investing guide hungary 2013 - pwc.de

INVESTINGGUIDE HUNGARY2013Why invest in Hungary?A useful guide for foreign investors with up-to-date information and inspiring success stories from around the country.

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CONTENTS03 WHAT SHOULD YOU KNOW ABOUT HUNGARY?03 Location and climate04 Infrastructure in Hungary09 Main industries10 Mercedes in Kecskemét: World class cars made in Hungary12 Audi in Győr: Good for Audi, good for Hungary15 Interview with Bridgestone factory chief executive Karato Kenji16 Interview with László Ábrahám, general manager of the Hungarian unit of National Instruments18 Interview with Csaba Vecsernyés, factory head of Becton Dickinson in Hungary

23 WHY INVEST IN HUNGARY?25 Cash subsidies26 Innovation centers in Hungary28 Shared Service Centers in Hungary31 Vocational education in Hungary32 Tax incentives

35 HOW DOES ONE INVEST IN HUNGARY?35 Establishing your business39 Hiring and employment44 Key tax related issues

47 ABOUT THE HUNGARIAN INVESTMENT AND TRADE AGENCY (HITA)47 Interview with HITA president Erzsébet Dobos

50 WHY CHOOSE PWC?

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5.0Published by PricewaterhouseCoopers Hungary Ltd. in cooperation with Hungarian Investment and Trade AgencyPUBLISHING DIRECTOR: Viktor Bálint, Marketing & Communications Director, PwC Tel.: +36 1 461 9100 (PwC in Budapest) • E-mail: [email protected] • EDITOR: Patricia Fischer • ART DIRECTOR: Tamás Tárczy PUBLISHER: Absolut Media Zrt.

01: WHAT SHOULD YOU KNOW ABOUT HUNGARY Investing Guide Hungary 2013 IGH05

ungary’s central location makes it a favorite destina-tion for foreign investors who intend to expand their opera-tions in Central and Eastern

Europe. The country’s telecommunica-tions, transport and logistics infrastructure, and the quality of education and life have attracted large amounts of foreign invest-ment to Hungary in recent years. The capi-tal, Budapest, is the center of the country’s economic activity; however, the main cities are also gaining an increasing role.

The country’s favorable geographical location places it at the crossroads of main commercial routes. From Hunga-ry, a market of some 250 million people can be reached within 600 miles (about 1,000 kilometers).

EU accession in 2004 brought both commercial and regulatory advan-tages. Becoming an EU Member state brought a free trade system, the free movement of goods, services and labor, as well as capital.

In addition to all these advantages, another of Hungary’s strengths is its well-qualifi ed labor force. Due to the high standards of its education system, the country has a highly skilled and talented workforce, with professional foreign language skills and relatively low wage requirements.

The country’s economy, mainly focused on the manufacturing industry, was hit hard by the economic crisis. The interna-tional situation became disadvantageous and debt increased.

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WHAT SHOULD YOU KNOW ABOUT HUNGARY?

LOCATION AND CLIMATE

PARTNER LETTERealizing growth aspirations brings a number of challenges in today’s economy both in Hungary and worldwide. To

navigate through this environment companies still tend to rely upon implementing cost-cutting measures and strengthening their positions at home. The importance of investments, however, hasn’t shrunk a bit. Expanding business operations cross-border and exploring new markets still have

enormous potential for growth. Despite all diffi culties, there are great opportunities ahead for foreign investors in Hungary. This is also backed by recent news of impressive investments which may give us a break from the gloomy outlook caused by last year’s rather unfavourable regulation changes. We’ve also seen examples of strategic alliances built between the government and a number of multinational companies which set a more positive tone for future cooperation.

This is the third year PwC Hungary and the Hungarian Investment and Trade Agency (HITA) publish Investing Guide Hungary. Year by year, our publication offers guidance for foreign investors and showcases the biggest investment success stories from around the country, providing both useful information and inspiration for businesses. Again, I hope that our publication will provide you with invaluable insight and a reliable guidance.

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EXPANDING BUSI-NESS OPERATIONS CROSS-BORDER AND EXPLORING NEW MARKETS STILL HAVE ENORMOUS POTENTIAL FOR GROWTH.

