VZCZCXRO9310
RR RUEHIK
DE RUEHUP #0043/01 0271339
ZNR UUUUU ZZH
R 271339Z JAN 10
FM AMEMBASSY BUDAPEST
TO RUEHC/SECSTATE WASHDC 4838
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCPCIM/CIMS NTDB WASHDC

UNCLAS SECTION 01 OF 11 BUDAPEST 000043 
 
SIPDIS 
 
DEPT FOR EUR/CE LAMORE, EB/IOA DAHN; TREASURY FOR LNORTON, 
MHAARSAGER; COMMERCE FOR ITA/MAC SSAVICH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN OPIC KTDB PGOV HU
SUBJECT: 2010 INVESTMENT CLIMATE STATEMENT FOR HUNGARY 
 
BUDAPEST 00000043  001.2 OF 011 
 
 
¶1.  The following is the 2010 Investment Climate Statement for 
Hungary: 
 
2010 INVESTMENT CLIMATE STATEMENT - HUNGARY 
OPENNESS TO FOREIGN INVESTMENT 
¶2.  Hungary maintains an open economy and attracting foreign 
investment remains a priority for the Hungarian government. 
According to the Hungarian Investment and Trade Development Agency 
(ITDH), "foreign direct investment (FDI) has been crucial in 
boosting economic performance and remains the driving force behind 
Hungary's economic success, fueling its strong export growth and 
significantly increasing productivity." With more than $80 billion 
in FDI since 1989, Hungary has been a leading destination for FDI in 
Central and Eastern Europe, although this level is beginning to 
decline. The global financial crisis hit Hungary in late 2008, and 
the sharp economic downturn both globally and domestically 
negatively impacted investment flows into Hungary. Investment from 
American companies is estimated at more than $9 billion since 1989. 
There are approximately 2200 companies with partial U.S. ownership, 
and 128 wholly U.S. owned companies in Hungary. 
¶3.  Hungary's high-quality infrastructure, its productive and highly 
skilled labor force, and its central geographic location are often 
cited as features that make Hungary an attractive destination for 
investment. Investment promotion agency ITDH views Hungary as a 
particularly well suited location for research and development 
centers; manufacturing facilities; and service centers, and believes 
that considerable opportunities exist in the biotechnology; 
information and communications technology; software development; 
renewable energy; automotive; and tourism sectors. ITDH reports that 
the agency brought in EUR 894 million worth of investments into 
Hungary in 2009, supporting 27 major investments that created nearly 
5,500 jobs. 
¶4.  Despite Hungary's advantages, some businesses complain that 
obstacles and disincentives to investment remain, including a lack 
of transparency and predictability; reports of corruption, 
particularly in the government procurement sector; and barriers 
related to excessive red tape. In late 2009, media sources reported 
several cases in which local and national authorities took decisions 
that may have unfairly impacted foreign investors. These cases, 
which are currently being challenged in the courts, include a tender 
for national radio frequencies and the cancellation of a water 
services contract in a city in southern Hungary. This led nine 
Embassies to issue a statement of joint concern over the situation 
for foreign investors in Hungary (the nine Embassies were Belgium, 
France, Germany, Japan, Norway, Switzerland, The Netherlands, The 
United Kingdom and The United States). The November 2009 statement 
emphasized the need to promote transparency as a competitive 
advantage for Hungary as it seeks to attract further foreign 
investment. Officials of the current government as well as 
representatives of the major opposition party, however, insist that 
these cases do not reflect a trend and that foreign investors in 
Hungary are welcome and are treated fairly. 
ECONOMIC CRISIS AND RECOVERY 
¶5.  The global financial crisis hit Hungary with particular 
severity. Despite declining budget deficits beginning in 2007, 
concerns about Hungary's macroeconomic vulnerabilities - in 
particular its high debt-to-GDP ratio and external liability 
position - caused Hungary to become one of the first emerging 
markets to suffer from the fallout of the global financial crisis. 
Investor risk aversion and global deleveraging caused liquidity 
pressures in Hungary's financial markets and created significant 
stress in the government securities market. The deleveraging 
contributed to a significant weakening of the forint, and on October 
22, 2008, the Hungarian National Bank increased the policy rate by 
300 basis points to fend off a potentially destabilizing swing in 
the exchange rate. 
¶6.  In late October 2008, Hungarian authorities requested liquidity 
support from international organizations, and in early November 
concluded a USD 25.1 billion assistance package with the IMF, EU, 
and World Bank to help reduce the government's financing needs and 
improve long-term fiscal sustainability; maintain adequate 
capitalization of domestic banks and liquidity in domestic financial 
markets; and underpin confidence and secure adequate external 
financing. 
¶7.  In April 2009, Hungary's new Prime Minister Gordon Bajnai 
initiated a crisis management program intended to achieve short term 
crisis management, long term budget equilibrium, sustainable 
stimulation of growth, and long term restoration of confidence. 
Unlike most other EU Member States, macroeconomic policy could not 
be used to support the economy, and fiscal policy had to remain 
tight to avoid further erosion in investor confidence. Discretionary 
spending was cut significantly, and the crisis served as a catalyst 
to implement a number of structural economic reforms. 
¶8.  The Bajnai government's reform package, designed to help improve 
fiscal sustainability, included reforms to the pension and social 
welfare system, as well as changes to the public sector compensation 
system. In addition to cuts in discretionary spending, the 
 
