1. Establishment of enterprises (Act CXLIV of 1997)
(1) Common rules for limited liability companies and stock corporations
Any foreign or domestic, legal or natural person or business association without legal personality may establish a company in Hungary.
Limited liability companies ("SRL") and joint stock corporations ("SA") may be established and owned by a single owner, as well, there are certain special rules for these types of companies.
A single-owner company may not establish and may not hold a 100 % share in a company, even if the owner company is a foreign one.
The liability of the owner of an SRL and the shareholder of an SA is limited to its capital contribution (issue price or purchase price of the share), therefore, after the full payment of the capital contribution or the price of the share, the owner is not liable for any obligation or debt of the company. (There are, however, exceptions for bad faith conduct of business, but these are insignificant in importance and occurrence.)
The company is considered to come into existence after its registration in the firm registry by the court of registration, until this date the company exists as a pre-company with almost all the rights and obligations of a regular company. A pre-company may conduct its regular business except for that it is not authorized to pursue any activity that requires an official license and should the registration of a company be refused (thus the company failing to come into existence), then the managers are jointly and severally liable for any such debt incurred by the company that exceeds the assets of the company.
(a) Shareholders' meeting
The shareholders' meeting consists of all of the shareholders of the company; no member may be excluded from it, unless this is prescribed by law.
The shareholder may be represented by a proxy, but a manager, member of the supervisory board and the auditor may not be appointed proxy.
The function of the shareholders' meeting is to decide on the strategic questions of operation, including election, removal and remuneration of the officials, acceptance of the annual report, decision on the profit/loss, termination or transformation, modification of the articles of association (deed of foundation) and any question that is referred by the articles of association (deed of foundation) to the competence of the shareholders' meeting.
As a general rule, the shareholders' meeting passes its resolutions with a simple majority with certain limited number of issues and questions requiring three-thirds majority or unanimous decision, however, the shareholders themselves may stipulate in the articles of association additional issues requiring qualified majority.
The shareholders' meeting has to be convened by the management at least once each year.
The shareholders bringing a resolution, provided that they knew or should have known taking reasonable care that the resolution infringes the major interest of the company, are jointly and severally liable and may be accountable without limitation for any damage suffered by the company.
Foreign or Hungarian private persons may be elected to be managing director (for SRL) or member of the board of directors (for SA), and such position may not be sub-delegated as whole (although it is possible to assign certain tasks and powers to third persons).
Members of the management may be elected to office for a maximum period of 5 years, however, they may be re-elected without limitation.
The management is responsible for the leadership and operation of the company, managers are authorized in general to decide in any question and represent the company in any transaction, unless the law or the articles of association specifically provides otherwise. In case of an issue that is out of their competence, they must request the shareholders' meeting to pass a resolution.
The management convenes the shareholders' meeting and they submit proposals for decision.
Managers shall conduct the management of the company with the increased care generally expectable from persons occupying such positions, and give priority to the interests of the company. They shall be liable to the company in accordance with the general rules of civil law for damages caused to such by violation of their obligations.
The manager is responsible for any culpable violation of his obligation, namely if s/he does not act with the prescribed increased care. This requirement means that managers shall, when proceeding, do their utmost in order to make the activity of the company successful and to choose in the actual situation the most advantageous solution for the company. Should they violate this obligation, they shall be fully liable for damages caused to the company.
A manager may not acquire any interest in another company (except for shares in a public corporation) pursuing an activity identical to that of the company, furthermore, may not be a manager in another company pursuing an activity identical to that of the company, unless approved by the company. Without permission, a manager and his/her close relatives may not conclude in his/her own name or to his/her own benefit such transactions that fall within the scope of activities of the company.
(c) Supervisory board
A supervisory board consisting of a minimum of 3 and a maximum of 15 members (foreign or Hungarian) may be (and in certain cases, must be) appointed at the company. A manager and his/her relatives may not be elected to member of the supervisory board at the same company.
If the number of employees at the company exceeds 200, then one third of the supervisory board must be delegated by the employees.
Members of the supervisory board may be elected to office for a maximum period of 5 years, however, they may be re-elected without limitation.
The supervisory board controls the management of the company, it may request reports or information from managers and other employees of the company, and may examine the books and documents of the company. The supervisory board must examine all major reports submitted to the shareholders' meeting, furthermore, it must examine the balance sheet and the profit and loss statement upon the closing of the fiscal year, and they shall prepare a written report thereon; in the absence of the respective supervisory board report, no valid resolution may be passed by the shareholders' meeting concerning the balance sheet and apportionment of profits upon the closing of the fiscal year.
The supervisory board is authorized to determine its own procedural by-laws, which are to be approved by the shareholders' meeting.
The members of the supervisory board have joint and unlimited liability for the damage caused to the company by the violation of their obligation of supervision.
Same as the rules for managers, members of the supervisory board may neither acquire any interest in another company, nor they may be a manager in another company pursuing an activity identical to that of the company. Furthermore, a member of the supervisory board and his/her close relatives may not conclude in his/her own name or to his/her own benefit such transactions that fall within the scope of activities of the company.
(2) Single-owner company
In case of single-owner companies, there is no shareholders' meeting, the owner decides in writing on all issues falling into the competence of the shareholders' meeting.
The manager or supervisory board member of the daughter company may not be the manager or supervisory board member of the mother company.
(3) Limited liability company
The share capital of an SRL must be at least HUF 3,000,000 (approx. EUR 12,800), and at the time of establishment (but not during operation) this amount must consist of at least 30 % or HUF 1,000,000 (approx. EUR 4,300) cash, with the rest of the capital being contribution in kind (any marketable property or transferable right of value).
(a) Shareholders' meeting
Except for the decision on the acceptance of the annual report and the appropriation of the profits/losses, the owners may bring a resolution in any question in writing, without holding a formal meeting.
(b) Managing directors
There may be one or more managing directors appointed, otherwise, there are no significant special rules for the managers, the general rules apply.
(c) Supervisory board
The appointment of a supervisory board is required if the share capital of the SRL exceeds HUF 50,000,000 (approx. EUR 215,000), this rule does not apply to single-owner companies) or if the number of employees at the company exceeds 200.
(4) Stock corporation
A stock corporation may be private, if the shares are not issued or offered publicly, or public, if part or the whole of the shares are issued or offered publicly.
The share capital of an SA must be at least HUF 20,000,000 (approx. EUR 85,500), and at the time of establishment (but not during operation) this amount must consist of at least 30 % or HUF 10,000,000 (approx. EUR 43,000) cash, with the rest of the capital being contribution in kind (any marketable property or transferable right of value).
(a) Shareholders' meeting
There are no significant special rules for the shareholders' meeting, the general rules apply.
(b) Board of directors
The board of directors may consist of a minimum of 3 and a maximum of 11 natural persons, and the members shall elect a chairman from among themselves.
The board operates as a body; however, it is possible that by adopting special by-laws, the members divide the duties and competences among themselves.
A private corporation may be managed by a single chairman, without any board of directors.
(c) Supervisory board
The appointment of a supervisory board is always required for a joint stock corporation, apart from this requirement, there are no significant special rules, and the general rules apply.
The Hungarian legislation has adopted the following Council Directives of the European Community ("EC"):
Council Directive 68/151/EEC of March 9 1968 on co-ordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, with a view to making such safeguards equivalent throughout the Community;
Council Directive 78/855/EEC of October 9 1978 based on Article 54 (3) (g) of the Treaty concerning mergers of public limited liability companies;
Council Directive 82/891/EEC of December 17 1982 based on Article 54 (3) (g) of the Treaty, concerning the division of public limited liability companies;
Council Company Law Directive 89/667/EEC of December 21 1989 on single-member private limited-liability companies;
Council Directive 92/101/EEC of November 23 1992 amending Directive 77/91/EEC on the formation of public limited liability companies and the maintenance and alteration of their capital.