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Kind regards,Tamás LőcseiService Line LeaderTax Advisory ServicesPwC Hungary

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ECONOMIC DATA AND OUTLOOK1

General informationLocation: East-Central EuropeTime zone: GMT+ 1 hourPopulation: 9.96 million (2012)Participation in international organizations: United Nations, NATO, European Union, OECD, IMF, Visegrád Group, Organization for Security and Cooperation in Europe (OSCE), Conseil Européen pour la Recherche Nucléaire (CERN), Duna Committee, Schengen Agreement, World Meteorological Organization, Bank for International Settlements, International Atomic Energy Agency, Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and TechnologiesMain industries: automotive, electronics, pharmaceuticals, ICT, foodCurrency: HUF (forint)1

Economic dataLabor force: 4.2798 million (2011)Employment: 3.8119 million (2011); 3.925 million (2012 Sept-Nov)Unemployment rate: 10.9% (2011); 10.6% (2012 Sept-Nov)Gross domestic product (mil USD, PPP): 195,500 (2011); 196,100 (2012 forecast)Consumer Price Index: 3.9% (2011); 5.7% (2012)FDI – Inward direct investment: USD 4.58 billion (2011); USD 3.85 billion (2012 forecast)

Road transportation

Hungary has a central location in Europe, at the crossroads of four main European transportation corridors, including:

No. IV from northern Germany/North Sea to the Black Sea;

No. V from the Adriatic ports to Kiev-Moscow;

No. VII – the Danube River and Rhine-Main canal, from the North Sea; and

No. X the north-south corridor from the Baltic states to Turkey and Greece.

The largest Hungarian cities – Debrecen, Nyiregyhaza, Miskolc, Kecskemét, Szeged, Pécs, Győr, and Székesfehérvár – are all connected to the capital city, Budapest, by motorways (motorway total: 1,099 km).

Hungary has one of the highest motorway densities in all of Europe and the third highest road density, after Belgium and Holland. Highways reach the borders of the country and the different regions of Hungary. Neighboring countries are, therefore, easy to access.

INFRASTRUCTURE IN HUNGARY

HIGHWAY SYSTEM OF HUNGARY

SOURCE: HITA, 2013

REGIONS OF HUNGARY

SOURCE: HITA, 20131 Sources: Economist Intelligence Unit, Hungarian Central Statistical Offi ce, European Commission, Ministry for National Economy, International Monetary Fund

2 Exchange rate used: 290 HUF/EUR


Railway transportation

ue to its central location, Hungary has an exten-sive railway network. Rail transport carries more than 20% of total

freight, which is well above the EU average.Several main train lines con-nect Hungary with the main ports of Western Europe (e.g. Hamburg (D), Bremerhaven (D), Rotterdam (NL)) and the Adriatic (Koper (Sl), Trieste (I)) with regular services.The total length of the Hungarian

railway system is 7,729 km, of which double-track is 1,335 km (17.3%) and the electrified railway network is 2,628 km (34%). Záhony and its region is the junction and reloading center for European standard-gauge railways and the wide-gauge system of the CIS states. There is a direct railway connection between China and Záhony; the transfer takes ap-proximately 19 to 22 days.

Air transportation

Hungary has a number of interna-

tional airports: Budapest Liszt Fer-enc International Airport, Debrecen, and Balaton – Sármellék. There are also airports that cater for commer-cial and seasonal public flights in Győr and Pécs.

Water transportation

Hungary has excellent waterway connections, as the Danube crosses through the whole country from north to south. The Danube-Rhine-Main canal in Europe links the North Sea and the Black Sea: several

Dscheduled block train lines con-nect Hungary with the seaports of Hamburg, Bremerhaven, Rotterdam, and Antwerp (B) on the North Sea, and with Koper and Trieste on the Adriatic. The Adriatic seaports also offer alternative shipping routes from Asia. Lead times from these ports are within 16-36 hours.

Industrial & logistics marketHungary’s geographical advantages make it a popular logistics location. The

country is already a strategic location for many international distribution centers, and offers many advantages for compa-nies that wish to develop their logistics centers here in the future.

