Environment, Energy

1053.56

4.85

Implementation

94.88

0.44

National Performance Reserve

98.38

0.45

Regional Operative Programs

1620.59

7.45

NHDP total

6875,25

31.63

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 purchase from local sources, however the EU Rule of Origin applies. The government imposes “offset” requirements for defense sector investments over one billion forint. Investors are not required to disclose proprietary information to the government as part of the regulatory process. There are no restrictions on participation in government financed or subsidized research and development programs.

Visa, residence, and work permit requirements are a lengthy and tedious hurdle, but do not inhibit foreign investors’ mobility. Employment of foreign nationals must meet Hungarian Labor Code requirements.

There have been no complaints against Hungary related to any failure to fulfill any trade related investment measures (TRIMS) treaty obligation.

Right to Private Ownership and Establishment

The Hungarian constitution guarantees the right to private ownership. Foreign and domestic private entities may establish and own business enterprises and engage in all forms of remunerative activity, except those prohibited by law. Hungarian law guarantees the right of establishment of private entities, as well as the right to acquire and dispose of interests in business enterprises. Many foreign companies operate through representative offices.

The Foreign Investment Act of 1988 grants full protection to the investments and businesses of non-Hungarian resident investors. The Act guarantees that investors will be treated in the same manner as national investors, and 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.

In 2010 the government enacted changes to the pension system that make it economically disadvantageous for most beneficiaries to remain in the private (second) pillar of the pension system. As a result most of the Euro 9.8 billion of privately managed pension assets was transferred into the state pay-as-you-go system. The State Debt Management Agency (AKK) is responsible for all of the new assets under state control. It is estimated that 3 million Hungarians were affected by this change and only about 100 thousand people remained in the private pension system. Those in the private pension system are also likely to join the public pension system because recent legislation transfers the pension contributions paid by their employers to the public pension system which reduces their future pension by approximately 25%. The registration of business associations is compulsory in Hungary. All firms registered in Hungary are under the Court of Registration’s legal authority. The Court maintains a fully computerized registry, provides public access to company information, and is developing an electronic filing system. The Court also enforces compliance with the Company Act, enacted in June 1998, which compels registry courts to process applications to register limited liability and joint-enterprise companies within 30 days (60 days for unincorporated business entities). If the court fails to act in the period, the new company is automatically registered. The act eliminated separate registrations at the tax and social security authorities. The minimum capital required for a limited-liability company is HUF 500 thousand (USD 2100) and for a joint stock company it is a minimum of 5 million HUF (USD 21300. As of July 1, 2008 businesses may be established in one hour’s time electronically or by a simplified registration procedure. The GOH announced the intention to decrease administrative burdens by 25 percent by 2012.

Protection of Property Rights

Secured interests in property (mortgages), both moveable and real, are recognized and enforced but there is no title insurance in Hungary.

Intellectual Property Rights: On January 1, 2003, Hungary acceded to the European Patent Convention and has accordingly amended the Hungarian Patent Act. It is a party to the WTO Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement and mostother 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 new 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.

Patent protection in Hungary covers the use, sale, offering for sale, and import of a patented product or products made using a patented process. The definition of infringement has been extended to include, ”supplying the means.” A person who sells or offers to sell the means of producing a patented product is liable if that person is proven to have known that the means could be used for infringement. An example is the sale of decoder boxes that would allow the user to pirate a cable signal.

Under the revised Patent Act, effective January 1, 1996, an invention may be patented if it is novel and has industrial application. The patent application process takes from six months to one year, and patents are issued for a period of twenty years from the filing date. Foreigners applying for a Hungarian patent whose permanent residence is not in the European Economic Area (EEA) must be represented by an authorized Hungarian patent agent. Hungarian patent law conforms to the guidelines of the European Patent Convention, to which Hungary is a signatory.

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) has competency of patent revocation and trademark invalidity proceedings, while all disputed related to the infringement of IPR fall under the jurisdiction of the courts.