BUDAPEST 00000043  002.2 OF 011 
 
 
government enacted tax reforms aimed at encouraging employment and 
growth by reducing the tax burden on labor, while remaining revenue 
neutral by offsetting tax cuts with increases in consumption and 
wealth-based taxes. 
¶9.  The government's tight fiscal policies and the gradual 
improvement in the global economic climate helped bolster market 
confidence, and the government has been able to return to the market 
for public sector financing. Significantly, in July 2009 the 
government successfully concluded a EUR 1 billion Eurobond auction. 
The narrowing current account deficit has also helped substantially 
ease government external financing requirements. 
¶10.  As of January, 2010, Hungary successfully completed four 
reviews under the IMF Stand-by Arrangement. As a result of the 
continued improvement in Hungary's external financing conditions, 
the government declined to draw the amount available to it from the 
IMF Stand-by Arrangement following the latest review. 
¶11.  Despite the improving macroeconomic situation, the global 
economic crisis has had a severe impact on the real economy, as 
sharply lower demand for Hungarian exports and a steep drop in 
domestic demand adversely impacted economic growth in Hungary. The 
unavailability of credit in the months following the onset of the 
crisis exacerbated the problem, particularly for small and medium 
sized businesses. A sharp contraction of 6.7 percent is expected for 
2009 - more than twice the OECD average. The unemployment rate is 
expected to peak near 11 percent. As of late 2009, liquidity 
returned to the banking sector, but loan rates remain down, due to 
banks' tightening credit conditions and the high costs of forint 
denominated loans. 
FRAMEWORK FOR FOREIGN INVESTMENT 
¶12.  Since 1989, Hungary has undergone a dramatic transformation 
from a centrally planned economy to an open, pro-business economy. 
In 2004 it became a member of the European Union. The Hungarian 
Constitution guarantees private ownership, right of enterprise, and 
freedom of competition. The government engages in reasonably 
transparent regulation. Financial markets are highly developed and 
smoothly operating, and reflect a level of sophistication indicative 
of an early reformer in the region. 
¶13.  The Ministry of Economic Affairs established the Hungarian 
Investment and Trade Development Agency (ITDH) in 1993, and this 
agency continues to help companies looking to make major investments 
in the country. ITDH has set up a "one-stop-shop" service for 
potential large investors. The government has a National Development 
Program II (NDPII) for channeling EU development funds and the Smart 
Hungary investment incentive program, aimed at facilitating 
investments in key areas for development, especially in less 
developed regions. 
¶14.  The reinvigorated Investors' Council continues to operate as a 
mechanism to maintain Hungary's economic competitiveness and 
attractiveness to foreign investors. Co-chaired by the Minister of 
Economy and a leading private sector business executive, it is made 
up of the largest investors, including foreign investors, 
economists, NGO's, and business chambers. 
¶15.  A substantial body of laws protects foreign investment in 
Hungary, provides national treatment and enables profit 
repatriation. The most important are the 1988 Law on Business 
Organizations, as amended in 1997 (no. CXLIV), the 1990 Law on 
Enterprise, the 1992 law on transforming state companies into 
economic associations, the 1990 and the 1996 Competition Laws, and 
the 1995 Privatization Law. Other important laws include the 1991 
Law on Bankruptcy, the Law on Securities, and the 1994 Law 
establishing the Commodity Exchange. Legislation is uniform for all 
investors regardless of their origin. Institutions and procedures 
are in place to ensure compliance with legislation and competition 
rules. The applicability of these laws extends without 
differentiation to domestic and foreign investors. 
¶16.  The most notable legislation protecting both foreign and 
domestic investors is the Foreign Investment Act of 1988. It grants 
full protection to the investments and businesses of non-Hungarian 
resident investors and guarantees that investors will be treated in 
the same manner as national investors. The Act also contains a 
repatriation guarantee under which foreign investors are free to 
remit profits and investment capital to their home country in the 
event of partial or complete termination of their enterprise. 
¶17.  Commercial law in Hungary is well developed; however, most 
analysts see both a need to continue to revise the corporate legal 
code and to improve the judicial and administrative capacity for 
enforcing it. There continue to be complaints from foreign investors 
about the slow pace of the judicial system, and the need for 
timelier judicial due process. 
¶18.  Up to 100 percent foreign ownership is permitted with the 
exception of designated "strategic" holdings in some defense-related 
industries. Foreigners investing in financial institutions and 
insurance companies must officially notify the government but do not 
need advance authorization. Foreign financial institutions may 
operate branches and conduct cross-border financial services in 
Hungary, in keeping with OECD commitments. Currently, foreign firms 
control two-thirds of manufacturing, 90 percent of 
 
BUDAPEST 00000043  003.2 OF 011 
 
 
telecommunications, and 60 percent of the energy sector. The private 
sector currently produces about 80 percent of Hungary's output. 
¶19.  The Hungarian State Holding Company (MNV) became the legal 
successor to the Hungarian Privatization and State Holding Company 
(APV) in 2008, and is responsible for managing and privatizing 
state-owned properties. With most state-owned companies now 
privatized, however, the pace of privatizations has slowed 
considerably in recent years. 
¶20.  Ownership in Hungary is considerably more concentrated than in 
the U.S. It is common for one or two stockholders to have a 
controlling stake in even large corporations. Crossholdings are 
common and the independence of directors sometimes difficult to 
establish. 
¶21.  Land-Ownership Restrictions: Under the Investment Act, a 
company incorporated in Hungary may only acquire real estate 
"required for its economic activities," but this has been broadly 
interpreted and has not prevented foreign entrepreneurs from 
engaging in property development. The 1994 Land Law restricts the 
purchase of land by foreigners to 6,000 square meters, but allows 
for leases of up to 300 hectares for a maximum of 10 years. Only 
private Hungarian citizens and EU citizens resident in Hungary and 
engaged in agricultural activity can purchase farmland, while others 
may lease it. Restrictions on foreigners buying land will remain in 
force for seven years following EU membership and it is possible 
they could be extended for an additional three years. 
CONVERSION AND TRANSFER POLICIES 
¶22.  The Hungarian forint (HUF) has been convertible for essentially 
all business transactions since January 1, 1996. As a legal 
obligation of its EU membership, Hungary must eventually adopt the 
Euro. Hungary complies with IMF Article VIII and all OECD 
convertibility requirements. Act XCIII of 2001 on Foreign Exchange 
Liberalization lifted all remaining foreign exchange restrictions 
and allowed free movement of capital in line with EU regulations. 
Foreign currencies are freely available in all banks and exchange 
booths. In 2001, Hungary adopted an exchange rate intervention band 
of +/-15 percent around a benchmark rate against the Euro. In order 
to allow the Hungarian National Bank (MNB) to exclusively focus on 
its inflation target of 3 percent, in February 2008 the MNB adopted 
a free-floating exchange rate regime. Since that date market forces 
determine the HUF exchange rate to the Euro and other currencies. 
¶23.  Although the current government notes that adoption of the Euro 
remains a priority, a specific target date for entry has not been 
set. Recent reforms are helping to strengthen Hungary's fiscal 
sustainability and will bring Hungary closer to meeting the 
conditions required for entry into the Exchange Rate Mechanism II 
(ERM II), one of the "Maastricht Criteria" required for Euro 
adoption. With national elections in April 2010, the timing of 
Hungary's entry into the Eurozone will largely depend on the 
economic policies and priorities of the next government. All major 
political parties have expressed support for Hungary's adoption of 
the Euro. 
¶24.  Short-term portfolio transactions, hedging, short and long-term 
credit transactions, financial securities, assignments and 
acknowledgment of debt may be carried out without any limitation or 
declaration. While the Forint remains the legal tender in Hungary, 
parties may settle financial obligations in a foreign currency. 
¶25.  Hungarian legislation allows for profit repatriation and 
re-investment. The timeframe for remittances are in line with the 
financial sector's normal timeframes (generally less than 30 days), 
depending on the destination of the transfer and if corresponding 
banks are easily found. There is no limitation on the inflow or 
outflow of funds for remittances of profits, debt service, capital, 
capital gains, returns on intellectual property, or imported inputs. 
 