Due to its infrastructure and central position, large-volume development activity and transactions are con-centrated in the vicinity of Buda-pest. To date, more than 30 modern logistics and warehouse parks of approximately 1.3 million square meters have been developed in a 30 kilometer radius around the capital,

primarily along the M0 ring road. More than 200 industrial parks exist for greenfield or brownfield invest-ment opportunities countrywide.

Logistics activities are the most of-ten outsourced services in Hungary and the sector accounts for up to 5-6% of Hungary’s GDP.

Offi ce market

There are currently around 3.2 mil-lion square meters of offi ce space on the Budapest offi ce market, including

THE TOTAL LENGTH OF THE HUNGARIAN RAILWAY SYSTEM IS 7,729 KM

RAILWAY LINE MODERIZATION (MÁV)

SOURCE: MÁV, 2013

1.0 WHAT SHOULD YOU KNOW ABOUT HUNGARY Investing Guide Hungary 2013 IGH 11

(EEA) NATIONALS

owner-occupied buildings. The volume of modern owner-occupied buildings – properties built or renovated after 1989, excluding government-owned buildings – is estimated at 550,000 square meters. Modern offi ce space built as speculative investments in Budapest comes to about 2.6 million square meters. The majority of this (75%) is Class A quality.

The Hungarian offi ce market is fo-cused predominantly on the capital, although some modern offi ce space has also been built in the biggest regional cities.

The overall vacancy rate on the mar-ket of leased offi ces was about 25% at the end of 2010, which was the highest this fi gure has ever reached.

The vacancy rate did not change signifi cantly in 2011, and in the third quarter of 2012 the vacancy rate for offi ces built on speculative basis came to 26%. (At the end of 2007 the all-Budapest vacancy rate was around 12%.). New supply has been limited; in 2012 only two offi ce build-ings were handed over.

The high vacancy rate and, of course, current market conditions have result-ed in decreasing rental levels in the Budapest offi ce market since the sec-ond half of 2008. Rents have probably reached their lowest level and are not expected to decrease further in the new developments, but landlords in older projects and secondary loca-tions may be forced to offer even more attractive rental packages.

MAIN INDUSTRIES

he automotive sector is one

of Hungary’s core industries

and generates almost 21% of

total exports. More than 600

companies employing a total of 100,000

people are active in the sector. Four

large automotive Original Equipment

Manufacturers (“OEMs”) have production

facilities in the country: Suzuki, Audi,

Opel, and Daimler. Serial production of

Mercedes-Benz cars began in March 2012

in Kecskemét. Audi has systematically

been expanding since 2008 to establish

the world’s second biggest engine plant

in Győr, and an R&D center, in addition to

car assembly. Due to the fact that some

large multinational companies have chosen

Hungary to locate their capital investments,

they have attracted a lot of equipment

manufacturers and other suppliers.

Small- and medium-sized local automotive

companies have also become stable and

strategic partners of both locally based and

Western European car manufacturers.

The Hungarian automotive sector’s

cooperation with the local education

system is strong and focuses on R&D.

Numerous multinationals have set up

R&D centers in Hungary, including Audi,

Bosch, Knorr-Bremse, Thyssen-Krupp,

Arvin Meritor, Denso, Continental,

Visteon, WET, Draxlmaier, Edag,

Temic Telefunken, and ZF.

AUTOMOTIVE

WHAT SHOULD YOU KNOW ABOUT HUNGARY

AUTOMOTIVE PLAYERS IN HUNGARY

SOURCE: HITA, 2013


WORLD CLASS CARS MADE IN HUNGARY

he German fi rm picked a greenfi eld site when it chose Hungary’s eighth biggest city as the venue of its new base of production in Central

Europe, but is seeing the rewards for that initiative, and is now looking to substan-tially increase’s the area’s role and make it a recognized spot on the international map. “We are well on our way to making Kecskemét the center of car production in Hungary,” Daimler AG’s chief executive Dr. Dieter Zetsche said at an event introducing a new Mercedes model in Kecskemét.

January saw the fi rst of Daimler’s Mercedes-Benz CLA compact executive four-door sedans roll off the assembly line, a model that is produced exclusively in Hungary. The addition to the product line comes after the Kecskemét plant rolled out some 40,000 cars from its inaugura-tion in March 2012, which contributed to boosting the global output of the

Mercedes-Benz B-class compact sports tourer by 11% compared to 2006, totaling 145,649 units.