In May 2004 the United States Trade Representative (USTR) announced that Hungary was placed upon the Special 301 Watch List of countries owing to weak enforcement and inadequately protected confidential pharmaceutical test data. The government of Hungary has taken some positive steps towards more complete implementation of its international obligations by putting into effect a ministerial decree to provide data exclusivity protection for pharmaceutical products authorized in the EU or Hungary after April 11, 2001. Due to this and other measures, USTR removed Hungary from the Special 301 Watch List in 2010.

In January 2008, the GOH established a National Board Against Counterfeiting and Piracy (HENT), led by a government ocmmissioner, the Hungarian Intellectual Property Office (HIPO), and the Ministry of Justice (MOJ), with participation from law enforcement and other government agencies, various business chambers, industry associations, and NGOs. The Board established a strategy until the end of 2010, which was approved by the government in October 2008. Since its creation, the HENT has undertaken a number of positive measures to increase training of judicial law enforcement officials, improve coordination between rights-holders and law enforcement officials, and increase public awareness of the importance of intellectual property rights protection. Ongoing areas of concern include internet-based piracy and the failure of judges to impose deterrent-level sentences for civil and criminal IP infringement. In January 2011 HENT was reorganized by a governmental decree and given a legal framework for its operation. It is currently establishing a new strategy to meet today’s IPR challenges.

In January 2011 the Customs and Tax Authority (NAV) were merged 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 enforce internet infringements of IPR.

Transparency of the Regulatory System

The regulatory process in Hungary is relatively open and transparent. On the whole, tax, labor, environment, health and safety laws are consistent with EU regulations. However, some companies operating in Hungary have claimed that recent “crisis taxes” are inconsistent with EU regulations since they target certain industries/sectors over others and do not reflect the costs of regulating the affected sectors.

Laws before Parliament can be found on the Parliament website (http://www.parlament.hu/parl_en.htm). Legislation, once passed, is published in a legal gazette and available online. Civil organizations complain about a loophole in current law that exempts bills submitted by individual Members of Parliament from many of the publication and comment requirements as other pieces of legislation. The government has an inconsistent record of inviting interested parties to comment on draft legislation and does not always incorporate input into final documents. Companies in industries impacted by the crisis taxes complained that there were no consultations before the new taxes were announced, and that the government failed to take into account industry-expressed concerns. Foreign investors, along with some sectors of civil society and some international organizations, including the EU, would like to see more consultations between government and stakeholders in drawing up regulations. Some regulatory functions are delegated to professional associations, such as medical and legal associations. In addition, several permanent advisory committees may review draft laws and rules. However, in most cases the government has complete discretion over who sits on these boards, over whether or not the boards see draft decrees before they are promulgated and whether or not to accept the boards’ input in making final regulations. The bureaucratic procedures can be very lengthy, but one of the government's top stated priorities is to reduce bureaucratic red-tape.

There are some exceptional types of regulations where consultation with the public is required, including environmental and land use regulations. The Environmental Act (LIII/1995) and the Regional Development and Country Planning Act (XXI/1996) require the government to solicit input from affected parties. Open-ended public hearings are uncommon, and the courts generally cannot review administrative decisions. Some ministries are beginning to put draft rules and laws on the Internet and to invite comments, but this practice is not yet widespread.

A revised Public Procurement law came into force on May 1, 2004. Companies operating on subsidies or price-regulated sectors may suffer due to insufficient transparency and responsiveness in the setting of prices or subsidies. In response to continued international criticism regarding Hungary’s procurement laws and practices, a bill to modify existing public procurement legislation and make it more transparent was passed by Parliament in 2008. Parties requesting bids will be required to post information on their websites about the project and results of the public procurement process. Additionally, bids will need to indicate all subcontractors that will be used and how they will participate in the project. The new law also simplifies the current process by reducing the amount of paperwork for bidders. The government has recently moved forward with several modifications of the Public Procurement Act in 2010 that are intended to further simplify and streamline the public procurement process. The current Hungarian government extended the law to investments financed by the Hungarian Development Bank and increased the number of open tenders.