EXPROPRIATION AND COMPENSATION 
¶26.  A 1990 Constitutional amendment provides protection against 
expropriation, nationalization, and any arbitrary action by the 
government except in cases of acute national concern. In such cases, 
immediate and full compensation is to be provided to the owner. 
There are no known cases where the Hungarian government has 
discriminated against U.S. investments, companies, or 
representatives in expropriation. 
DISPUTE SETTLEMENT 
¶27.  Hungary has an independent judiciary and well-developed system 
of commercial law. The legal process, however, can be quite lengthy. 
Hungary modernized its court system as of January 1, 2003. A new 
level has been added to the previous three-level court system, which 
consisted of Local Courts, Courts of Appeal, and the Supreme Court. 
In order to decrease the workload of each court and, as a 
consequence, reduce the time of the appeal process, the Parliament 
established five regional courts called the High Court of Justice. 
EU membership empowers private parties to appeal violations of EU 
rights or regulations directly to EU bodies, providing another means 
of redress in potential disputes. Investment disputes are infrequent 
and do not reflect a pattern in Hungary. Mediation is spreading, but 
is not yet a widely used means to settle disputes. 
¶28.  Contracts can include sole arbitration by a foreign court. 
 
BUDAPEST 00000043  004.2 OF 011 
 
 
Contractual rights have to be met and failure to do so can be 
challenged in court. Proceedings and rulings can belengthy and the 
legal system is slow and overburdened. Courts and the prosecution 
are independent and there is no evidence of influence by the 
government. 
¶29.  The Act on Bankruptcy Procedures, Liquidation Procedures and 
Final Settlement, as amended in 1993, covers all commercial entities 
except banks (which have their own regulatory statutes), trusts, and 
state-owned enterprises. Bankruptcy proceedings can be initiated 
only by the debtor provided he/she has not sought bankruptcy 
protection within the previous three years. Within 90 days of 
seeking bankruptcy protection, the debtor must call a settlement 
conference to which all creditors are invited. Majority consent of 
the creditors present is required for all settlement plans. If 
agreement is not reached, the court can order liquidation. The 
Bankruptcy Act establishes the following priorities of claims to be 
paid: 1) liquidation costs; 2) secured debts; 3) claims of 
individuals; 4) social security and tax obligations; 5) all other 
debts. Creditors may request the court to appoint a trustee to 
perform an independent financial examination. The trustee has the 
right to challenge, based on conflict of interest, any contract 
concluded within 12 months preceding the bankruptcy. 
¶30.  Hungary has accepted binding international arbitration in cases 
where the resolution of disputes between foreign investors and the 
state is unsuccessful. There are domestic arbitration bodies within 
the Hungarian Chamber of Commerce, the Ministry of Labor, and local 
municipal governments. Hungary is a member of the International 
Center for the Settlement of Investment Disputes (ICSID). Hungary is 
also a signatory to the 1958 New York Convention on the Recognition 
and Enforcement of Foreign Arbitral Awards.  In the last few years 
mediation has become a tool of increasing importance for dispute 
settlement to avoid lengthy court procedures. 
PERFORMANCE REQUIREMENTS/INCENTIVES 
¶31.  Performance requirement/incentives are available to all 
enterprises registered in Hungary, regardless of the nationality of 
owners or location of incorporation, and applied on a systematic 
basis. To comply with European Union rules, the government of 
Hungary no longer grants tax holidays based on investment volume. 
¶32.  Eligibility for incentives is regulated by GOH Decree 163/2001, 
as amended by 241/2002, in accordance with EU regulations. 
Incentives can be received by tendering procedures for: (1) research 
and development, employment, training; (2) economic sectors; or (3) 
regions. The government defines an intensity indicator for 
incentives, which is the maximum value of the totl of various 
incentives in proportion to the present value of the investment. 
This can be higher for less developed areas or for small and medium 
sized enterprises (SMEs). 
¶33.  Hungary has a well developed incentive system for investors, 
the cornerstone of which is a special incentive package for 
investments over a certain value (typically over EUR 10 million). 
The incentives are focused on investors establishing manufacturing 
facilities, logistics facilities, regional service centers, R&D 
facilities, bioenergy facilities, or tourist facilities. Incentive 
packages may consist of cash subsidies, development tax allowances, 
training subsidies, and job creation subsidies. The incentive system 
is compliant with EU regulations on competition and state aid and is 
administered by the Hungarian Investment and Trade Development 
Agency and managed by the Ministry of Development and Economy. 
¶34.  Parliament enacted a new National Development Plan for 
2007-2013. In the Framework of the New Hungary Development Plan 
(NHDP), Hungary will receive around 7,000 billion HUF (22.4 billion 
Euros) from the EU. This will be complemented by the national public 
contribution amounting to 15 percent of the total available funding. 
The Hungarian government will add to this amount around 1,000 
billion HUF. Projects using EU structural and cohesion funds will be 
subject to a series of requirements, including a portion of 
own-source financing. As these programs become implemented, the 
inflow of EU funds will create numerous opportunities for 
investment. In an attempt to ease the effects of the global 
financial crisis, the GOH initiated an economic stimulus package 
worth 1,400 billion HUF for businesses, including SMEs that have 
been particularly affected by the unavailability of credit. In the 
current climate, loans have been hard to obtain even for SMEs with 
good credit histories, and expiring loans have been hard to renew. 
The package includes a HUF 377 billion liquidity package (micro 
loans, SME loans, Hungarian Development Bank loans), a credit 
guarantee of HUF 76 billion, as well as interest and venture capital 
subsidies from the New Hungary Development Program and the New 
Hungary Rural Development Program. The division of EU Resources for 
the Sectoral Operative programs is as follows (2007-2013):  [see 
emailed chart] 
¶35.  Performance requirements, such as job creation or investment 
minimums, can be imposed as a condition for establishing, 
maintaining, or expanding an investment. There is no requirement 
that investors purchase from local sources, however the EU Rule of 
Origin applies. The government imposes "offset" requirements for 
defense sector investments over one billion forint. Investors are 
 