2. Acquisition of enterprises
Any foreign or domestic investor, be it private or legal person may purchase
shares in Hungarian companies without having to obtain any special license or
permission, except for the approval of the Hungarian Competition Office (if the
transaction is subject to such regulatory approval).
The acquisition of enterprises in general is regulated by Act CXLIV of 1997 on Companies, whereas and Act CXX of 2001 on Capital Market contains additional special rules for the acquisition of public stock corporations.
In this field of law, the Hungarian legislation has adopted Council Directive 88/627/EEC of December 12 1988 on the information to be published when a major holding in a listed company is acquired or disposed of.
(1) Acquisition of limited liability companies
SRLs, according to the general principle unite not only capital, but also human resources, as well, therefore, although the applicable law itself provides for a free transfer of ownership, there are rules the owners of an SRL may adopt that serve the purpose of filtering or even prevent the entering of an outside owner into the company.
In Hungary, an overwhelming number of businesses operate in the form of SRL, therefore, the knowledge of the main rules of the acquisition of a business share in such company is essential.
(a) Right of first refusal
In case an outside investor intends to purchase a business share in an SRL, the existing owners, the company itself and any person appointed by the company (in this order) have right of first refusal to the business share to be transferred. This means, that the seller of the share must present to the above mentioned persons the draft of the transfer agreement or if such has not yet been prepared, he must inform them on all of the important conditions of the transfer (purchase price, payment terms, etc.), and these persons have 15 days (30 days for the company and the appointed person) to decide on the acceptance or refusal of the offer. Should they accept the offer, then the seller must sell the business share to this person, however, if they do not respond within the deadline, the offer is considered to be refused.
In case of any breach of this right of first refusal, the suffering party may initiate a lawsuit within 1 year, and demand that the transfer agreement concluded with the third party be assigned to him/her, thus the acquirer may be forced to return the business share purchased.
The right of first refusal may not be limited or excluded by even the Articles of Association of the company.
(b) Approval by the Company
In the articles of association of an SRL, the owners may (as written above, this is a potential mean to filter outsiders) stipulate that the transfer of a business share to outside person(s) is subject to the approval by the company. In this case, the conditions of approval or the reasons for refusal must be listed in the articles of association, and in lack of such approval, the transfer is invalid.
(c) Prohibition of transfer
Furthermore, the owners may also stipulate in the articles of association that the business share may not be transferred to outsiders under any legal title, except for sale. This restriction eliminates the possibility of any acquisition, except for sale purchase, against which transfer the existing owners (as seen above) have rights of first refusal.
Consequently from the above, the prospective buyer of a Hungarian SRL must first have to study the effective articles of association of the subject company to find out if there are any limitations or restrictions to its acquisition.
(d) Registration of ownership
After the signing of the transfer agreement, the acquisition must be announced by the buyer to the managing director of the company, and also, the new owner has to make a declaration on the recognition and acceptance of the effective articles of association.
Moreover, the new owner must be registered in the firm registry kept by the court of registration, which action certifies towards third persons that the buyer is a new owner of the company.
(2) Acquisition of stock corporations
Due to the fact that their legal treatment is similar to SRLs (thus both legal forms have almost the same advantages), but their operation and 'maintenance' require more care and compliance with several additional conditions (thus there are disadvantages), the joint stock corporation is not a popular form of business in Hungary, unless there are reasons for a company to be public.
(a) Private corporations
Private corporations' shares are not offered publicly at the time of establishment, but the shares may be transferred and traded freely during the existence of the company.
The legal rules provide for a free trade of shares, but similarly to SRLs, the deed of foundation of private corporations may contain provisions that restrict or prohibit the acquisition of ownership by an outside person.
The private corporation may issue preferred shares that authorize its holder to have right of first refusal on any share of the company. This right of first refusal and the consequences of its breach are similar to that prescribed by the law for SRLs, but the main conditions have to be indicated in the deed of foundation (including the deadline, during which the authorized person must respond to an offer).
The private corporation's deed of foundation may limit the types and classes of shares to be acquired by certain persons (legal or private).
Finally, the deed of foundation (again, similar to the SRL) may provide that the transfer of shares is subject to approval by the company. The law specifies one reason for refusal, namely if a competitor intends to acquire the shares, but the deed of foundation may list additional reasons, however, these may only be reasons for refusal (not conditions for approval) and they must be significant ones.
The study of the deed of foundation of a joint stock company before the transaction is important, because as seen above, acquisition may be restricted.
After the signing of the share transfer agreement, the acquisition must only be announced towards the management of the company, the court of registration need not to be informed (except for if the share exceeds certain proportions, as seen below).
(3) Common rules for significant shares in limited liability companies and in stock corporations
Any acquisition of 25 %, 50 % or 75 % of an SRL or a stock corporation must be announced to the court of registration. The announcement must contain the acquired share and the data of the shareholder.
Until the announcement is made, the shareholder may not exercise its voting rights arising from the concerned share that should be announced. Furthermore, if the owner's share is above 50 %, its liability is not limited in case the company files for bankruptcy and the assets are insufficient to cover the creditors' claims. Therefore, it is important that the acquisition be reported as soon as possible.
There is an additional rule for private stock corporations if a shareholder acquires more than 50 % of the voting rights, according to which the minority shareholders may demand (within 60 days counted from the announcement) from the majority shareholder to purchase their shares at fair market value.
(a) Public corporations
Beyond the applicable provisions of the Company Act, in case of the acquisition of a public joint stock company, the respective rules of the Act on Capital Market must also be observed.
(b) Announcement and publication of acquisition
Any influence acquired in a public corporation and exceeding 5 % or falling below 5 % and any increased or decreased influence at each 5 % (10 %, 15 %, 20 %, etc.) must be announced to the Hungarian Financial Supervisory Authority ("PSZÁF") and to the management of the concerned company within 2 days and also it has to be published in an official newspaper and on the web-site of the subject company.
The direct or indirect acquisition of voting rights (by ways including share transfer agreement, call options, futures sales, right of use), any agreement authorizing a party to elect or remove the majority of the management or the supervisory board and any agreement on concerted actions between shareholders qualify as an acquisition of influence.
Above 50 % influence, the announcement and the publication are prescribed at 75 % and 90 %.
Conditional agreements and agreements becoming effective in the future are also to be announced and published and the deadline is counted from the signing of the contract.
Until the announcement and the publication the acquirer may not exercise any shareholder's rights in the company.
(c) Acquisition by public offer
An influence exceeding 33 % in a public corporation may only be acquired by way of a binding public offer. If no shareholder holds more than 10 % of the voting rights, then the public offer is mandatory from 25 %.
The public offer has to be managed, organized and conducted via an investment service provider licensed in Hungary.
The offer must be submitted to the PSZÁF for approval, which has 15 days to decide and may not refuse consent if the offer complies with the statutory requirements.
The offer must contain (among others) the purchase price and the period that is open for the shareholders to accept the offer (minimum of 30 days, maximum of 45 days).
The purchase price may not be less than both the weighted average of the market prices of the previous 180 days and the highest price paid by the offeror (or its affiliates) for the shares in the previous 180 days. If the offer is successful, then the purchase price must be paid within 5 days of the closing date.
The offer may contain that the offeror is not bound to purchase the shares if less than 50 % of influence would be acquired. In lack of such disclaimer, the offeror is obliged to purchase all of the shares of those shareholders who accept the offer.