According to Transparency International’s National Integrity Study, systemic corruption adds as much as 20-25 percent to the costs of government procurement. A Freedom House study estimates that only 10 percent of government procurements are transparent. Government procurement reform is a major topic of discussion among foreign chambers of commerce and business groups that have provided input and suggestions to the GOH for inclusion into draft legislation. The Accounting Law of 2000 and subsequent modifications were designed to bring Hungarian financial reporting standards and practices in line with the International Accounting Standards and the EU Fourth and Seventh Directives. Under the latest modification, effective January 1, 2005, listed companies under the scope of Decree 1606/2002 of the EC are obliged to prepare consolidated financial statements in accordance with international financial standards, except for companies which are subsidiaries of a parent company already preparing a consolidated annual report.

Efficient Capital Markets and Portfolio Investment

Prior to the global financial crisis, capital adequacy was not an issue in Hungary as funds were readily available for businesses, due in large part to a large foreign presence and significant competition in the banking sector. Since the crisis, banks have increased their capital adequacy ratios above the required 8 percent. In line with EU requirements, banks also need to reduce loan-to-debt ratios to 110% by 2014 from 140% currently. Lack of confidence in financial markets affected Hungarian banks. The Government has practically banned banks from lending in foreign currency by stipulating that only those who earn their income in foreign currency can take foreign currency denominated loans to eliminate exchange rate risk on customers. Forint loans to businesses are hard to obtain as well, as banks increase their debt-to-loan ratios, forcing them to promote deposits aggressively and lend to the less risky sectors, including consumer loans. On the whole, foreign investors continue to have equal access to credit on the local market, with the exception of special governmental credit concessions such as small business loans. Markets for direct finance are thin.

Hungary has an impressively modern financial sector. In April 2000, the responsibilities of the Bank Supervisory Board were merged with the state insurance and pension supervisory agencies to form the Hungarian Financial Supervisory Authority (PSZAF) and its importance was further enhanced by Act CXXXV of 2007. This body is a consolidated financial supervisor regulating all financial and securities markets. In order to increase its ability to foresee possible problems in the financial sector, PSZAF’s authority was increased through a package of modifications to existing financial laws passed by Parliament in December 2009 and October 2010. These include stricter regulations on loans for private individuals, better information about exact loan conditions and costs, and a code of ethics for banks. These changes are designed to prevent individuals from taking on loans they are unlikely to be able to repay and provide better protection for those who cannot meet current installments and wish to change their loan conditions or opt for early repayment. Most of the new legislation entered into force on January 1, 2010. In December 2010 Parliament empowered the PSZAF to pass decrees in line with NBH decrees and other existing legislation. This creates a strong two-pillar system of control by the Central Bank and the PSZAF over the financial sector and provides new tools to allow them to address systemic and other risks. Tasks related to the establishment of the European Systemic Risk Body and the European System of Financial Supervisors would also be delegated to the PSZAF.

Competition from State-Owned Enterprises (SOEs)

Beginning in the 1990s, there has been considerable privatization of former state-owned enterprises. Today, few SOEs remain, and primarily operate in strategic sectors, for example in the areas of national security, energy (MVM) and transportation. However, most recently the government made some strategic investments in areas that are outside the scope of national interest, such as the telecommunications sector (bidding on the fourth mobile telephone license) and the production of machinery (RABA). At present we are aware of few complaints from private companies regarding competition from SOEs.