BUDAPEST 00000043  005.2 OF 011 
 
 
not required to disclose proprietary information to the government 
as part of the regulatory process. There are no restrictions on 
participation in government financed or subsidized research and 
development programs. 
Visa, residence, and work permit requirements are a lengthy and 
tedious hurdle but do not inhibit foreign investors' mobility. 
Employment of foreign nationals must meet Hungarian Labor Code 
requirements. 
¶36.  There have been no complaints against Hungary related to any 
failure to fulfill any trade related investment measures (TRIMS) 
treaty obligation. 
RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT 
¶37.  The Hungarian constitution guarantees the right to private 
ownership. Foreign and domestic private entities may establish and 
own business enterprises and engage in all forms of remunerative 
activity, except those prohibited by law. Hungarian law guarantees 
the right of establishment of private entities, as well as the right 
to acquire and dispose of interests in business enterprises. Many 
foreign companies operate through representative offices. 
¶38.  The Foreign Investment Act of 1988 grants full protection to 
the investments and businesses of non-Hungarian resident investors. 
The Act guarantees that investors will be treated in the same manner 
as national investors, and contains a repatriation guarantee under 
which foreign investors are free to remit profits and investment 
capital to their home country in the event of partial or complete 
termination of their enterprise. 
¶39.  The registration of business associations is compulsory in 
Hungary. All firms registered in Hungary are under the Court of 
Registration's legal authority. The Court maintains a fully 
computerized registry, provides public access to company 
information, and is developing an electronic filing system. The 
Court also enforces compliance with the Company Act, enacted in June 
1998, which compels registry courts to process applications to 
register limited liability and joint-enterprise companies within 30 
days (60 days for unincorporated business entities). If the court 
fails to act in the period, the new company is automatically 
registered. The act eliminated separate registrations at the tax and 
social security authorities. The minimum capital required for a 
limited-liability company is HUF 3 million and for a joint stock 
company it is HUF 20 million. As of July 1, 2008, businesses may be 
established in one hour's time electronically or by a simplified 
registration procedure. GOH announced the intention to decrease 
administrative burdens by 25 percent by 2012. 
PROTECTION OF PROPERTY RIGHTS 
¶40.  Secured interests in property (mortgages), both movable and 
real, are recognized and enforced but there is no title insurance in 
Hungary. 
¶41.  Intellectual Property Rights: On January 1, 2003, Hungary 
acceded to the European Patent Convention and has accordingly 
amended the Hungarian Patent Act. It is a party to the WTO Trade 
Related Aspects of Intellectual Property Rights (TRIPS) agreement 
and most other major international IPR agreements, including the 
most recent World Intellectual Property Organization (WIPO) 
copyright Treaty and the WIPO Performance and Phonograms Treaty. It 
is also a party to the EU Information Society Directive, and 
implemented the EU Enforcement Directive in 2005. 
¶42.  The United States and Hungary signed a Comprehensive Bilateral 
Intellectual Property Rights (IPR) Agreement in 1993 that addresses 
copyright, trademarks and patent protection. A subsequent industrial 
property and copyright law entered into force on July 1, 1994, that 
significantly strengthened the domestic patent system. A new 
Copyright Law passed in June 1999 made necessary technical changes 
required by the WTO TRIPS Agreement. 
¶43.  The 1993 IPR agreement recognizes an exclusive right to 
authorize the public communication of works, including the 
performance, projection, exhibition, broadcast, transmission, 
retransmission or display of these works. It also requires that 
protected rights be freely and separately exploitable and 
transferable (contract rights), and recognizes an exclusive right to 
authorize the first public distribution, including import, for 
protected works. 
¶44.  Patent protection in Hungary covers the use, sale, offering for 
sale, and import of a patented product or products made using a 
patented process. The definition of infringement has been extended 
to include "supplying the means." A person who sells or offers to 
sell the means of producing a patented product is liable if that 
person is proven to have known that the means could be used for 
infringement. An example is the sale of decoder boxes that would 
allow the user to pirate a cable signal. 
¶45.  Under the revised Patent Act, effective January 1, 1996, an 
invention may be patented if it is novel and has industrial 
application. The patent application process takes from six months to 
one year, and patents are issued for a period of twenty years from 
the filing date. Foreigners applying for a Hungarian patent whose 
permanent residence is not in the European Economic Area (EEA) must 
be represented by an authorized Hungarian patent agent. Hungarian 
patent law conforms to the guidelines of the European Patent 
 