From the date of receiving an offer until the closing date, the management of the subject company may not raise the share capital, acquire the shares of the company or act in any way that would disturb the procedure.
A counteroffer by another offeror may be made, announced and published according to the above rules if the purchase price offered exceeds that of the original offer by at least 5 %.
If, as a result of the public offer, the shareholder acquires more than 90 % of the voting rights, then for a period of 30 days it has a call option at the price of the public offer for all outstanding shares, but also, during this period the shareholders of the outstanding shares have a put option on their shares towards the majority shareholder.
For any breach of the above rules, the law prescribes that the acquirer may not exercise its shareholder's rights, and all shares acquired in an illegal way must be sold within 60 days.
If the offer was successful and more than 33 % (or 25 % if applicable) of influence was acquired, then the further increase of influence does not have to be carried out by a public offer, however, if the acquired influence did not reach the threshold, then this threshold may be crossed in the future by way of another public offer.
3. Acquisition of realty
Although in general the Hungarian legislation has eradicated from the legal system all rules and provisions differentiating between domestic and foreign owners and businesses, thus foreign persons (both legal and natural) are treated without any discrimination (in fact, there used to be periods of times in the 1990's when Hungarian companies were discriminated against foreign companies), the acquisition of real estate and its regulation in Hungary has several elements that reflect that intention of the legislation to keep real estate, this limited and precious resource in the hands of Hungarian individuals and entities. There is a clear prohibition in the case of agricultural land and there are severe restrictions on non-agricultural real estate.
(1) Agricultural land (Act LV of 1994)
(a) Hungarian buyer
No Hungarian legal person or other entity (except for the Hungarian State and local municipalities) may acquire the ownership of agricultural land, and even an ecclesiastical legal person may only acquire ownership by inheritance or donation.
Therefore, from the private sector, practically only Hungarian private persons are allowed to own land, but limited to the extent of 300 hectares per person, and furthermore, the size of the land owned by a person and his/her close relatives in the same municipality may not exceed one quarter of the available land of the municipality but a maximum of 1,000 hectares.
Furthermore, any Hungarian entity (regardless of its owners' nationality) may conclude a long-term lease (maximum of 20 years, longer for forests and vine-yards) for agricultural land, and in this case the general size limitation is also 300 hectares, with companies having the right to lease 2,500 hectares.
(b) Non-Hungarian buyer
No foreign private or legal person may acquire ownership on agricultural land. The only possibility for foreigners to possess (but not to own) agricultural land under their own name is to lease it for the above maximum term of 20 years, but in this case size is also limited in 300 hectares.
(2) Other real estate (7/1996. (I.18.) government decree)
(a) Non-Hungarian buyer
The acquisition (other than inheritance) of non-agricultural real estate by any foreign natural or legal person is subject to permission. The granting of the permission is entirely a discretional competence of the head of the County Administrative Office of the concerned county or Budapest, there are no conditions to meet that would ensure that a permission is granted (a refusal does not have to be justified). As a negative condition, the acquisition must not violate any public interest, and such interest is rather broadly interpreted (according to experiences, violation of public interest include, for example, the increase of real estate prices in a popular city or district). Furthermore, the attitude of no two Offices are the same (there are 20 in Hungary), some absolutely refuse to grant permissions, others are more lenient.
Applications of legal immigrants and private persons residing in Hungary on a permanent basis for at least 5 years may be refused with justification, thus if it clearly violates public interest.
Permission is granted to foreign private entrepreneurs if they permanently settle in Hungary and the acquisition of the real estate is directly necessary for the business activity to be pursued.
(b) Hungarian buyer
There is neither a general restriction on the acquisition of ownership of non-agricultural real estate by Hungarian natural or legal persons, nor there are any permissions or licenses required. Therefore, this creates also a possibility for foreign-owned companies to buy real estate in Hungary, however, the real estate will, of course, be owned by the Hungarian company and not by the owner of the company.
The contract for the sale and purchase of real estate must be in writing, and must be countersigned by a licensed Hungarian attorney.
(d) Land registry
The buyer will not acquire legal title to the real estate, until his/her/its ownership is not registered in the land registry, and buyer's protection is very limited.
Legally, it is absolutely crucial that the seller must be registered in the land registry as the current owner and there must not be any rights or facts registered that would prevent or restrict buyer in taking title. Therefore, a thorough check of the land registry records must be completed, and for this purpose, an up-to-date so-called ownership certificate may be obtained from the land registry.
After the conclusion of the agreement, buyer must immediately file to the land registry the contract and a petition for the registration of ownership.
The land registry records are public and are considered to be official, meaning that a good faith person trusting the existing legal status of a real estate as reflected by the land registry records may acquire ownership or other right (usufruct, mortgage, call option, right of first refusal, etc.) from the person authorized and legitimated by the records to dispose of the real estate, provided that the acquirer's right is registered. This principle is applied even if another person concluded a contract for the acquisition of ownership or some other right before the second acquirer, but the first one failed to register its right, whereas the second one did not.
(e) Transfer taxes
The buyer must pay transfer taxes after the market value of the purchased real estate, with the tax rate for houses and flats being 2 % up to HUF 4,000,000 (approx. EUR 17,000) and 6 % for the value above this, whereas the tax rate for other real estates being 10 %.
Hungary's taxation system, similarly to other fields of law, has become fairly
harmonized with the European Union ("EU") regulation grown has a complex and
evolving taxation system to accommodate the increasingly sophisticated business
environment. In addition, further harmonization steps are expected in support
of Hungary's application to join the EU.
In international matters, due to a recent change of law, the provisions of the more than 50 tax treaties Hungary has concluded with other countries supersede domestic legislation, even if the domestic legislation would provide for a more favorable treatment.
Hungary operates a system of self-assessment with tight filing deadlines, however, the tax authorities will perform detailed audits, and there are cases when such audits are mandatory. Significant interest and penalty costs may arise in case of false, late or incorrect declaration and late payments of tax.
The most important Hungarian taxes currently include: corporate income tax, VAT (value added tax) and personal income tax with social security contributions and local taxes completing the picture.
(1) Corporate income tax (Act LXXXI of 1996)
(a) Corporate tax system
A Hungarian resident entity is subject to corporate income tax on its world-wide income. A non-resident entity is only taxable on its Hungarian source income. Generally, the fiscal year is from January 1 to December 31, nevertheless, the fiscal year of a branch of a foreign enterprise, a subsidiary of a foreign parent company and the subsidiary of the above subsidiary may be different from the calendar year.
(b) Corporate income and dividend withholding tax rates
The corporate income tax rate is 18 %. A withholding tax of 20 % is payable on dividends. A dividend is deemed to have been paid upon distribution of after-tax profits to shareholders. The withholding tax does not apply to dividends distributed to Hungarian entities or if the dividend is used for the raising of the share capital of any existing Hungarian company or the establishment of a new one. As mentioned above, the rules of the treaties on the avoidance of double taxation always supersede the domestic rules.
(c) Determination of taxable profit
The base for corporate income tax is the pre-tax accounting profit adjusted by certain increasing and decreasing items. The purposes of the regulation of the increasing and decreasing items are on the one hand the correct determination of the true tax base and on the other hand to provide for preferential treatment of certain activities or certain types of enterprises (small and medium sized businesses).
(d) Thin capitalization
Hungarian law provides that if the debts of the entity (except for debts towards banks) are greater than three times net equity, the interest expense on the excess amount will not be deductible for the purposes of corporate income tax.
For tax purposes, the applicable depreciation rates are determined by the Act on Corporate Income Tax, also providing room for the preferential treatment of certain assets (computers, hi-tech equipment, etc.).