Daimler, and automotive production in general, enjoys the full support of Hungary’s government, which has made notable efforts to assure a comfortable operating environment for the sector and has vowed to keep the cooperation going. “If we Hungarians are capable of making a Mercedes, then we have noth-ing to fear,” Prime Minister Viktor Orbán said at the CLA launch, highlighting the work at Kecskemét as an encouraging example to balance other economic pressures weighing on the country.

Best of two cultures

Similarly, Daimler has also expressed satisfaction with the cooperative attitude of the Hungarian authorities, whether on a national or a local level. “We experience on a daily basis in both personal terms and

work in general that Hungarian and Ger-man mentalities complement one another perfectly, so we can achieve ‘the best both cultures have to offer’ in striving toward mutual success,” Zetsche said. Indeed, the company and the Hungarian government signed a strategic cooperation agreement in 2012 to underline their continued com-mitment to working together.

Daimler made the decision to ex-pand its production capacities in the compact car capacities in 2008, and announced it had chosen Kecskemét as the location of its new plant. The initiative involved expanding its stand-ing capacities in Rastatt in Germany with a €600 million investment, while spending another €800 million on building the Hungarian facility, which spans an area of nearly 441 hectares.

When it launched its Hungarian opera-tions, Daimler cooperated with 17 local component suppliers, a number that

Hungary continues to be an attractive destination for automotive investments and in 2012 welcomed the launch of a new Mercedes factory in Kecskemét. With the stated aim of turning the central Hungarian town into one of the biggest hubs of car production in the region, the company is already considering expanding its output capacity at the site, hardly a year after production started.

was boosted to 25 once production of the CLA model started in January. Daimler has said it is very happy with the available workforce, both in terms of number and quality. The com-pany currently provides jobs to 3,000 people, making a much-appreciated

contribution to the country’s labor market where qualifi ed workforce is available in plenty, but new employers are needed and always welcome.

The automaker prides itself in the fact that it has also introduced a German education model and provided specialized training to college students who are candidates to become employees once they complete their studies. Daimler’s own records show that there are now nearly 70 future special-

ists participating in the program.“The qualifi cations of our colleagues is a major factor in assuring that the cars coming out of our Kecskemét factory fully

live up to the high quality demands that anything released under the Mercedes brand must live up to,” Zetsche said. The government has also underlined its com-mitment to support industrial production in Hungary by restructuring the country’s education system to favor disciplines that

allow high school graduates to achieve the kind of degree that will help them fi nd employment with the likes of Mercedes and other manufacturers.

THE QUALIFICATIONS OF OUR COLLEAGUES IS A MAJOR FACTOR IN ASSURING THAT THE CARS COMING OUT OF OUR KECSKEMÉT FACTORY FULLY LIVE UP TO THE HIGH QUALITY DEMANDS THAT ANYTHING RELEASED UNDER THE MERCEDES BRAND MUST LIVE UP TO

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Mercedes-Benz Manufacturing Hungary chief executive Frank Klein, Prime Minister Viktor Orbán and Daimler AG chief executive Dr. Dieter Zetsche (l.-r.) and the fi rst Mercedes CLA manufactured in Kecskemét.


GOOD FOR AUDI, GOOD FOR HUNGARY”

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udi closed an exceptional 2012, with the Győr plant, situated in northwestern Hun-gary near the Austrian border, rolling out a record 1,915,567

engines, almost 30,000 more than the year before, marking an all-time record. While the number of fully assembled cars produced was lower than in 2011, Győr still produced 33,553 cars altogether from components arriving from Germany as well as from the extensive network of local vendors operating in the area.

“This record production is the result of our consistent work to develop products, which also contributes to assuring our position as one of the biggest engine manufacturers in the world,” Audi Hungaria managing director Thomas Faustmann said, commenting the fi gures.

As a prominent player of the automo-tive industry, which is one of the key areas supported by the government in its ambition to create favorable

terms for the manufacturing industry, Audi also enjoys central support like its peer German vehicle makers ac-tive in the country.