BUDAPEST 00000043  006.2 OF 011 
 
 
Convention, to which Hungary is a signatory. 
¶46.  Trademarks may be granted for any product-distinguishing sign 
capable of being graphically represented. They are issued for ten 
years and are renewable. The Hungarian Patent Office has competency 
over patent revocation and trademark invalidity proceedings, while 
all disputes related to the infringement of IPR fall under the 
jurisdiction of the courts. 
¶47.  In May 2004 the United States Trade Representative (USTR) 
announced that Hungary was placed upon the Special 301 Watch list of 
countries owing to weak enforcement and inadequately protected 
confidential pharmaceutical test data. The government of Hungary has 
taken some positive steps towards more complete implementation of 
its international obligations by putting into effect a ministerial 
decree to provide data exclusivity protection for pharmaceutical 
products authorized in the EU or Hungary after April 11, 2001. 
¶48.  In January 2008, the GOH established a National Board Against 
Counterfeiting and Piracy (HENT), led by a government commissioner, 
the Hungarian Patent Office (HPO), and the Ministry of Justice 
(MOJ), with participation from law enforcement and other government 
agencies, various business chambers, industry associations, and 
NGOs. The Board established a strategy until the end of 2010, which 
was approved by the government in October 2008.  Since its creation, 
the HENT has undertaken a number of positive measures to increase 
training of judicial and law enforcement officials, improve 
coordination between rights-holders and law enforcement officials, 
and increase public awareness of the importance of intellectual 
property rights protection.  One area of ongoing concern, however, 
is that judges do not tend to impose deterrent-level sentences for 
civil and criminal IP infringement, although this is slowly 
changing. 
TRANSPARENCY OF THE REGULATORY SYSTEM 
¶49.  The regulatory process in Hungary is relatively open and 
transparent. Tax, labor, environment, health and safety laws are 
consistent with EU regulations. Laws before Parliament can be found 
on the Parliament website. Legislation, once passed, is published in 
a legal gazette and available online. The government often invites 
interested parties to comment on draft legislation but does not 
always incorporate that input into final documents. Foreign 
investors would like to see more consultations between government 
and stakeholders in drawing up regulations. Some regulatory 
functions are delegated to professional associations, such as 
medical and legal associations. In addition, several permanent 
advisory committees may review draft laws and rules. However, in 
most cases the government has complete discretion over who sits on 
these boards, over whether or not the boards see draft decrees 
before they are promulgated and whether or not to accept the boards' 
input in making final regulations. The bureaucratic procedures can 
be very lengthy. 
¶50.  There are some exceptional types of regulations where 
consultation with the public is required, including environmental 
and land use regulations. The Environmental Act (LIII/1995) and the 
Regional Development and Country Planning Act (XXI/1996) require the 
government to solicit input from affected parties. Open-ended public 
hearings are uncommon, and the courts generally cannot review 
administrative decisions. Some ministries are beginning to put draft 
rules and laws on the Internet and to invite comments, but this 
practice is not yet widespread. 
¶51.  A revised Public Procurement law came into force on May 1, 
¶2004. The current Hungarian government extended the law to 
investments financed by the Hungarian Development Bank and increased 
the number of open tenders. Companies operating in subsidies or 
price-regulated sectors may suffer due to insufficient transparency 
and responsiveness in the setting of prices or subsidies.  In 
response to continued international criticism regarding Hungary's 
procurement laws and practices, a bill to modify existing public 
procurement legislation and make it more transparent was passed by 
Parliament in 2008.  Parties requesting bids will be required to 
post information on their websites about the project and results of 
the public procurement process.  Additionally, bids will need to 
indicate all subcontractors that will be used and how they will 
participate in the project.  The new law also simplifies the current 
process by reducing the amount of paperwork for bidders. 
 
¶52.  According to Transparency International's National Integrity 
Study, systemic corruption adds as much as 20-25 percent to the 
costs of government procurement.  A Freedom House study estimates 
that only 10 percent of government procurements are transparent. 
Government procurement reform is a major topic of discussion among 
foreign chambers of commerce and business groups that have provided 
input and suggestions to the GOH for inclusion into draft 
legislation.  The Accounting Law of 2000 and subsequent 
modifications were designed to bring Hungarian financial reporting 
standards and practices in line with the International Accounting 
Standards and the EU Fourth and Seventh Directives. Under the latest 
modification, effective January 1, 2005, listed companies under the 
scope of Decree 1606/2002 of the EC are obliged to prepare 
consolidated financial statements in accordance with international 
 
BUDAPEST 00000043  007.2 OF 011 
 
 
financial standards, except for companies which are subsidiaries of 
a parent company already preparing a consolidated annual report. 
 