(f) Transfer prices
The Act contains specific transfer pricing provisions for affiliates and related entities, prescribing that the fair market price be used in related parties' transactions and for breach of this obligation, the decreasing or increasing of the tax basis of the concerned parties is also required.
The Hungarian legislation has adopted the following Council Directives of the EC:
Council Directive 90/434/EEC of July 23 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States
Council Directive 90/435/EEC of July 23 1990 on the common system of taxation applicable to parent companies and their subsidiaries in different Member States.
(g) Withholding taxes
Hungary has developed an extensive network of tax treaties; most of them closely follow the OECD model.
(2) Value added tax (Act LXXIV of 1992)
(a) Taxable transactions and territorial scope
The sale of goods is regarded as being performed in Hungary if the goods are in Hungary when the title passes, and in case of imports, when the goods cross the border. As a general rule, services are performed in Hungary if the supplier has its seat in Hungary, but for certain goods and services the place of performance is defined as either the place where the services are provided or the goods are located or where the recipient has its seat.
In general, VAT must be charged by all individuals, legal entities and permanent establishments of foreign enterprises who supply goods or services in the framework of a regular business in the territory of Hungary.
(c) The rates and tax base
The standard rate of VAT is 25 %, whereas a reduced rate of 12 % applies to certain goods and services (e.g. books and newspapers, public utilities, food, agricultural products). There are some goods and services that are rated with 0 %, including certain pharmaceutical products and all exports. This means that exporting companies may reclaim the VAT suffered but are not obliged to collect VAT from their customers.
Imports are subject to VAT on a taxable base calculated as the sum of the customs value, plus customs duties, fees and consumption tax.
VAT is generally administered by the tax authority, but VAT payable on imports is administered by the customs authority.
Certain transactions which are carried out in Hungary are exempt from VAT. The most significant are the following: the sale, rental and leasing of land; the rental of an apartment; financial services; insurance; transfer of equities and credits.
(e) Assessment of tax and filing
Taxpayers are generally required to file VAT returns quarterly, but there are taxpayers with annual (optional under circumstances) and monthly (required under certain conditions) filing obligations.
When calculating the VAT liability, the taxpayer may offset the VAT suffered on goods and services procured in the particular period (there are some exceptions, where such procurements that are considered to be finally consumed by the taxpayer, may not be set off or reclaimed) against the VAT collected from customers for the provision of services and the sale of goods. Should the difference be negative, it may be carried forward to future periods or may be reclaimed.
The Hungarian legislation has adopted the following Council Directive of the EC:
Council Directive 77/388/EEC of May 17 1977 on the harmonization of the laws of the Member States relating to turnover taxes.
(3) Personal income tax
(a) Subjects of personal income tax
Hungarian tax residents are subject to personal income tax on their world-wide income. They may, however, be exempt from Hungarian taxation on foreign source income by tax treaties.
Non-residents are only liable to tax on their Hungarian-source income. This includes income from employment performed in Hungary.
The taxpayer may be classified as resident based on his/her (in order of importance) citizenship (Hungarian nationals are always considered to be resident) but also based on place of permanent residence (presumed by the law, if the person stays in Hungary for more than 183 days in a calendar year), center of interest and temporary residence, as well.
The Act classifies incomes into different categories with each category having specific rules. The most comprehensive category is the incomes of the consolidated (general) tax base, but there are categories for capital incomes, incomes on the transfer of property or on the sale of real estate, incomes received in kind, and finally, there are specific rules for sole proprietors (their taxation is almost identical to that of companies).
Personal income tax is calculated on a calendar-year basis.
(b) Tax on employment income
Employment income is usually fully taxed at progressive rates.
In order to ensure the proper payment of taxes at the end of the year the Act obliges the employers to withhold each month one-twelfth of the tax due after the employee's annualized monthly income.
Benefits in kind are generally taxable at a rate of 44 %. This tax is levied on the provider of such benefits rather than on the individual receiving the benefit. Accordingly, in addition to the 44 % benefit-in-kind tax due on entertainment benefits, health contribution of 11 % is also due, making incomes in kind to be the most heavily taxed type of income in Hungary.
Personal income tax rates of the consolidated tax base for 2003 (2004):
Income (in HUF per annum) Marginal tax rate Total tax payable
0 - 650,000 (800,000) 20 (18) % 20 (18) % of the total income;
650,001 (800,001) - 1,350,000 (1,500,000) 30 (26) % HUF 130,000 (144,000) + 30 (26) % of the amount exceeding HUF 650,000 (800,000);
Over 1,350,000 (1,500,000) 40 (38) % HUF 340,000 (326,000) + 40 (38) % of the amount exceeding HUF 1,350,000 (1,500,000).
(c) Tax on investment income
Although income tax is levied at progressive rates, interest income and profit on the sale of shares listed on the Budapest Stock Exchange (and, from the EU-membership of Hungary, from the sale of shares listed on any registered stock exchange of the EU) is generally tax-free.
Income from dividends, capital gains from shares and profit distributions from partnerships are subject to a flat final income tax rate of 20 %. In cases where the proportion of the dividend to the equity exceeds 30 %, the tax rate is 35 %.
(d) Tax deductions and tax credits
Beside a system of tax deductions that decrease tax liabilities finally, the Act provides for tax credits, as well, creating opportunities to temporarily decrease tax liabilities. Tax deductions may be granted for interest paid after house or apartment mortgages, for tuitions and educational expenses, for personal or family circumstances (large families, citizens with disabilities), for insurances, etc., whereas tax credits can be granted for holding certain securities and investments.
(e) Returns and payments
Individuals subject to personal income tax must file an annual tax return; however, there is large number of cases when the employer is to file the annual return on the individual's behalf. The income of married couples is taxed separately; there is no joint filing.
The Hungarian legislation has adopted the following Council Directive of the EC:
Council Directive 90/434/EEC of July 23 1990 on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States
(4) Social security contributions
Hungarian social security taxes represent significant burdens on businesses; they are to be paid by both the employee (approx. 15 % of the gross salary) and the employer (approx. 35 % of gross salary of the employee).
(5) Local taxes on companies
Municipalities may levy local turnover tax of up to a maximum of 2 % of net sales decreased by material costs and certain other costs.
5. Customs (Act C of 1995 and Act CI of 1995)
(1) General description
The fundamental sources of law concerning the customs system are Act C of 1995 on Customs and Act CI of 1995 on Customs Tariffs.
The Hungarian customs law substantially approximates the 1994 Customs Code of the EU. The Act on Customs Tariffs stipulates the principles and main trade policy rules concerning customs duties.
The customs territory related to the application of customs law in Hungary corresponds to the geographic area enclosed by the state borders. Goods can be imported at the border crossing points on road, rail or river and through the Budapest airport. Customs clearance can usually be arranged at the final destination if that is more convenient in the circumstances.
The Hungarian customs law is based on the General Agreement on Tariffs and Trade ("GATT"). As a general rule, duties are payable on goods imported to Hungary for final purposes.
(2) Customs tariff
The legal basis of the obligation to pay duty on goods imported to Hungarian customs territory is the public charge contained in the Hungarian customs tariff.
The headings included in the customs tariff refer to autonomous (Act on Customs Tariffs) or contractual duties (customs concessions under the WTO and the free trade agreements concluded with the Baltic States, Turkey, Israel and the CEFTA countries, but also the Europe Agreement concluded with the European Community).
As for its substance, the Hungarian customs tariff is to a significant extent similar to the customs tariff of the EU. Hungarian customs duties, as with the majority of those employed by the EU, are ad valorem duties (i.e. specified in percentage of the value of the goods). Hungarian duties are also similar in that the rates increase in proportion to the degree of processing.