According to government spokesman András Giró-Szász, €5 billion arrived in German capital since 2010, which now provides 1.2 million jobs from the likes of Audi and compatriot German investors like Mercedes and Opel. Audi employs around 9,000 people after boosting headcount by 1,450 in 2012.

The government and Prime Minis-ter Viktor Orbán have taken every opportunity to express appreciation for Audi’s activity and highlighted that the company’s expansion at its Győr base only goes to underline the decades-long fruitful relationship between Hungary and German busi-nesses. Audi and the government has just signed a strategic partnership agreement in order to ensure the suc-cessful cooperation between the two parties in the future.

Being one of Hungary’s biggest companies based on revenue and headcount, German carmaker Audi remains highly committed to its well-established operations in Hungary and is in the fi nal stages of unveiling a brand new addition to its production site in Győr.

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AUDI WILL BE SHOULDERING SEVERAL BILLION OUT OF THE TOTAL €6.6 BILLION PROJECT TO UPGRADE THE GYŐR-PÉR AIRPORT“

“A fi nal check before the brand new cars leave the factory


For its previous expansion, Audi was rec-ognized by the government as investor of the year in 2011, while it is in the fi nal stages of fully launching production in its latest add-on in early 2013.

“What’s good for Audi is good for Hungary,” state secretary in charge of foreign trade relations Péter Szíjjártó said upon the company announcing that it would be involved in yet another infrastructural investment. Thomas Faustmann announced that Audi will be shouldering several billion out of the total €6.6 billion project to upgrade the Győr-Pér airport, located near Audi’s base. The company has a decade-long partner-ship with the airport and chose to get involved in the project since it already accounts for most of its passengers and also needs a modern travel hub

to make the best use of its employ-ees’ time when having them travel between Germany and Hungary.

The developments will make the Győr-Pér site accessible to Boeing-737 and Airbus 320 models as a result of wid-ened taxiways and the runway and the installation of a landing system. Audi is also active in the Hungarian education system and runs various initiatives aimed at recruiting new tal-ent. The efforts are aimed at multiple age groups by programs such as the Audi Technik Kreaktivity which was organized for the fi fth time in 2012 and is targeted at high schools stu-dents. Out of the 40 applications 12 teams reached the fi nals, who were challenged to design a vehicle that is not driven by an internal combustion engine. The company’s internship

program aimed at securing the con-tinued availability of skilled work-force welcomed its 100th participant in 2012 while Audi also launched a program to promote gender equality and hired 30 female workers last year who completed a training program designed specifi cally for women.

An important milestone of Audi Hun-garia was the expansion of the engine factory which will soon make a full scale automobile production possible. Due to an investment of €900 million the new factory can be opened in June this year, where there will be an annual production capacity of 125,000 units. The new A3 derivative will be manufac-tured in Győr, which will be an entirely “made in Hungary” car. Thanks to the investment, more than 2,100 additional workplaces will be secured.

BRIDGESTONE HUNGARY ON THE ROLL

After nearly a decade of production in Hungary, Japanese tire maker Bridgestone has established itself as one of the biggest and well-respected foreign investors into Hungary’s thriving automotive industry. Chief executive director Karato Kenji recounts the company’s efforts of the past years and its high ambitions for the future.

Q: WHAT COMPELLED BRIDGE-STONE TO SET UP A NEW PRODUC-TION BASE IN HUNGARY?A: Bridgestone started its Hungarian manufacturing activity in 2005. The results and experiences that we have achieved since are all very impres-sive. Our decision to invest in Hun-gary was based on good infrastruc-tural potential, geographical location, quality of workforce and favourable business climate.

Q: DIDN’T THE RECESSION IN HUN-GARY AND THE DIFFICULTIES IN GEN-ERAL THAT THE INDUSTRIAL SECTOR FACES ADVERSELY AFFECT YOU?A: Of course, there were negative effects, but these were present everywhere. Con-sidering the Hungarian recession, even though all market players felt and still feel the negative consequences, I would not say that we were ‘adversely’ affected as we sell our products outside Hungary.