¶53.  In December 2009, Parliament passed new measures designed to 
reduce the possibility of corruption in public procurements by 
granting protection to whistleblowers, establishing a Public 
Procurement and Public Interest Protection Office, and supporting 
the use of "Integrity Pacts" in public procurements.  Although a 
positive step, these new provisions have not yet entered into force 
in Hungary. 
EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT 
¶54.  Prior to the global financial crisis, capital adequacy was not 
an issue in Hungary as funds were readily available for businesses 
due in large part to a large foreign presence and significant 
competition in the banking sector. Currently, however, banks are 
increasing their capital adequacy ratios to well above the required 
8 percent, and are reducing loan-to-debt ratios as well. Lack of 
confidence in financial markets affected Hungarian banks, many of 
which are now limiting foreign currency denominated lending, and 
previously popular Swiss franc and Japanese yen loans have largely 
disappeared. There are reports that forint loans to businesses are 
hard to obtain as well, as banks increase their debt-to-loan ratios, 
forcing them to promote deposits aggressively and limit lending to 
the less risky consumer loan sector. On the whole, foreign investors 
continue to have equal access to credit on the local market, with 
the exception of special governmental credit concessions such as 
small busness loans. Markets for direct finance are thin. Volumes 
on the stock exchange declined and the BUX plummeted to just above 
12 thousand, about 50 percent of the previous average index, but 
have since rebounded to near pre-crisis levels. 
¶55.  Hungary has an impressively modern financial sector. In April 
2000, the responsibilities of the Bank Supervisory Board were merged 
with the state insurance and pension supervisory agencies to form 
the Hungarian Financial Supervisory Authority (PSZAF). This body is 
a consolidated financial supervisor regulating all financial and 
securities markets. The PSZAF is independent, self-financing and 
well staffed, but lacks the ability to issue new regulations that 
carry legal force.  In order to increase its ability to better 
foresee possible problems in the financial sector, PSZAF's authority 
was increased through a package of modifications to existing 
financial laws passed by Parliament in late 2009. These include 
stricter regulations on loans for private individuals, better 
information about exact loan conditions and costs, and a code of 
ethics for banks. These changes are designed to prevent individuals 
from taking on loans they are unlikely to be able to repay and 
provide better protection for those who cannot meet current 
installments and wish to change their loan conditions or opt for 
early repayment. Most of the new legislation entered into force on 
January 1, 2010. Additional draft legislation includes regulations 
empowering PSZAF to draft and submit legislation to Parliament. If 
passed, it would create a strong two-pillar system of control by the 
Central Bank and the PSZAF over the financial sector, and provide 
new tools to allow them to address systemic and other risks. 
COMPETITION FROM STATE-OWNED ENTERPRISES (SOES) 
¶56.  Beginning in the 1990s, there has been considerable 
privatization of former state-owned enterprises.  Today, few SOEs 
remain, and primarily operate in strategic sectors, for example in 
the areas of national security and transportation. We are aware of 
few complaints from private companies regarding competition from 
SOEs. In October 2009, however, newspapers reported that a private 
company was denied a license to provide express bus service between 
Budapest and five major Hungarian cities. The company would have 
competed directly with the state-invested Voln companies. 
CORPORATE SOCIAL RESPONSIBILITY (CSR) 
¶57.  Since the mid-1990s, corporations began to pay more attention 
to social responsibility. Foreign long-term investors have 
"imported" their CSR mechanisms, policies and models, which local 
Hungarian corporations have begun to adopt. According to a survey 
conducted by CSR Hungary, 55 percent of businesses have a CSR policy 
and 44 percent of businesses think that CSR increased their 
competitiveness. The Hungarian Business Leaders Forum (HBLF), a 
non-profit representative body of local and international business 
leaders in Hungary, considers CSR as part of its mission. In 2006 
GOH signed a strategic resolution (No. 1025) for the reinforcement 
of social responsibility of employers. Since 2006 CSR Hungary has 
held an annual conference - the country's largest CSR forum - where 
company and communication managers, researchers and university 
students exchange information and experiences, and where an annual 
CSR award is presented. 
PRICE REGULATION AND LIBERALIZATION 
¶58.  The Price Act of 1990 authorizes the government to determine 
compulsory prices when the Competition Act fails to protect 
interests of consumers. This sets the upper or lower price limit for 
certain goods and services to be established by a relevant 
government authority. 
Foreign companies operating in price-regulated sectors, such as 
energy and pharmaceuticals, have suffered decreased margins due to 
 
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government delays in adjusting prices upward and extending subsidies 
to new drugs. Multinational pharmaceutical firms believe they have 
spent considerable time negotiating with the Ministry of Health with 
little effect on the price and reimbursement policies of the 
national health system. Many pharmaceutical companies see the 
current government plan for pharmaceutical subsidies as impractical. 
 
¶59.  Substantial market deregulation has occurred over the past few 
years. The electrical market is being unbundled and largely 
privatized. In June 2003, the Hungarian government passed the Gas 
Act, which provided the framework for gradual liberalization of the 
natural gas market from January 2004. On the other hand, that same 
Act has arguably reduced the political autonomy of the Hungarian 
energy regulatory office.  In 2007 the GOH initiated electricity and 
natural gas market liberalizations, both of which are slated for 
completion in 2009, although the Hungarian Energy Office will 
continue to regulate gas prices. 
PORTFOLIO INVESTMENT 
¶60.  The 1996 Offering of Securities, Investment Services and 
Securities Exchange Act, and the 1990 Securities and Stock Exchange 
Act govern the public issuance and trading of bonds, shares and 
other securities. The Budapest Stock Exchange (BSE) has 35 members, 
which are licensed-broker or broker-dealer companies, including 
several U.S.-based firms. It is a full member of the Federation of 
International Stock Exchanges and an associate member of the 
International Securities Market Association. The total market 
capitalization in 2009 amounted to EUR 62.8 billion, of which shares 
amount to EUR 20.5 billion, government bonds and treasury bills 
amount to EUR 36.5 billion. Average daily turnover was EUR 78 
billion, which is 9.6 percent lower than in 2008. In November 2005, 
the BSE integrated the Commodity Exchange, creating a commodities 
section. In December 2009 the BSE listed a total of 69 issuers. 
These include 46 equity, 5 bond, 3 mortgage, 15 investment funds, 
and one government bond and T-bill issuer. Sixty-six percent of 
capitalization is concentrated in four companies (MOL, OTP, Magyar 
Telecom and Richter). 
POLITICAL VIOLENCE 
¶61.  Despite frequent protests since 2006, political violence has 
not been a characteristic of the political landscape in Hungary. 
The transition from communism to democracy was negotiated and 
peaceful, and four peaceful changes of government via the ballot box 
have followed. There is little cause to expect insurrections, 
political terrorism, or interstate war. There has been no violence 
directed against foreign-owned companies, although Hungary's 
economic troubles have contributed to an increase in political 
extremism. 
CORRUPTION 
¶62.  The Hungarian Ministry of Justice is responsible for combating 
corruption. There is a growing legal framework in place to support 
its efforts. Hungary is a party to the OECD Anti-Bribery Convention 
and has incorporated its provisions into the penal code, as well as 
subsequent OECD and EU requirements on the prevention of bribery. 
Hungary adopted a national strategy on combating corruption and 
passed two modifications of the Criminal Code in 2001 (Act CXXI and 
CIV). Parliament also passed the Strasbourg Criminal Law Convention 
on Corruption (Law XLIX of 2002) and the Strasbourg Civil Code 
Convention on Corruption (Law L of 2004). Hungary is a member of 
GRECO (Group of States against Corruption), an organization 
established by members of the Council of Europe to monitor the 
observance of their standards for fighting corruption. Transparency 
International (TI) is active in Hungary and its 2009 Corruption 
Perceptions Index rates Hungary 46th out of 102 countries (1st being 
best), more favorably than most other countries in the region, but 
worse than Hungary's 2004 ranking of 34th. 
¶63.  Giving or accepting a bribe is a criminal offense, as is an 
official's failure to report a bribery incident. Penalties can 
include confiscation of assets, imprisonment, or both. Since EU 
membership, legal entities can also be prosecuted. An extensive list 
of public officials and many of their family members are required to 
make annual declarations of assets, but there is no specified 
penalty for making an incomplete or inaccurate declaration. The 2003 
"glass pocket law" extended the State Audit Office right to review 
businesses' government contracts to public-private transactions that 
were previously considered "business-confidential". Conflict of 
interest legislation prohibits members of parliament from serving as 
executives of state-owned companies. 
¶64.  While legislation is in place, persistent suspicion of 
corruption in some government procurement actions has arisen, due to 
a lack of transparency and an uneven implementation of the laws to 
prevent corruption.  Non-governmental organizations, the business 
community, and foreign governments share many of these concerns, and 
maintain an ongoing dialogue with the government to identify 
strategies to improve conditions. The GOH has also set up an 
Anti-Corruption Coordination Board, led by the Ministry of Justice, 
with participation from other government ministries, chambers and 
NGOs, which submitted a strategy and action plan to Parliament in 
¶2008. Another issue TI actively supports is a transparent party 
 