Corporate Social Responsibility (CSR)

Since the mid-1990s, corporations began to pay more attention to social responsibility. Foreign long-term investors have "imported" their CSR mechanisms, policies and models, which local Hungarian corporations have begun to adopt. According to a survey conducted by CSR Hungary, 55 percent of businesses have a CSR policy and 44 percent of businesses think that CSR increased their competitiveness. The Hungarian Business Leaders Forum (HBLF), a non-profit representative body of local and international business leaders in Hungary, considers CSR as part of its mission. In 2006 GOH signed a strategic resolution (No. 1025) for the reinforcement of social responsibility of employers. Since 2006 CSR Hungary has held an annual conference - the country's largest CSR forum - where company and communication managers, researchers and university students exchange information and experiences, and where an annual CSR award is presented.

Price Regulation and Liberalization

The Price Act of 1990 authorizes the government to determine compulsory prices when the Competition Act fails to protect interests of consumers. This sets the upper or lower price limit for certain goods and services to be established by a relevant government authority.

Foreign companies operating in price-regulated sectors, such as energy and pharmaceuticals, have suffered decreased margins due to government delays in adjusting prices upward and extending subsidies to new drugs. Multinational pharmaceutical firms believe they have spent considerable time negotiating with the Ministry of Health with little effect on the price and reimbursement policies of the national health system. Many pharmaceutical companies see the current government plan for pharmaceutical subsidies as impractical.

Substantial market deregulation has occurred over the past few years. The electrical market is being unbundled and largely privatized. In June 2003, the Hungarian government passed the Gas Act, which provided the framework for gradual liberalization of the natural gas market from January 2004. On the other hand, that same Act has arguably reduced the political autonomy of the Hungarian energy regulatory office. In 2007 the GOH initiated electricity and natural gas market liberalizations, which were for the most part completed in 2009, although the Hungarian Energy Office continues to regulate gas prices.

According to the Amendment on Electricity and Gas Act passed by Parliament in June 2010, the Ministry for National Development, in consultation with the Hungarian energy regulator, quarterly sets the new price regime of universal service providers. Universal service providers have seen their margins decrease due to their inability to make money when the set price is below the price of importing gas.

Portfolio Investment

The 1996 Offering of Securities, Investment Services and Securities Exchange Act, and the 1990 Securities and Stock Exchange Act govern the public issuance and trading of bonds, shares and other securities. The Budapest Stock Exchange (BSE) has 35 members, which are licensed-broker or broker-dealer companies, including several U.S.-based firms. It is a full member of the Federation of International Stock Exchanges and an associate member of the International Securities Market Association. The total market capitalization in December 2010 amounted to Euro 66.4 billion, of which shares amount to Euro 20.86 billion, government bonds and treasury bills amount to Euro 35.96 billion. Average daily turnover was Euro 82.35 million, which is 5.5 percent higher than in 2009. In November 2005, the BSE integrated the Commodity Exchange, creating a commodities section. In December 2010 the BSE listed a total of 77 issuers. These include 54 equity, 11 bond, 3 mortgage, 14 investment funds, one government bond and T-bill issuer, and one compensation note issuer. Some of these issue several type of instruments. Sixty-six percent of capitalization is concentrated in four companies (MOL, OTP, Magyar Telecom, and Richter), the “Blue-chips’ which determine the Stock Exchange Index.

Political Violence

Despite an uptick in protests in 2006, political violence has not been a characteristic of the political landscape in Hungary. The transition from communism to democracy was negotiated and peaceful, and four peaceful changes of government via the ballot box have followed. There is little cause to expect insurrections, political terrorism, or interstate war. There has been no violence directed against foreign-owned companies, although Hungary's economic troubles have contributed to an increase in political extremism.

Corruption

The Hungarian Ministry of Justice is responsible for combating corruption. There is a growing legal framework in place to support its 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. Hungary adopted a national strategy on combating corruption and passed two modifications of the Criminal Code in 2001 (Act CXXI and CIV). Parliament also passed the Strasbourg Criminal Law Convention on Corruption (Law XLIX of 2002) and the Strasbourg Civil Code Convention on Corruption (Law L 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. Transparency International (TI) is active in Hungary and its 2011 Corruption Perceptions Index rates Hungary 54th out of 178 countries (1st being best).

