Hungary - A Guide to Doing Business

YINGKE VÁRNAI Law Firm

Montevideo u. 10

1037 Budapest

Hungary

T: +36 1 887 8288

F: +36 1 887 8381

www.yingkevarnai.eu

Introduction to Hungary

Extending just over 93 thousand square kilometers, surrounded by the Carpathians, the Dinara Mountains and the lower

Alps and where the Danube river winds through the country, Hungary lies in Central Europe (within the Schengen zone),

with Slovakia, the Ukraine, Romania, Serbia, Croatia, Slovenia and Austria as its neighbors. As Hungary is the geographical

center of Europe, its strategic location is one of Hungary’s most important benefits, whether investors are seeking

opportunities within the country itself or are looking to further expand throughout Europe. This is a region characterized

by dynamic economic development, whose growth is driven forward by increasingly high industrial output, excellent

export and import potential and a growing domestic market.

Hungary is not just about goulash and paprika. Hungary is one of the oldest countries in Europe, founded way back in the

year 896. Interestingly, Hungary belongs to the group of countries, which has a relatively high amount of Nobel Prize

Laureates according to per capita index, ranging from Albert Szent-Györgyi (of Vitamin C’s discovery fame) to Imre Kertész

in the literature field. The helicopter, Rubik's cube, holography, ballpoint pen, theory of the hydrogen bomb, safety match,

binoculars and the krypton electric bulb were all invented by Hungarians.

Hungary always had a strong tradition of playing the role of a pioneer economically and politically in the former Soviet

Union bloc. Even before the fall of the Soviet Union, Hungarian legislation was the first in the bloc to allow for private

entrepreneurs to start small businesses. Following the country’s accession to the European Union in 2004, Hungary

continues to be one of the central European hub of innovation. It was one of the quickest country in the Eastern Block to

open its market to foreign capital and has eased capital and profit repatriation. Growth and development is further

supported by the fact that Hungary’s EU membership has strengthened the regulatory system and legal environment to

ensure a transparent and stable operating environment.

Despite the recent economic crisis, Hungary still presents itself as an attractive business location with great growth

potential, especially in the areas of export and foreign direct investment. Hungary definitely benefits from being a member

of the European Union. According to the Hungarian Investment and Trade Development Agency, Hungary is the recipient

of EUR 22.5 billion from the European Structural and Cohesion Funds of the European Union between 2007 to 2013. These

funds will be distributed to enterprises and certain government institutions under the scope of the 'New Hungary

Development Plan', with the aim that Hungary may strengthen its existing capacities, create jobs, promote stronger

competition and eliminate obstacles that hinder economic development. Besides being a regional hub and gateway,

Hungary stands to benefit from free movement of labour, goods and services and also access to over 450 million

consumers. Hungary will be holding the European Union’s rotating presidency next year, starting the 1st of January 2011,

armed with the objectives of leading the European Union into becoming a stronger organization with increased internal

cooperation and international influence.

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Establishing a Business in Hungary

Foreign investments are welcome in Hungary, that is to say, it is encouraged by the Hungarian government by different

subsidies and tax allowances. There are several government and EU aids available for investors, in order to create new jobs,

encourage competitiveness, develop the infrastructure system, or to protect the environment.

According to the Hungarian laws, no special permit is required to found a business association; natural and legal entities of

Hungarian and foreign nationalities are equally allowed to establish a business enterprise. Even a single person can found a

joint-stock company, or a limited liability company; the only limitation is that the headquarters of such companies must be

located within the territory of Hungary. If the owner /shareholder is a natural entity, the following data has to be provided:

name; date and place of birth; mother’s name; current address (in China); tax number and authentic copy of passport. In

case the owner is a company, it is necessary to submit its official and authentic company extract officially translated to

Hungarian, or the deed of association; authentic and official specimen signature of the company manager.

Business associations as well as commercial representative offices and branches are registered by the competent court of

registry. In order to register a company, an electronic application has to be submitted within 30 days from the conclusion of

the Articles of Association. It is necessary to have legal representation through the registration procedure.

If the company uses a sample deed of association (according to the Act V of 2006), the registration can be done in only one

business hour, otherwise the procedure takes 15 business days (if the company does not use the sample deed). A newly

registered company must also register with the local municipality, State Taxation Office, Central Statistical Office and Social

Security Authorities.

There are two kinds of companies: those having legal entity, such as the limited liability company and the joint-stock

company, and those that don’t – general partnership and limited partnership. The most common company forms in

Hungary are the limited liability companies (korlátolt felelősségű társaság, Kft) and companies limited by share

(részvénytársaság) – in private (Zrt) or public (Nyrt) form. No specific restrictions apply to foreign shareholders.