(3) Customs waivers
In accordance with established practice in the Hungarian customs system, the Act on Customs Tariffs and the related ministry decrees provide opportunities for customs waivers in the forms of preferential customs quotas, customs suspensions, and waiver vouchers.
(4) Customs value
Provisions concerning customs value are enforced in Hungary through the customs tariff. In the case of ad valorem duties, however, care must be taken to prevent fraud by way of invoicing under the real value of the goods. The provisions concerning the assessment of customs value are therefore very important in Hungary. The customs value is generally the contractual price, except for if it is more than 50 % lower than the comparative value established by the customs authority (including all the costs that the importer must pay in order for the product to be at his disposal on the customs border), and in such case the latter is the customs value.
(5) Economic customs procedures
Economic customs procedures are rules that enable the suspension of the obligation to pay duties prior to the final customs procedure (for instance, clearance for free traffic), and which enable the performance, under customs surveillance, of certain operations on the imported products. The types of economic customs procedures are the following: customs warehousing, inward processing, transformation of the product under customs surveillance, temporary admission (temporary import) and outward processing. Authorization for these procedures must be obtained from the customs authority in every such case. Authorization may be granted only to those who are able to provide all the necessary assurances that the given operations will be conducted in the prescribed order. It is also important that the authorities have adequate scope for surveillance and control.
A license for a simplified customs procedure can be requested for economic customs procedures, which provides easier customs clearance. Under this procedure, stricter recording and administrative obligations apply and electronic declarations can be made. In accordance with EU regulations, deferred payment can also apply in certain circumstances.
(6) Customs guarantees
Hungarian regulation narrowly prescribes who has to put up the guarantee and under what conditions. In Hungary, the customs guarantee may be provided in the form of cash in the local currency, a guarantee of a domestic bank, a guarantee of a foreign bank re-guaranteed by a domestic bank, by statement of coverage or the assumption of payment guarantee on demand by an officially authorized organization established in Hungary.
(7) Customs free zones
In Hungary, the industrial customs free zones have grown to serve a multitude of businesses and, as such, they boost the driving engines of the national economy. Customs free zones are the cradles for the automotive and IT industries in Hungary. The regulation of customs free areas is exceedingly liberal in Hungary. In addition to what is practiced in the EU, Hungarian regulations also provide an opportunity for the customs (and VAT) free importation of materials, machinery, and equipment used in the course of production (except for construction materials, engineering and maintenance equipment) and alternatively customs clearance may be requested for home use without paying import duties or VAT (this possibility is only open until Hungary's EU accession).
(8) Binding information
Hungary applies the system of binding information, thus the importer can be certain that goods imported by him will be cleared under the same customs tariff heading on every occasion since the customs duty payable is of decisive importance in his calculations.
The institution of binding information applies both to tariff classification and ascertainment of origin of the goods.
Foreigners aiming to export directly into the Hungarian market may appoint a local individual or business as their representative or agent. The representative can be either direct (acting in the name and on behalf of the principal) or indirect (acting in its own name but on behalf of the principal). Indirect agents (who can only be a customs agent or a customs agency) may dispose of the goods and pay the import duties as their own liability in two aggregate sums on the 15th and the last day of the month (import duties for all principals are grossed before payment).
6. Currency regulation, capital and profit transfer, investment incentives
(1) Currency regulations
The Hungarian Forint (HUF) became convertible for essentially all business transactions within Hungary on January 1 1996.
In 2001, Hungary eliminated any remaining capital controls and changed its foreign exchange regime, reaching full compliance with the convertibility requirements of the Organization for Economic Cooperation and Development ("OECD"). As of June 2001 a government decree lifted all relevant restrictions on foreign currency transactions. This is a significant policy change, since over the past 70 years the Hungarian National Bank as a foreign exchange authority, tightly controlled all foreign exchange transactions. The current rules are in compliance with the Sections 56-60 and 119-120 of the Rome Treaty, furthermore with the 88/361/EEC Directive.
By the above liberalization of Hungarian foreign exchange regulations virtually all currency limitations have been abandoned. In line with this, all prior restrictions have been lifted, therefore, in contrast to the past regime:
(a) Hungarian residents may inter alia without permit or prior notification:
. hold bank accounts with foreign banks in any currency,
. transfer currency, securities, shares etc. to residents or to non-residents within Hungary or to other country,
. remit between accounts held in foreign currency,
. grant loans to residents or non-residents in both HUF and foreign currency,
. receive loans from non-residents and re-pay them in either HUF or in foreign currency,
. buy and sell foreign real estate.
(b) Non-residents may inter alia without permit or prior notification:
. buy and sell Hungarian securities of any kind denominated in HUF,
. transfer HUF to abroad,
. provide securities as in-kind contribution to the registered capital of companies established in Hungary.
(c) Both residents and non-residents may inter alia without permit or prior notification:
. freely exchange HUF for foreign currencies and vice-versa,
. make payment either in foreign currency or in HUF between residents and non-residents,
. take or send out, bring or send in foreign currency or HUF regardless of the amount of involved money.
However, the commercial conversion of currencies can be carried out solely by banks or exchange-offices authorized to convert currencies.
(2) Capital and profit transfer
In accordance with the above detailed foreign currency regulations, there are no restrictions concerning the free transfer of capital and repatriation of profit.
Furthermore, Hungary has concluded bilateral investment protection agreements with the most important investor countries, which expressly warrants the free movement of capital and profit. National law also provides a full range of legal protection against such impediments.
In 2001 and 2002, Hungary implemented legislation to combat money laundering and terrorist financing. The law significantly broadened the scope of institutions required to report suspicious activities to include financial institutions, auditing companies, antique shops, car dealers, and other businesses. In connection with these and other improvements to Hungary's anti-money laundering regime, in June 2002 Hungary has been also formally removed from the "blacklist" of countries that were not in full compliance with international anti-money laundering norms.
At international payment transactions between residents and non-residents such as transfer, selling and buying foreign currency - the parties have to reveal the purpose and legal title of the transaction for statistical purposes. Provided that the parties do not identify the legal title, the credit institutes are to call upon the parties to do so. In case the parties summoned by the credit institute still do not provide information, the Hungarian National Bank may launch a legal procedure against them.
Parties who are exclusively residents or non-residents shall not provide such information in event of transaction between each other in foreign currency.
(3) Investment incentives
In the light of the forthcoming joining of Hungary to the European Union, the government has recently amended the legal regulations concerning the tax-related and direct incentives of investments. Most of these new rules came into force on January 1 2003, being fully in compliance with the current EU regulations on competition and state aid. These new rules aim to enhance predictability in terms of legal and planning security, as well as transparency and efficiency of the incentive instruments.
(a) Tax-related incentives
(i) New development tax benefit
Investment projects over approx. EUR 50-million (in case the investment project takes place on an undeveloped area, the threshold is only approx. EUR 15-million) are eligible to tax benefit for 5 years, provided that certain conditions are fulfilled:
. the project will be carried out in compliance with and in the framework of the development plan of the government,
. the investment aims to establish or to expand production facilities or it results in a substantial change of the production process,
. it induces a significant increase of employment (by 500 employees - in case of undeveloped area: 300 employees),
. it is based at least in 50 % on the Hungarian small and medium firms as contract suppliers,
. it induces the substantial growth of wages costs of the company compared to that of prior to the investment,
. the invested capital must be spent on acquisition or production of new equipment in a ratio at least 50 %, whereas upgrading investment may not exceed a ratio of 20 %.
In addition, similar tax benefits may be given in case the investment is over EUR 500,000 and it purposes individual environmental investment or development of broadband Internet networks.