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financing system, especially important before elections in April 
¶2010. 
¶65.  Hungarian legislation on combating money laundering is in line 
with international obligations. Act LXXXIII of 2001 on Combating 
Terrorism, on Tightening Provisions on Impeding Money Laundering 
widened the scope of the 1994 anti-money laundering legislation. Act 
XV of 2003 on Preventing Money Laundering increased the scope of 
business under the anti-money laundering legislation. It now 
includes financial and supplementary financial service providers, 
investment service providers, Stock Exchange-related activities, 
money transfers via postal service, real estate agents, auditors, 
tax advisors, casinos, retailers of precious metals, gems, 
antiquities, insurance companies, and lawyers. 
BILATERAL INVESTMENT AGREEMENTS 
¶66.  Hungary and the United States do not have a bilateral 
investment treaty (BIT), nor is one currently under negotiation. 
¶67.  Hungary has bilateral investment treaties with the following 
countries: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, 
China, Cyprus, Czech Republic, Denmark, Egypt, Finland, the Federal 
Republic of Yugoslavia, France, Germany, Great Britain, Greece, 
Indonesia, Israel, Italy, Kazakhstan, Kuwait, Luxembourg, Malaysia, 
Moldova, The Netherlands, Norway, Paraguay, Poland, Romania, 
Slovakia, South Korea, Spain, Sweden, Switzerland, Thailand, Turkey, 
Ukraine, Uruguay and Vietnam. 
¶68.  Hungary has tax treaties which eliminate many aspects of double 
taxation with the following countries: Albania, Australia, Austria, 
Belgium, Brazil, Bulgaria, Canada, China, Croatia, Cyprus, Czech 
Republic, Denmark, Egypt, Finland, the Federal Republic of 
Yugoslavia, France, Germany, Great Britain, Greece, India, 
Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Kuwait, 
Luxembourg, Malaysia, Malta, Moldova, Mongolia, The Netherlands, 
Norway, Pakistan, Philippines, Poland, Portugal, Romania, Russia, 
Singapore, Slovakia, South Korea, South Africa, Spain, Sweden, 
Switzerland, Thailand, Turkey, Tunisia, Ukraine, the United States, 
Uruguay and Vietnam.  Negotiations were recently concluded to revise 
Hungary's current tax treaty with the United States. 
TAXATION 
¶69.  In 2009, the Bajnai government enacted tax reforms aimed at 
encouraging employment and growth by reducing the tax burden on 
labor, while remaining revenue neutral by offsetting tax cuts with 
increases in consumption and wealth-based taxes. The tax changes 
eliminated the 4 percent so-called "solidarity tax," but the 
corporate tax was increased from 16 to 18 percent. Employer welfare 
contributions were lowered, the brackets for the two tax rates 
broadened, and tax rates lowered, creating a flatter system. 
Currently there is a tax rate of 17 percent for annual income below 
HUF 5 million and 32 percent for incomes exceeding this amount. 
Despite the tax cuts, Hungary still maintains a relatively high tax 
wedge. 
¶70.  As several newly acceded EU members decreased both their 
corporate and personal income tax rates and/or switched to a 
one-tier tax system, Hungary faces strict competition in the region. 
  Additionally, businesses sometimes complain that they are targeted 
for lengthy audits and competition investigations. Tax changes in 
the government reform program had the effect of abrogating certain 
preferential tax agreements for foreign investors. 
OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS 
¶71.  The U.S. Overseas Private Investment Corporation (OPIC) has 
operated in Hungary since October 1989, offering U.S. investors 
financing through direct loans or guarantees, political risk 
insurance, and capital for private equity funds. OPIC helps U.S. 
companies compete in new markets and developing countries when 
traditional lenders or financing is not available. OPIC's financial 
support ranges from small micro financings to large infrastructure 
project loans. 
LABOR 
¶72.  Hungary's civilian labor force of 3.9 million persons is highly 
skilled. Literacy exceeds 98 percent and about two-thirds of the 
work force has completed secondary, technical or vocational 
education. Hungary is particularly strong in engineering, medicine, 
economics, and science training. An increasing number of young 
people are attending U.S. and European-affiliated business schools 
in Hungary. Foreign language skills, especially in English and 
German, are becoming more widespread. 
¶73.  Hungary's unemployment increased from 7.9 percent in 2008 to 
10.4 in 2009, and is currently exceeding the EU-27 rate of 9.3 
percent and that in all of the neighboring countries. The labor 
participation rate is still low by European standards at 55.6 
percent, which is 1.6 percent lower than in 2008. Despite increasing 
rates of unemployment, in certain sectors there still is a shortage 
of skilled and well educated employees.  Regional differences in 
employment opportunities still prevail. The northwest region of the 
country sometimes sees shortages of skilled workers, particularly in 
the financial and marketing sectors, but east of the Danube 
unemployment levels are above average, though the labor force is 
cheaper and comparably skilled. The government is now turning its 
focus to help education adapt better to labor market requirements 
 