Q: WHAT IS YOUR IMPRESSION OF THE ENVIRONMENT IN HUNGARY?A: The most important factor for us is the availability of qualifi ed people. At present we employ more than 400 colleagues and we are planning to hire 500 more in the upcoming 5 years. Our experiences show that the Hungarian workforce’s educational level, expertise and motivation are really good. Salary competitiveness is also an important factor compared to other countries in

the region. As our aim is to further educate our workforce in as many fi elds as possible we seriously invest in training our new and old employees.

Another weighty factor is the quality of infrastructure and the outstanding potential of the Tatabánya-Környe Industrial Park.

The third reason that I would like to point out is the stable and staunch business relationship with our Hungarian suppliers which is a serious achievement of the past years. We would like to widen our business relationships and also our Hungarian supplier base.

All our plans are aiming towards reaching our business goals and targets with a clear objective to align these with Bridgestone’s core vision which states: “Serving societies with superior quality”.

Q: HOW HAS YOUR COOPERATION BEEN WITH THE HUNGARIAN GOVERNMENT? A: It is an important aspect for us that the Hungarian Gov-ernment expressed its aim to support the realization of the Hungarian investment and as far as our experiences are concerned in this respect they assist the execution of the investment with all instruments possible. Our main goal is to respect the deadlines and to realize the investment at the highest quality. We hope that with receiving the high importance status for our investment we will be able assist the region’s and the country’s growth.

Q: HAVE YOU EXPERIENCED ANY CULTURAL DIFFER-ENCES BETWEEN HUNGARY AND JAPAN THAT SUR-PRISED YOU?A: I see many similarities and differences between the two cultures and two nations. Out from the former, I would choose cooperation for a common goal as an important similarity. The Hungarian workforce’s motivational level and professional attitude reminds me of our Japanese col-leagues. This really helps in reaching our corporate goals and future successes.

Out from the latter, I would say that pessimism is a difference. In many cases I feel that Hungarians are pessimistic about their present and future and they cannot appreciate the successes and achievements that they should be proud of.

Q: HUNGARY’S ECONOMY IS IN A RECESSION AND THE OUTLOOKS ARE MUTED. DO YOU SEE THE ECONOMY RECOVERING ANYTIME SOON?A: The Hungarian economy’s short- and long-term perfor-mance rests mostly on how many new workplaces will be created in the upcoming period. One can see that with the arrival of new companies in the Tatabánya-Környe Industrial Park the local environment and infrastructure signifi cantly developed. We are very pleased that in this process Bridge-stone can serve as a leading partner. We hope that with creating new jobs, realizing our investment and reaching our goals we will be able to assist to the regions and the coun-tries growth in the upcoming time period.

Q: IF A POTENTIAL INVESTOR ASKED FOR YOUR AD-VICE ABOUT INVESTING IN HUNGARY, WOULD YOU RECOMMEND THE COUNTRY AS A DESTINATION? A: Absolutely. I believe that the results and successes that were achieved by Bridgestone Hungary since its initial invest-ment can serve as a prime example for many Japanese and other foreign companies that our business decision to come to Hungary was well grounded and it was meant to the long-term.

Karato Kenji, CEO of Bridgestone Hungary


ELECTRONICS

The electronics industry is one of the largest industrial sectors in Hungary, accounting for 22% of total Hungar-ian manufacturing production. The country is the largest electronics producer in the CEE region, provid-

ing 26% of total regional production. Around 112,000 people are em-ployed in the sector. In addition to several prestigious OEMs, six out of the top 10 Electronic Manufac-turing Services (“EMS”) providers

in Europe are present in Hungary (Jabil, Flextronics, Foxconn, San-mina, Zollner and Videoton). Some of the companies, such as National Instruments and Jabil, also conduct R&D activities.

IN STRONG POSITION

National Instruments, based in Austin, Texas, provides ready-for-use software and modular cost-effective hardware to customers around the world. T he company opened its fi rst

overseas factory in Debre-cen, Hungary in 2001. Today, the factory has more than

1,000 employees and more than 90% of the company’s total production of hardware happens here. We talked to László Ábrahám, general manager of the Hungarian unit.