Certain branches of the economy are excluded from the application of these investment tax benefits or in certain cases further conditions are to be fulfilled. For the tax benefit an application is to be submitted to the Ministry of Finance with content and form as required by the government decree No. 162/2001. The extent of the possible tax benefits range between 35-60 %.
(ii) Credit subsidies
Medium and small companies may reduce their tax by the 40 % of the interest (up to EUR 20,000) paid for credits related to acquisition and production of equipments.
(iii) Tax-free investment reserve
This reserve promotes the formation of investment resources by allowing for the creation of tax-free investment reserve (up to 25 % of the untaxed profit, at most EUR 20-million).
(iv) Tax allowances for R&D activities and innovation
Tax base reduction may be eligible to corporate R&D activities, as well as a part of the income from the utilization of intellectual products might also be deductible from the tax base.
(v) Tax benefit can be related also to adult education
so as to alleviate training costs of employees attending additional education.
(b) Direct incentives
From January 1 2003 new investment incentive forms have been implemented.
Applications for direct financial support/subvention can be submitted to the Ministry of Finance promoting the following goals:
(i) Business site prepared according to investors' needs
The incentive provides a prepared business site for capital investments, exceeding approx. EUR 27-million upon certain conditions. The extent of the governmental aid may vary according to the region, where the investment will be carried out.
(ii) Outbound infrastructure development
Above a certain capital investment volume the Hungarian government subsidizes the development of outbound infrastructure. In this framework non-refundable grants are available both for greenfield and non-greenfield investments.
(iii) Incentive for vocational training, adult education and employment
Different forms of employment subsidies are available so as to promote the meeting the demands of the business sector.
(iv) Incentive for IT development
Different forms of grants are eligible in order to promote competitiveness in IT sector and to improve the IT resources.
(v) Incentive for environment-friendly investments
Investments are financially supported aiming the utilization of renewable sources of energy, leading to reduction in noxious emissions, rehabilitating polluted areas, recycling waste etc.
(vi) Incentive for the creation and expansion of capacities of competitive investments
Government grants are available aiming the creation and expansion of modern production capacities of high quality and high added value.
(vii) Incentive for the establishment of European regional corporate and strategic service centers
By granting financial means the government promotes international companies to bring their central management or development and service centers to Hungary.
(viii) Incentive for corporate R&D and innovation
Apart from the tax incentives, direct incentives can also be drawn from governmental funds to investments, which contribute to the establishment of activities requiring substantial knowledge capital and assistance to retain highly qualified researchers in Hungary.
The so called "Széchenyi program" for development of micro, small and medium size companies also grants investment incentives to the above sized firms, such as investment subsidies for projects aiming:
. modernization and technical development of production sector
. enhancing the chances of becoming a contractual partner of large, multinational firms
. installation of modern corporate governance systems
. building of information and assistance network between small firms
7. Competition Law (Act LVII of 1996)
The Act LVII. of 1996 on the Prohibition of Unfair Market Practices and the Restriction of Competition (Competition Act) contains the main rules of competition law in Hungary. The Competition Act came into force on January 1 1997 and rather different from the former one.
The Competition Act shall be applied to the behavior of all entities (both natural and legal persons) effected in Hungary. The antitrust chapters have extraterritorial effect.
The Competition Act consists of two main parts: the so-called law of unfair market practices and antitrust law.
The law of unfair market practices contains the regulations of unfair competition and of misleading of the consumers.
(1) Unfair competition
The Competition Act contains a general rule on the prohibition of competing in an unfair way, for example: harming the goodwill of a competitor, acquisition of business secrets, copying of the product of a competitor etc.
Ordinary courts deal with these issues. The court may oblige to discontinue the prohibited practice, to pay compensation, etc.
(a) The misleading of the consumers
This chapter contains a general rule on prohibition of unfair manipulation of consumers e.g. in connection with the product, the distribution procedure, etc.
The Competition Office is competent in such cases; its decisions may be challenged at court. The possible legal consequences are the following: obligation to discontinue the prohibited practice, fine, etc.
(2) Hungarian Antitrust Law consists of three parts: cartel-regulations, rules concerning the abuse of dominant position and concentrations.
(a) The cartel regulations are almost the same as those of the EU Article 81 of the consolidated version of the Treaty of Rome. Agreements and concerted practices among independent undertakings (or associations) are generally prohibited in case of restraining the competition. The practice of the Competition Office is consequent in defining agreements rather broadly; its interpretation is similar to that of the European Commission.
The Competition Act exemplifies the behaviors of restraining the competition, but these are examples only, and the Competition Office examines thoroughly all cases with the economic background thereof.
The Hungarian antitrust law, similar to that of the EU, grants individual and block exemptions. Petition for individual exemption can be filed with the Competition Office. The exemption is granted if that has more positive than negative effects.
The block exemptions are issued in a form of government decrees. The block exemption regulations are similar to that of the EU, but the Hungarian ones are shorter and simpler.
Agreements among undertakings having less than 10 % of the relevant market are exempted by law.
The Competition Office is competent in cartel cases. The possible legal consequences are: obligation to discontinue the prohibited practice, fine up to 10 % of the yearly total income of the undertaking, etc.
(b) Abuse of dominant position
The structure of this part of the Competition Act is similar to the others: there is a general prohibition and examples (restrictions of manufacture, distribution, use of unfair prices, refuse of concluding contracts etc.) This chapter was based on Article 82 of the consolidated version of the Treaty of Rome.
An undertaking is considered as being in dominant position if it can operate extensively in an independent manner from the other undertakings.
The Competition Office is competent in such cases. The possible legal consequences are: obligation to discontinue the prohibited practice, fine up to 10 % of the yearly total income of the undertaking, etc.
Concentrations (merger, acquisition, acquisition of a part of an undertaking, acquisition of leadership, common control of an undertaking) can be executed in case of obtaining the permission of the Competition Office.
The permission is required if the total yearly net income of the respective undertakings is higher than HUF 10-billion (approx. EUR 43-million) and the income of two of them exceeds HUF 500-million (approx. EUR 2,150,000).
The Competition Act provides exemption for banks, insurance companies in case of temporary acquisition for less than one year. The concentration may be permitted if it does not create or strengthen dominant position restricting the competition.
The Competition Office is competent in concentration cases. Consequences of missing the permission: the whole transaction shall be qualified as null and void.
8. Intellectual property protection
Generally it can be stated that Hungary is party to all significant international intellectual property treaties, such as Berne Convention for the Protection of Literary and Artistic Works (1922), Paris Convention for the Protection of Industrial Property (1909), WIPO Copyright Treaty (2002), trademark classification treaties, Agreement on Trade-Related Aspects of Intellectual Property Rights (1998). Relevance is made to further international treaties to which Hungary is a member at the respective part of this chapter.
It also has to be mentioned that foreign applicants have to be represented by authorized representatives residing in Hungary in the course of application procedures at the Hungarian Patent Office concerning patents, designs and trademarks.
(1) Copyright protection (Act LXXVI of 1999)
All individual and original works - either creations of literature, science or art - may fall under copyright protection. The copyright protection of works originates from their creation, no registration is necessary to obtain such protection. Copyright protection shall be provided during the lifetime of the author and for 70 additional years following his/her death.
The Hungarian legislation has adopted the following Council Directives of the EC:
Council Directive 91/250/EEC of May 14 1991 on the legal protection of computer programs,
Council Directive 92/100/EEC of November 19 1992 on rental right and lending right and on certain rights related to copyright in the filed of intellectual property,
Council Directive 93/83/EEC of September 27 1993 on the coordination of certain rules concerning and rights related to copyright applicable to satellite broadcasting and cable retransmission,
Council Directive 93/98/EEC of October 29 1993 on harmonizing the term of protection of copyright and certain related rights,
Directive 96/9/EC of March 11 1996 of the European Parliament and of the Council on the legal protection of databases.
