Why Should Companies Set Up Business in Hungary?
We speak with Stanka Gergely on why foreign companies should set up business in Hungary and the regulations and policies they should be aware about.
What are the common reasons to why [foreign] companies will establish a business in Hungary?
There are several common reasons to why foreign companies establish a business in Hungary. Being in the heart of Central Europe, a region which now works as a catalyst for the growth of the European Union, it certainly has a geographical advantage. Besides location, the well trained labour force and foreign investor friendly environment has always attracted investors right from the fall of the communist regime. Historical reasons should also be mentioned as one of the key factors, as a result of which Hungary has always been a preferential choice for Austrian and German companies to establish a business abroad.
Apart from the above reasons, the ever ruling governments, regardless of their political sides have always spent great attention on developing the infrastructure of the country to promote a better investment environment and also to attract investors not only to the capital, Budapest, but to every region of Hungary. In recent years, the government also attempted to attract foreign investors by introducing very low corporate income tax level and enacting a flexible Labour Code. Large investments also receive additional support or even special legal treatment by the government and governmental agencies.
In general, the legal environment is investor friendly and foreign investors are always welcomed.
How do you assist clients as such?
In most cases we start to assist our foreign investor clients even before they create their local business. Such assistance includes, among others, an introduction to the country by preparing summaries of applicable local laws or even discovering “up for grab” benefits that a potential investor may receive on the basis of choosing Hungary as a place to invest. All of these activities are to assist clients in their decision making and to create and start their local business, in order to be able to act quickly once the decision has been made.
Companies in Hungary, regardless of their corporate form, shall be registered with the competent Court of Firms. Therefore, in regard to setting up a local business, we assist our clients by preparing all the necessary corporate documents that are needed for the registration of a local company. If requested, we also draft the contracts and prepare and proceed with the fillings that are necessary to the commencement of the local operation, including, among others: licensing, construction and employment agreements, or vendor and sales contracts. Once the local business has been established, our role varies on the basis of the clients’ needs. Depending on the request of our clients, we are involved in the day-to-day legal issues or we provide legal assistance on a project based basis.
Accordingly, trading into Hungary is very much based on the principles of EU law. As for companies seated out of the European Union the common administrative and customs rules shall apply for trading into Hungary.
What do these companies need to prepare for? What regulations should your clients be aware about?
In general, the legal environment is investor friendly and foreign investors are always welcomed. Hungary is part of the European Union and has approximated its laws to the EU laws in full, which makes it easier to establish a business. Creating a local company is fast and easy. In most cases, the most time-consuming part of setting up a company in Hungary is to get the founding documents duly executed, notarized and apostilled and returned.
From a practical point of view, it should be mentioned that like in all other countries certain activities are subject to a licence or concession in Hungary. In general, obtaining such licence rarely has unusual conditions that need to be fulfilled. Conditions are all set by law, however, it is well advised to check the practice of the competent licensing authority as to its interpretation on how such conditions could be fulfilled.
Interpretation of the applicable laws given by the authorities could be surprising and may cause unexpected risks in the local operation. Notably, the practice of the Hungarian Taxation Office and the supervising administrative courts in Hungary are extremely strict and the European Court of Justice often finds the interpretation of EU tax laws in Hungary excessive.
Hungary also has a strict approach to consumer rights. It could be said that to some extent the requirements set by the law making bodies in Hungary to protect consumer right are much more protective for the consumers, than in other EU countries. Such a strict and protective approach is reflected in the practice of the government agencies responsible for consumer protection.
Besides some strict approach of certain public administrative bodies, on the other hand, in recent years the government and public administrative bodies have been continuously making considerable efforts to speed up and simplify administrative proceedings. In most cases, filings can be done or even may only be done by electronic means and statutory deadlines to proceed are better respected.
Another positive aspect for investors is that the Central Bank, through certain programmes and the government through state owned banks, make vast financial resources available for investors on low interest rates. State sponsored investment programmes are also frequently available.
Certainly, changes to the regulatory regime are often referred to as a challenge that both foreign and local companies face in Hungary.
How can companies trade into Hungary?
As aforementioned, Hungary is a member of the EU. Accordingly, trading into Hungary is very much based on the principles of EU law. As for companies seated out of the European Union the common administrative and customs rules shall apply for trading into Hungary.
Therefore, free movement of goods and services in granted local presence is always well advised. Instead of providing cross border services to Hungary, creating a local subsidiary and setting up a strong local management with the involvement of executives of the parent company, may prove to be practical and beneficial.
As for the future we expect further laws to be introduced to promote foreign investments in Hungary.
What reports do you assist your clients with?
Mostly we provide reports to our clients on the changes of applicable Hungarian law. If requested, we also provide our clients with updates on the changes of relevant court practice, regardless of the fact that Hungarian procedural law – except for some guiding decisions of the Supreme Court -, does not recognise case law. This later is helped by the fact that most of our partners do litigation and arbitration. In general, we believe that the assistance and the service that we provide to our clients is more effective if we have adequate practice in court, so we can have a direct and first hand experience of the understating and the approaches of the courts regarding certain risks and challenges that the our clients may face in the course of their operation in Hungary.
What common challenges do foreign companies face when setting up in Hungary?
Certainly, changes to the regulatory regime are often referred to as a challenge that both foreign and local companies face in Hungary. These changes could happen very quickly and very dramatically and could considerably affect the day to day operation and the profitability of complete industries. Although it is not specifically a legal issue, it should be mentioned that the unemployment rate is just above 3%, which at one hand reflects the strength of the economy, but on the other hand, at least in certain professions, it results in shortages of adequate labour force.
What changes do you expect that may affect foreign companies?
As for the future we expect further laws to be introduced to promote foreign investments in Hungary. The subject of these laws could be to create shorter and simple administrative proceedings and more flexible labour conditions. We also expect new laws and measures to attract more investments targeting local resources in the field of research and development and informational technology.
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Stanka Gergely is one of the founding partners of BPSS Law Office. His main areas of practice are dispute resolution, corporate law and banking and finance. He is also listed as an arbitrator on the panel of the Permanent Court of Arbitration of the Hungarian Chamber of Commerce and Industry for banking and financial services matters.