Q: WHILE MANY FACTORIES IN HUNGARY HAVE SUFFERED DUR-

ING THE CRISIS, NI IN DEBRECEN HAS BEEN ABLE TO CONTINUOUSLY INCREASE SALES AND REVENUES. WHAT MAKES YOU DIFFERENT FROM OTHER HUNGARIAN MANU-FACTURING COMPANIES?A: Our status is special as our market position is very strong: our direct sales network covers more than 40 countries around the world. Beside our direct sales offi ces we can reach all of our customers through our connected sales and dis-tribution partners. Most of the products manufactured in the Hungarian factory go to export markets, and I can proudly an-nounce that our products are very popular and the demand is continuously increas-ing. Regarding the geographical distribu-tion of sales, it is roughly 30% among the three main continents North America, Europe and Asia. In 2011, our revenue reached HUF 127 billion. That makes us the 57th biggest company in Hungary by revenue. For 2012, we expect better results, based on our interim reports.

Q: WHAT ARE THE COMPANY’S MAIN GOALS FOR 2013?A: Our factory here in Hungary is working at full capacity, so output expansion goals would be out of question. However, last year we opened a new factory in Malaysia, so our main task is to transfer knowledge and technology to this new facility. Our qualifi ed employees’ hard work and strong commitment to the company has helped us in creating a Center of Excellence in Hungary by setting a very good exam-ple to all members of the NI family. This Malaysian opening is also a challenge in that we are focusing on the new installa-tions while in the meantime remodeling our manufacturing processes. We have more than 35,000 customers around the globe, but recently we made agreements with some bigger partners, who need NI’s capacity for a specifi c time period. To fulfi ll these requirements, we have to make some changes and implement some new

methods, for example a contract manu-facturer’s scheme. Our business world is developing in this direction, so we are going ahead on this path. It is equally important to us that an agree-ment has recently been signed with the Hungarian government, which gives National Instruments with strategic partner status. In addition, we won a grant from the European Union for the construction of a new Science Park. This 6,000 sqm build-ing will be home for laboratory, experimen-tal and educational activities.

Q: MOST READERS FROM OUTSIDE YOUR FIELD ARE PROBABLY NOT VERY FAMILIAR WITH NI’S PROD-UCTS. COULD YOU BE A LITTLE MORE SPECIFIC ABOUT WHAT YOU DO?A: Our product portfolio is very wide. We manufacture more than 2,500 types of instruments and devices with a workforce of more than 1,000 employees. Amongst many other things, we produce state-of-

the-art industrial computers, measurement units and many utilities used in education. Our customers come from all over the globe, and from several industrial fi elds. No industry comprises more than 15% of our revenue. Our products are almost eve-rywhere from the Beijing Olympic Stadi-um’s structural health monitoring solutions through the control system of a medical robot used for treating brain tumors, to the LEGO Mindstorms robot brain, which was developed by NI engineers and made for creative minds everywhere on the planet. Q: THE COMPANY, AND YOU PER-SONALLY, HAVE RECEIVED MANY AWARDS OVER THE YEARS. IT IS WIDELY KNOWN THAT NI CON-TRIBUTES A LOT TO THE CITY OF DEBRECEN IN THE FIELD OF EDUCATIONAL ACTIVITIES, AMONG OTHER THINGS. HOWEVER, YOU HAVE MADE SOME RECOMMENDA-TIONS ON THE QUALITY OF HUN-GARIAN EDUCATION, ESPECIALLY THE EDUCATION OF ENGINEERS.A: Indeed, the standards of Hungarian education could be improved, just like the motivation on both the side of the educators, the students and the private sector. Our company has a similar men-torship program too, where students can spend, for example, four days at univer-sity and one day at work. This program is a win-win situation for our company and the student also. It is easier for us to choose our next colleagues when we already know them, and it is easier for them to know what is required from them and their likely tasks in the future, when they see the ‘all in a day’s work’ mental-ity from point blank range.

László Ábrahám, general manager of the Hungarian unit of National Instruments

WE MANUFACTURE MORE THAN 2,500 TYPES OF INSTRUMENTS AND DEVICES WITH A WORK-FORCE OF MORE THAN 1,000 EMPLOYEES.