(2) Patents (Act XXXIII of 1995)
Any inventions that are new, involve an inventive activity and are utilizable for industrial application are patentable; however, discoveries, scientific theories, mathematical methods, aesthetic creations, computer programs etc. are not regarded as inventions. In addition, a few categories of invention are specifically excluded from patentability.
Patent protection lasts for 20 years beginning on the date of filing of the application.
Patents bring the exclusive right to use the invention or let others use it under terms agreed with the owner of the patent. They also bring the right to take legal action against others who might be infringing the invention and to claim damages.
Hungary is party to both the Patent Cooperation Treaty (1980) and to the European Patent Convention (2003). The Hungarian legislation has adopted the Directive 98/44/EC of July 6 1998 of the European Parliament and of the Council on the legal protection of biotechnological inventions, furthermore, the provision of the European Patent Convention.
(3) Designs (Act XLVIII of 2001)
Design protection can be obtained for any new designs that are of individual and original character in the course of a granting procedure. A registered design secures a monopoly right for the outward appearance of an article or a set of articles of manufacture to which the design is applied. It is additional to any copyright protection that may exist automatically in the design. Any registered designs, like any other business commodity, may be bought, sold, hired or licensed.
Designs are registrable only if they are new, the outward appearance of the article to which the design is applied is not detrimental to the proper use of the article or is not merely the consequence of the technical solution or of the purpose of a product.
Hungary is party to the Hague Agreement on the International Deposit of Registered Industrial Designs (1984), therefore, a registered design could be obtained (besides by filing a national design application) by filing an international design application as well.
Design protection lasts for 5 years counting from the date of application and upon request it can be renewed for further 5-5 year periods for four times at the most.
The Hungarian legislation has adopted the Directive 98/71/EC of October 13 1998 of the European Parliament and of the Council on the legal protection of designs.
Basically it cannot be excluded that a design would qualify as a copyright work as well, and parallel protection may be applied for other protection forms (that is: under certain circumstances an element of a trademark mark could qualify as copyright work, too).
(4) Trademarks (Act XI of 1997)
Any signs that are capable of being represented graphically and which can in the course of trade, distinguish the goods or services from those of other undertakings, may be granted for trademark protection, that is: words, combination of words, slogans, letters, numerals, figures, two- or three dimensional forms, sound signals.
During the granting procedure absolute and relative grounds for refusal are examined by the Hungarian Patent Office. Any owner of earlier rights may file an observation with the Hungarian Patent Office referring to its earlier rights as relative ground for refusal.
The Hungarian legislation has adopted the following directives of the EC:
Council Directive 89/104/EEC of December 21 1988 on the approximation of the laws of the Member States relating to trade marks;
Council Regulation 2081/92/EEC of July 14 1992 on the Protection of Geographical Indications and Designations of Origin for Agricultural Products and Foodstuffs.
Since Hungary is party to the Madrid Agreement (1909) and to the Madrid Protocol (1997) on the International Registration of Trade Marks trademark protection could be obtained in Hungary by filing an international trademark application, too.
9. Employment law
Hungary's employment law, similarly to other fields of Hungarian legal system, has become fairly harmonized with respective EU regulation on working conditions, employment and unemployment, however further harmonization steps are expected as consequence of recent changes to the European employment laws as part of EU social legislation. Main features of Hungarian employment legislation are quite different from that of the EU countries: 1. collectivism both on sides of employers and on employees is fairly weak, therefore employment law is regulated basically by statutes; 2. collective bargaining agreements, if any, are echoing provisions of the same in many cases; 3. provisions on individual employment relationship and on industrial relations are not included in separate laws as typical in Western European countries, but are incorporated into a single, comprehensive and well-constructed Act called Labor Code (there are some minor exceptions).
With regard to international matters, bilateral treaties on employment matters are dealing mostly with administrative issues of exchanging of young and other workers, furthermore with limitations on admission of non-Hungarian nationals to Hungary (and of Hungarian nationals to other countries) for employment, while multilateral treaties ratified by Hungary are in most cases those negotiated by the International Labor Conference.
(1) Labor Code (Act XXII of 1992)
In the frame of the following short overview principles of Hungarian employment law are enumerated, only, mainly in the field of protection of workers, industrial relations furthermore wages, income and working hours.
(a) Industrial relations, freedom of strike
Although the Labor Code ("LC") gives detailed regulation on rights of trade unions and of employers' organizations in respect of promoting their members' interests and concluding collective bargaining agreements, there is no significant collectivism in Hungary. One reason for this could be the fact that Hungarian labor pool is dominated traditionally by small and medium sized enterprises ("SME"), while another reason can be also the detailed provisions of the LC itself. Whatever the reasons for this situation, the Hungarian legislator becoming aware of the same extended the right of concluding of bargaining agreements in 1999 and made it available for work councils, as well. Embodied new provisions - applying only to the very situation when no union is represented at the given employer - are still in force, however, it seems they failed in their long desired effect.
Most important provisions on collective agreements are the following: 1. employers may enter into only one collective agreement at a time; 2. the collective agreement covers every worker irrespective of their membership to those unions being part to the agreement; 3. with certain exceptions, minimum rules provided for by the LC must be honored; 4. provisions of employment contracts contradicting the respective provisions of the collective agreement are valid in so far as they are favorable to the employee.
Issue of freedom of strike is closely connected to issues of industrial relations, therefore - although it is regulated by a separate act (Act VII of 1989 on Strikes) - we are dealing with questions of the same right at this point. Workers employed in Hungary are entitled to come out on strike anytime when protection of their social and economic interests requires so. Each worker has its own right to come out or be on strike, mandatory participation of a trade union is required in case of sympathy strikes, only. Nevertheless, a single person is never entitled to use his/her right alone: at least another worker is needed so that the strike could be qualified as a lawful one. Before declaring a strike, employees are obliged to initiate conciliatory procedure lasting for seven days. Neither before nor during the strike are employers eligible for making counteractions in the form of lockout; no forms of lockout are known to Hungarian labor law.
Earlier strikes were more often a result of political issues than of real labor conflicts, however, this is slowly changing now. Nevertheless, another important feature of Hungarian strike practice still remained a dominant characteristic: strikes occur in Hungary only sporadically, mainly in the public sector.
(b) Protection of workers
Although the legal harmonization required by the EU accession has taken place in the field of Hungarian employment law, too, the accomplishment of the protection of employees requires some further steps in legal harmonization, mainly due to the recent changes of the relevant EU regulations.
One of the strangest regulations of the Labor Code, which formulates regulations identical with the employment law of the Western European countries in several aspects in the field of the protection of employees, is the regulation stipulating the compulsory written form of employment contracts. The LC, in the interest of the containment of undeclared work and of the increasing of contractual discipline, requires the written form of employment contracts irrespective of the fact that the Hungarian employers are now obliged to inform their employees separately about the labor circumstances and the regulations relating to employment. The minimal required elements of the employment contract are as follows: employee's scope of work, place of effecting work and personal basic wage.
(c) Working hours
The general length of normal working hours is 8 hours per day, 40 hours per week. Employees can be employed both according to proportioned, as well as according to disproportioned working schedules. If the length of working hours determined per day exceeds 6 hours, the employees are entitled to a 20-minute rest period. Between the ending of work and its next day's beginning at least an 11-hour rest period is to be secured, should the collective agreement not decide differently. The employees are entitled to 2 rest days weekly, one of which shall be Sunday according to one main regulation. As per the relevant EU-directives, the employees can be obliged to extraordinary work (overwork or work on rest day) and readiness in return of payment of different surplus payments over the personal basic wage.