With most of the company forms, it is necessary to have a minimal share capital. A Kft must have a minimum share capital of

HUF 500,000 (about USD 2,500) in case of a Zrt it is HUF 5 million (about USD 25,000) and a Nyrt must have HUF 20 million

(about USD 100,000). Shares or quotas can be issued for non-cash consideration, including intellectual work, recognized

claim, or other marketable things of value. It is important to talk about the management structure as well. The managing

director of the Kft is appointed by the quota holders. If there are more than one managing directors, they can possess

individual or joint right of representation. In the case of Zrts and Nyrts, the companies can be managed by a board of

directors, but if it is excluded by the deed of association, only one director can manage the company – in that case the

members of the board of directors are treated as executive officers.

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Hungary has very skilled and educated labor force of approximately 4.2 million workers. The country has long traditions and

high standards in many areas, such as medicine, sciences, engineering or economics. Foreign employers find Hungarian

employees extremely flexible, motivated and efficient. Most of young Hungarians speak English and/or other Western

languages. In terms of employment laws of Hungary, it is inevitable to mention the Labor Code (XXII:1992), which applies to

all employees working in Hungary and to the employees working abroad for a Hungarian employer for a temporary period.

The terms of employment have to be incorporated into a written contract. If an international element is present regarding

the employment, the parties are free to choose the governing law, unless it does not result in less favorable terms. The

contract can be terminated by mutual agreement or ordinary and extraordinary dismissal.

Holding a valid work permit is required for foreign employees, unless they are persons from EU member states or

Switzerland, and their relatives. It is also not necessary to have a work permit in the case they are executives of an

organization or they benefit from certain legal provision where a work permit is not mandatory. Obtaining the permit takes

about 30 days and costs HUF 25,000 (USD 135). Prior to submitting the application the employer must certify that there is an

actual need for the job to be performed by the foreign employee. The workforce request must be submitted to the relevant

local Labor Center by the employer prior to applying for a “visa for obtaining residence permit”. From December 21, 2007

Hungary has been a member of the Schengen Area, and applies the Schengen regulation in full, meaning visas and residence

permits issued by one of the Schengen States are also valid for Hungary, and vice versa. Foreign nationals requesting entry

to Hungary with a purpose of an extended stay (employment, education, etc.) should submit a “visa for obtaining residence

permit”. Successful applicants are provided with a special single-entry visa – valid for 30 days –, so they can enter the

country and once there, apply for a residence permit.

Tax Regulations

The tax regulations are very pleasant for foreign investors in Hungary. Within the aims of the Hungarian government, the

formulation of a business environment that is favorable to the foreign investors is one of the most crucial questions. That is

why the modification of tax laws was in the first measures of the newly elected government in 2010. From 1st January 2011,

Hungary will be one of the countries with the lowest tax rates in the region.

The government wants to reach the increase of employment not only with the reduction of corporate and other tax

volumes, but also the offer of wide range of subsidies for those investors who meet the requirements. The Hungarian

government offers subsidy packages for the projects worth at least EUR 5 million in the less developed regions, and EUR 10

million in other regions. These packages could be non-refundable cash subsidy, development tax allowance, job creation

subsidy or training subsidy. The government also provides further tax allowance and regional subsidies in addition to the

above.

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As a member of European Union, in Hungary the custom duty regulations of the Community are applied. The exports are

zero-rated for VAT purposes, but imports are subject of VAT, that is 25% in Hungary. While considering the tax aspects of

investing in Hungary, it should also be kept in mind that a double tax treaty was concluded by the Republic of Hungary and

the People’s Republic of China on 17 June 1992.

Why is it good for Chinese businesses to invest in Hungary?

� Central location, good transportation channels in Europe, to Asia

� No special permit is required to found a business association

� Issuer of Schengen visa

� One of the countries with the lowest tax rates in the region

� Already existing Chinese institutions such as Bank of China, China Investment Promotion Agency, Hainan Airlines

� Bilingual Chinese-Hungarian school

� Highest Chinese population in Europe

Why is it good for Chinese businesses to work with YINGKE VÁRNAI Law Firm?

� Offices in Budapest, Central and Eastern Europe and in China

� Partner of one of the most prominent Chinese law firm, YingKe

� Chinese speaking colleagues in Budapest office as well

� Experience in working with Chinese enterprises

� Extended scale of expertise from corporate law to patent law

Conclusion

Due to the strong relationships that already exist between China and Hungary, the numerous benefits Hungary offers to

foreign investment, including its strategic location, and the overall support of the European Union, Hungary provides the

ideal locale for interested foreign investors. The YINGKE VÁRNAI Law Firm understands the needs of such investors and was

created to ensure the success of their ambitious plans. In order to learn more about the YINGKE VÁRNAI Law Firm, please

visit www.yingkevarnai.eu.

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