Giving or accepting a bribe is a criminal offense, as is an official’s failure to report a bribery incident. Penalties can include confiscation of assets, imprisonment, or both. Since EU membership, legal entities can also be prosecuted. 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. The 2003 “glass pocket law” extended the State Audit Office right to review businesses’ government contracts to public-private transactions that were previously considered “business-confidential”. Conflict of interest legislation prohibits members of parliament from serving as executives of state-owned companies.

While legislation is in place, persistent suspicion of corruption in some government procurement actions has arisen, due to a lack of transparency and an uneven implementation of the laws to prevent corruption. Non-governmental organizations, the business community, and foreign governments share many of these concerns, and maintain an ongoing dialogue with the government to identify strategies to improve conditions. The GOH set up an Anti-Corruption Coordination Board, led by the Ministry of Justice, with participation from other government ministries, chambers and NGOs, which submitted a strategy and action plan to Parliament in 2008. This board disbanded in late 2009 and no new organization as arisen in its place. TI continues to actively support a transparent party financing system, however there has been little progress on reforming this issue over the past several years.

In addition, observers have raised concerns about appointments of Fidesz Party loyalists as heads of quasi-independent institutions like the Media Council and the State Audit Office.

In December 2009, Parliament passed new measures designed to reduce the possibility of corruption in public procurements. However, most of these measures have not been implemented. The government has suggested that it does not intend to set up new anti-corruption institutions. Rather, it prefers strengthen and build upon existing institutions. For instance, Deputy Prime Minister and Justice Minister Tibor Navracsics recently announced that a new team, dedicated to the fight against corruption, is likely to be set up within the Public Prosecutor’s Office. According to Minister Navracsics, nearly Ft 1 billion more from 2011 budget was spent on combating corruption and that an Anti-Corruption Department was established at the Central Investigative Prosecutor’s Office in April, with eight prosecutors. From 2012, a total of 35 prosecutors have started working in this area.

Hungarian legislation on combating money laundering is in line with international obligations. Act LXXXIII of 2001 on Combating Terrorism, on Tightening Provisions on Impeding Money Laundering widened the scope of the 1994 anti-money laundering legislation. Act XV of 2003 on Preventing Money Laundering increased the scope of business under the anti-money laundering legislation. It now includes financial and supplementary financial service providers, investment service providers, Stock Exchange-related activities, money transfers via postal service, real estate agents, auditors, tax advisors, casinos, retailers of precious metals, gems, antiquities, insurance companies, and lawyers. Hungary is a member of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL).

Bilateral Investment Agreements

Hungary and the United States do not have a bilateral investment treaty (BIT), nor is one currently under negotiation.

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

Hungary has tax treaties which eliminate many aspects of double taxation with the following countries: Albania, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Finland, the Federal Republic of Yugoslavia, France, Germany, Great Britain, Greece, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kuwait, Luxembourg, Malaysia, Malta, Moldova, Mongolia, The Netherlands, Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, Singapore, Slovakia, South Korea, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, Tunisia, Ukraine, the United States, Uruguay and Vietnam. Negotiations were recently concluded in 2010 to revise Hungary’s current tax treaty with the United States.

Taxation

In 2009, the Bajnai government enacted tax reforms aimed at encouraging employment and growth by reducing the tax burden on labor, while remaining revenue neutral by offsetting tax cuts with increases in consumption and wealth-based taxes. The tax changes eliminated the 4 percent so-called "solidarity tax," but the corporate tax was increased from 16 to 18 percent. Employer welfare contributions were lowered, the brackets for the two tax rates broadened, and tax rates lowered, creating a flatter system. Businesses sometimes complain that they are targeted for lengthy audits and competition investigations. Tax changes in the government reform program had the effect of abrogating certain preferential tax agreements for foreign investors.