The employees are entitled to 20-30 working days of paid vacation each year, depending on their age, in special cases (for example: nursing children) the LC requires the employers to increase this length of the vacation by some days. In case of sickness of the employees, the employers are generally obliged to bear the costs of the paid sick-leave, however, up to maximum 15 days each year. Thereafter the sick-pay is covered by the social insurance fund.
(d) Wages, income
Employers are required to pay at least the statutory minimum basic wage set by the Hungarian government. Currently, the minimum basic wage is HUF 50,000 (approx. EUR 215) per month; part time workers are eligible to a proportional part of the same only. The amount of the basic wage of a given employee shall be defined by his/her employment contract either in the form of a time-wage or in the form of an incentive (efficiency) wage. Certain workers are also entitled to surplus payments with regard to the nature of their work (night-workers, shift-workers etc.).
It is not mandatory to make any additional payments, however, there are many forms of additional payments such as different types of bonuses, premiums, commission payments and share of profits.
Hungarian legislation has adopted almost every EC Directives on employment, particularly, but not limited to the following most important ones:
Council Directive 77/187/EEC of February 14 1977 on the approximation of the laws of the Member States relating to the safeguarding of employees' rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses
Council Directive 91/383/EEC of June 25 1991 supplementing the measures to encourage improvements in the safety and health at work of workers with a fixed- duration employment relationship or a temporary employment relationship
Council Directive 91/533/EEC of October 14 1991 on an employer's obligation to inform employees of the conditions applicable to the contract or employment relationship
Council Directive 93/104/EC of November 23 1993 concerning certain aspects of the organization of working time
Council Directive 94/33/EC of June 22 1994 on the protection of young people at work
Directive 96/71/EC of the European Parliament and of the Council of December 16 1996 concerning the posting of workers in the framework of the provision of services
(e) Employment regulation for foreigners
Foreign citizens wishing to work in Hungary for an employer having Hungarian residence must be in possession of an authorizations to reside (residence permit) and to work (work permit) required by Hungarian laws. The granting of residence permits is regulated not by Hungarian labor law but by Hungarian immigration law.
(f) Granting of work permits for foreigners
Work permits are granted by Hungarian Labor Offices called "Labor Centers" organized and established in each county. Not the foreign employees but the employers wishing to employ them are eligible for applying for a work permit. The activity carried out by a foreigner and the duration thereof, furthermore the work place and its location must effectively correspond to the content of the work permit granted.
In certain cases no work permit is required (only business-related cases are enumerated):
. for senior officials (managing directors/members of the board of directors) and for members of supervisory boards of companies with foreign participation;
. for chief officers of a branch office or a representative office of a foreign-domiciled company;
. for employees of a foreign supplier performing installation or providing warranties and/or services regarding product sold by their employers.
Foreign citizens not qualifying as senior officials or members of supervisory boards are not exempt from possessing work permit, however they may benefit from a shorter licensing procedure provided that they are qualifying as key personnel as defined by EU labor laws and the Europe Agreement between the EU and Hungary.
Last but not least it is worth to mention that foreigners wishing to work in Hungary and already possessing work permit shall apply for a work visa in advance.
10. Banking law
(1) Structure of the Hungarian banking system
Hungary's banking system is characterized by the separation of central and commercial bank activities since 1987. The Hungarian National Bank ("MNB") acting as central bank primarily maintains the value of the Hungarian currency by the measures of monetary policy. MNB has dismissed most of the functions of a commercial bank, which, of course, did not affect the essential role of MNB in the whole banking sector.
The Act CXII of 1996 on Credit Institutes and Financial Enterprises effective from January 1 1997 is the complex code in Hungary containing the general provisions in the field of commercial banking activity. This Act is in conformity with several EC Directives including 2000/12/EC, 91/308/EEC, 94/19EEC, 86/365 EEC, 87/102/EEC Directive etc.
Companies acting in the financial sector are divided into two categories: credit institutions (banks, specialized credit institutions and cooperative credit institutions) and financial enterprises. The above classification concerns the difference between the allowed scopes of activities of these institutions. Banks are allowed to provide the widest range of financial services, credit institutions are exclusively authorized to several activities (for example: collecting deposit). There are also some institutions with special character that have been present in the Hungarian financial sector for only a few years, such as home savings institutions, private pension funds, and mortgage lending institutions. The Hungarian Development Bank (MFB) as specialized credit institution owned exclusively by the Hungarian State shall take part in development projects and investments to be financed by the State. The Hungarian Export-Import Bank (Eximbank) has a similar function in the field of support of the Hungarian export.
A foreign company may also operate as a credit institution or a financial enterprise through its Hungarian branch office.
There are rather detailed and complex regulations concerning the permission procedure of establishment/operation of financial institutions including capital, organizational, corporate, personal and material requirements. Banks and branch offices can be established with a minimal capital amounting to HUF 2-billion (approx. EUR 8.5-million).
(2) Solvency, prudence
Besides the minimum capital requirement it is also provided that the equity and the warranty capital of a financial institution may not go under the registered capital, aiming the maintenance of the solvency throughout the operation. Furthermore, financial institutions shall have an 8 % solvency rate continuously. 10 % of the profit after taxation shall be transferred into a general reserve for covering losses, unless the financial institution was exempted from this obligation due to its solvency rate by the PSZÁF.
Special rules shall be applicable in case of loans with special risk. Any and all loans committed to one client or group of clients shall be deemed as large risk, if it exceeds 10 % of the warranty capital of the financial institution. Loans committed to one client or group of clients shall not exceed 25 % of the warranty capital. The total amount of large risks may not be more than 8 times larger than the warranty capital of the financial institution. These legal provisions are always specified in internal regulations (credit policy) of financial institutions as well.
A special law (Act XXIV of 1994) was enacted for the prohibition and prevention of money laundering.
As of April 1 2000 an integrated financial supervisory authority, the PSZÁF is liable for the supervision of banking, insurance, securities companies and private pension funds. PSZÁF has a large number of legal measures for supervision purposes, which consists of on the one hand the permission functions (permission of establishment, operation and appointment of the managerial employments, etc.) and on the other hand of controlling functions during the operation. PSZÁF can order various measures for the restoration of the prudent activity, that is: it can oblige the financial institutions to prepare/modify any of its internal regulation, to the training or employing of employments; it can prohibit/restrict the payment of dividend or the salary of managerial employees. Beside this PSZÁF is also entitled to impose fines both on financial institutions and their managerial employees.
(3) Consumer protection, secured deposits
Hungarian law also reflects consumer protection issues in the bank sector including advertising, information of the clients, requirements for the general terms and conditions and consumer loan. One of the most relevant provisions in this regard is that the conditions relating to interest and other fees, provisions shall be indicated clearly.
It is a precondition for the operation of credit institutions that they shall be member of the Hungarian Savings Deposit Insurance Fund ("OBA"). OBA insures depositors up to HUF 3-million (approx. EUR 13,000) per client per credit institution. The establishment of a voluntary deposit insurance fund is also allowed.
Summarizing the above, we can state that the Hungarian banking law is in almost full conformity with EU law. Derogation was requested by and granted to Hungary in case of minimal capital requirement at cooperative credit institutions and the minimal amount of deposit to be insured.
Although - due to the expected privatization of the few banks still owned by the state - there might be some smaller changes in the Hungarian bank sector in the future, any structural or essential change seems to be rather unlikely.
Dr. Tamás Gödölle
Attorney at Law