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and is encouraging cooperation between higher education institutions 
and the business arena. Wages in Hungary are significantly lower 
than those of Western Europe. Average Hungarian labor productivity 
is lower than the EU average, but greater than that of other Central 
and Eastern European economies. 
¶74.  Hungary's labor law, in force from July 1, 2003, made several 
important changes to labor market regulation. The law applies 
stricter guidelines regarding which personnel may be employed asindependent contractors and which must be considered employees 
(using a "service" agreement versus an "employment agreement"). 
Companies with an EU-wide presence must institute European works 
councils, which act as a mechanism for sharing information between 
labor and management. 
ROLES OF GOVERNMENT AND TRADE UNIONS 
¶75.  A tripartite National Council for Interest Reconciliation is 
legally recognized by the Hungarian Labor Law (Labor Code 
XXII/1992). Members of the Council are representatives of employers, 
employees, and the government. In practice, the Council has six 
trade union representatives and nine employer representatives. The 
Hungarian minimum wage is set by agreement of all three parties. The 
law also requires the government to consult with the Council on 
issues affecting labor, such as health and safety. The Council is 
the only group that must legally be consulted on many labor issues, 
even though only about 25 percent of the workforce is unionized. 
¶76.  The Hungarian labor code guarantees the right to join trade 
unions and gives unions the right to operate inside a company. 
Unions are entitled to negotiate collective bargaining agreements. 
The labor code limits the length of the workday plus overtime to 12 
hours; guarantees maternity leave; provides for at least 20 days of 
annual leave; mandates at least 30 days notice prior to severance 
and requires severance pay for those employed at least three years. 
The law forbids discrimination based on gender, age or nationality. 
The minimum employment age is 16 years, though apprenticeships may 
begin at age 15. Hungary adheres to ILO conventions protecting 
worker rights. Labor/management relations are better than in much of 
Europe. As a result of the current economic situation, labor-related 
strikes are occurring with increasing frequency. 
FOREIGN TRADE ZONES/FREE PORTS 
¶77.  The 1988 Law on Foreign Investment, the 1995 Law on Customs, 
Customs Procedures, and the 1995 Law on Foreign Currency permitted 
and regulated the operation of foreign trade zones. Prior to Hungary 
becoming a full member of the EU, 143 companies operated in about 
130 customs free zones, producing about half of total Hungarian 
exports. 
¶78.  According to Law CXXVI of 2003, permits for operating in 
customs free zones expired. Currently no company operates in customs 
free zones and all of them transferred their assets and continued 
operation following customs handling of their assets. The Finance 
Ministry plans to nominate customs free zones, but currently there 
seems to be little demand for this service. Possible sites could 
include Szekesfehervar, Gyor, Kecskemet, Miskolc, Zahony or 
Szombathely. 
FOREIGN DIRECT INVESTMENT (FDI) STATISTICS 
¶79.  According to the National Bank of Hungary, foreign direct 
investment between 1995 and the third quarter of 2008 amounted to 
EUR 60.4 billion (which includes shares, other participation, and 
reinvested incomes). Since a record high of EUR 6.2 billion in 2005, 
FDI has been declining. (EUR 5.7 billion in 2006, EUR 4.2 billion in 
2007, and EUR 3.0 billion in 2008). In 2009 and 2010, as a result of 
the global economic crisis, FDI inflow is expected to fall to EUR 
1.5-3 billion, before recovering somewhat in 2011. Leading foreign 
investors include Germany, Austria, the Netherlands, and the United 
States. Seventy-seven percent of total FDI is from the EU. 36.5 
percent of cumulative FDI in Hungary is in manufacturing, 14.8 
percent in trade and retail, 12 percent in services, and 12 percent 
in financial activity. Hungary has a reasonably significant level of 
foreign investment abroad, primarily through acquisitions in other 
Central and Eastern European countries. By the third quarter of 
2009, total Hungarian investment abroad amounted to 11.1 billion 
Euros. The majority of this is directed to services and crude oil 
processing. 
¶80.  Of the U.S.'s 50 largest multinationals, 40 are present in 
Hungary. The following U.S.-based companies have made major direct 
investments here: GE, Alcoa, AES, Coca-Cola, O-l (Owens Illinois), 
General Motors, Guardian Industries,  IBM, Lear Corporation,  Pepsi 
Co, Sara Lee, Procter & Gamble, Visteon, Ford, Citibank, Emmis 
International, Emerson, Zoltek, PACCAR, Celanese, Exxon Mobil, EDS, 
Sykes, Jabil Circuit, McDonald's, Burger King, National Instruments, 
AIG/Lincoln, HP, Cisco, Microsoft, Oracle, Johnson and Johnson, 
Pfizer, Lilly, Monsanto, Dow Chemical, to name a few. 
¶81.  Among the largest non-U.S. foreign investors in Hungary are: 
Deutsche Telekom, Audi, Nokia, Telenor, Vodafone, E.ON, 
Sanofi-Aventis, Electrolux, RWE, Tesco Global, Suzuki Motor, Auchan, 
Hankook, Mercedes Benz, SAP, ABB,  Philips, CP Holdings and Robert 
Bosch. 
 
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