Since April 2010, the new government has initiated a series of moves related to taxation. The government has approved cuts in the personal and corporate income tax rates, which it hopes will spur economic growth in the future. The personal income tax rate was reduced to 16 percent for all income groups and the corporate income tax rate became 19 percent for large companies and 10 percent for smaller firms with tax bases of less than HUF 500 million (USD 2.1 million). At the same time, the government has imposed temporary financial sector taxes and “crisis taxes” on the energy, telecommunications, and retail sectors. Retail companies will pay up to 2.5 percent for tax bases exceeding HUF 100 million (USD 426,000), telecommunications companies will pay up to 6.5 percent for tax bases exceeding HUF 5 billion (USD 21.5 million), and energy suppliers will pay up to 1.05 percent for all tax bases. Under a recent agreement between the government and the Banker’s Association, the bank tax will be reduced by 50% in 2013 and replaced by the financial sector tax applied in the EU in 2014, which has a lower rate and is based on profit rather than the entire balance sheet. The manufacturing sector is exempt from these “crisis taxes.” The new government also approved a 98 percent tax on public sector severance pay, retroactive to 2005. The tax applies to the severance pay of approximately HUF 3.5 million (USD 15,000) for ordinary employees and HUF 2 million (USD 8,500) for senior government officials.

The government has also merged the Tax and Financial Control Administration (APEH) and the Hungarian Customs and Finance Guard into a newly established agency, the National Tax and Customs Office (NAV). Within the new agency the tax department functions as the tax authority and the customs department functions as the customs authority.

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 helps U.S. companies compete in new markets and developing countries when traditional lenders or financing is not available. OPIC’s financial support ranges from small micro financings to large infrastructure project loans.

Labor

Hungary's civilian labor force of 4.3 million persons is highly educated and skilled. Literacy exceeds 98 percent 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. 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.

Hungary’s unemployment rate is 10.7 percent (as of September 2011), decreasing from a peak of 11.8 percent in March 2010. This currently exceeds the EU-27 rate of 9.7 percent. The labor participation rate is still low by European standards at 56.3 percent, which is 0.9 percent higher than in 2009. Despite the high unemployment-rates, in certain sectors there still is a shortage of skilled and well educated employees. Regional differences in employment opportunities still prevail. The northwest region of the country sometimes sees shortages of skilled workers, particularly in the financial and manufacturing sectors, but east of the Danube unemployment levels are above average, though the labor force is cheaper and still skilled. The government is now turning its focus to help education adapt better to labor market requirements and is encouraging cooperation between higher education institutions and business. Wages in Hungary are significantly lower than those of Western Europe. Average Hungarian labor productivity is lower than the EU average, but greater than that of other Central and Eastern European economies.

Hungary's labor code, currently in force from July 1, 2003, made several important changes to labor market regulation. The law applies stricter guidelines regarding which personnel may be employed as independent contractors and which must be considered employees (using a “service” agreement versus an “employment agreement”). Companies with an EU-wide presence must institute European works councils, which act as a mechanism for sharing information between labor and management. A new labor code will come into force in July 2012. It will leave the basic legal framework as unchanged but it will transfer some of the collective bargaining rights from trade unions over to the works councils. (Note: Although they have a similar mission to labor unions, works councils only exist at individual firms and are therefore often more dependent on corporate leadership and less capable of representing employees’ interests. End note.)

Roles of Government and Trade Unions

The tripartite National Council for Interest Reconciliation, which was previously charged with negotiating the minimal wage, was replaced by the National Economic and Social Council (NGTT) in 2011 (Law on the composition of the National Economic and Social Council XCIII/2011). The new Council’s members are representatives of employers and employees, delegates of Hungary’s historical churches and certain members of civil society. The organization does not include representatives of the government, and its decisions, regarding the minimum wage and other labor regulations are no longer binding. The minimum wage is now set by decree after consultation with NGTT.

The Hungarian labor code guarantees the right to join trade unions and gives unions the right to operate inside a company. Unions are entitled to negotiate collective bargaining agreements. The labor code limits the length of the workday plus overtime to 12 hours; guarantees maternity leave; provides for at least 20 days of annual leave; mandates at least 30 days notice prior to severance and requires severance pay for those employed at least three years. The law forbids discrimination based on gender, age or nationality. The minimum employment age is 16 years, though apprenticeships may begin at age 15. Hungary adheres to ILO conventions protecting worker rights. Labor/management relations are better than in much of Europe. As a result of the current economic situation, labor-related strikes are occurring with increasing frequency.

In late 2010, Parliament accepted a law that tightens provisions for a strike by civil servants and rules a strike illegal unless a preliminary agreement is reached on a provision of minimum service. If parties are unable to decide, they may bring their case to a Labor Court, which has five days to set minimum service levels. Parties have five days to repeal the Court’s decision and the entire process cannot take more than 15 days.

Foreign Trade Zones/Free Ports

The 1988 Law on Foreign Investment, the 1995 Law on Customs, Customs Procedures, and the 1995 Law on Foreign Currency permitted and regulated the operation of foreign trade zones. Prior to Hungary becoming a full member of the EU, 143 companies operated in about 130 customs free zones, producing about half of total Hungarian exports.

According to Law CXXVI of 2003, permits for operating in customs free zones expired. Currently no company operates in customs free zones and all of them transferred their assets and continued operation following customs handling of their assets. The Ministry of National Economy plans to nominate customs free zones, but currently there seems to be little demand for this service. Possible sites could include Székesfehérvár, Gyõr, Kecskemét, Miskolc, Záhony or Szombathely.

Foreign Direct Investment (FDI) Statistics

According to the National Bank of Hungary, foreign direct investment between 1995 and the second half of 2011 amounted to Euro 68.6 billion (which includes shares, other participation, and reinvested incomes, equivalent to USD 90.9 billion). Since a record high of Euro 6.2 billion in 2005, FDI has been declining (from Euro 5.7 billion in 2006 to Euro 1.4 billion in 2010). Leading foreign investors include Germany, Austria, the Netherlands, and the United States. Seventy-seven percent of total FDI is from the EU. 36.5 percent of cumulative FDI in Hungary is in manufacturing, 14.8 percent in trade and retail, 12 percent in services, and 12 percent in financial activity. Hungary has a reasonably significant level of foreign investment abroad, primarily through acquisitions in other Central and Eastern European countries. By the third quarter of 2009, total Hungarian investment abroad amounted to Euro 11.1 billion. The majority of this is directed to services and crude oil processing.

Of the U.S.’s 50 largest multinationals, 40 are present in Hungary. The following U.S. companies have major investments here: GE; Alcoa; AES; Coca-Cola; O-l (Owens Illinois); General Motors; Guardian Industries, IBM, Lear Corporation, Pepsi Co, Sara Lee, Procter & Gamble; Visteon; Ford; Citibank; Emmis International; Emerson; Zoltek; PACCAR; Celanese; Exxon Mobil; EDS Sykes; Jabil Circuit; McDonald’s; Burger King; National Instruments; AIG/Lincoln; HP; Cisco, Microsoft; Oracle; Johnson & Johnson; Pfizer; Lilly; Monsanto;BD Medical; Johnson Controls; and, Dow Chemical.

Among the largest non-U.S. foreign investors in Hungary are: Deutsche Telekom; Audi; Nokia; Telenor; Vodafone; E.ON; Sanofi-Aventis; Electrolux; RWE; Tesco Global; Suzuki Motor; Auchan; Hankook; Mercedes Benz; SAP; ABB, Philips; CP Holdings; and, Robert Bosch.

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