MAJOR ELECTRONICS MANUFACTURING COMPANIES IN HUNGARY

SOURCE: HITA, 2013


PHARMACEUTICALS & MEDICAL TECHNOLOGY

Hungary’s pharmaceutical industry with its century-long tradition is one of the most effi cient and successful sectors of the Hungarian economy. No wonder that Hungary has the best track record in the region for FDI in the pharmaceuticals sector. With the most developed pharma-ceutical and biotechnology sectors in Central and Eastern Europe, Hungary provides an ideal base for life science companies planning further expansion in this region, or towards the Balkan states, and the more distant markets in Eastern Europe and Asia.

Pharmaceutical exports reached USD 3.93 billion in 2011. The sector directly employs approximately 15,000 people. The majority of the companies are located around four life-sciences clusters: Budapest, Debrecen, Szeged and Pécs.

COMPETING ON A GLOBAL SCALE

HAT FACTORS HELPED EXPAN-SION IN HUN-GARY?The establish-

ment of the factory in the Tatabánya Industrial Park was BD’s response to the increase in global demand for pre-fi lleable syringes. Because of the strengthening of the sector, we had to improve our capacities. The project started in 2006 when, after a survey assessing 13 countries, three locations (two in Europe and one in the Far East) were shortlisted. Of the three, it was Hungary that we select-ed in 2007. We started a greenfi eld investment in the following year and took over the plant in the Tatabánya Industrial Park in 2009.

In the past four years, we have extended the factory continuously. Although the recession has not spared this industry, its impact was far less noticeable than in the auto-motive sector. For all the diffi culties, BD could grow. We hope that our achievements help boost trust in the fi rm for further investments.

A: WHY DID BD CHOOSE HUNGARY IN PARTICULAR?Q: The country’s geographic position, and its closeness to our main European clients, was an important factor. The avail-ability of an adequate workforce and the stable political and economic environ-ment were also among the considera-tions. The smooth, cost effi cient and qual-ity implementation of the fi rst investment and the fact the plant worked in line with our expectations from the very beginning also played a role in recent investments aiming at capacity expansion.

Becton Dickinson, an American medical technology company, opened its fi rst factory in Hungary in 2009. In its choice of investment location, BD showcases well why many fi rms opt for Hungary – excellent location, highly skilled workforce, low wages and infrastructure are among the main considerations. The quality of the job done is another reason why the fi rm is contemplating further expansion. Factory head Csaba Vecsernyés talks about results and opportunities.

W

A: WHAT OPPORTUNITIES DO YOU SEE FOR FURTHER DEVELOP-MENT (RE-INVESTMENT, R&D, ETC.) IN HUNGARY? Q: The key product of the factory is glass syringes made for pharmaceuti-cal companies. The initial investment was producing for pharmaceutical and biotechnological fi rms that use those syringes in their pharma prod-ucts. In the upcoming months, we will start an expansion, which will allow us to produce another product line.

Aside from glassmaking, we are es-tablishing new technologies such as injection moldings, assembling and SAIS (Self Administration of Injectable Systems). We also look for ways to attract other sectors to Hungary. We project growth in both sectors as long as we continue to produce reliable, quality products at planned cost levels. Successful manufacturing can also provide a basis to widen value-added processes in Hungary in the future – though that will take a few years.

A: HOW DO YOU SEE HUNGARY AS AN INVESTMENT LOCATION IN A REGIONAL COMPARISON?Q: Our major competitors are not coun-tries from the region but countries from the Far East and South America. Still, it has happened that Hungary has lost an investment to a country from the CEE region.

Last year, we wanted to set up an internal shared service center but the parent company chose another CEE country in the end. Even though Hun-gary remains an attractive investment location, it has lost some of its edge in foreign investments. Stability and pre-dictability [of the legal environment] are the factors decision-makers are most concerned about.

A: WHAT DO YOU THINK ARE THE ARGUMENTS IN FAVOR THE COUNTRY?Q: Hungary’s biggest advantage is its skilled workforce and competitive wages. The availability of quality service providers, trained entrepreneurs and the supportive attitude of bureaucratic personnel is also a plus. All of the above are essential for visitors to feel that Hun-

gary can provide them with a suitable business environment. They, of course, have to be coupled/complemented with a successful business activity here and progression, the basis of which is created by the high-level knowledge of professionals.

A good geographical location and infrastructure are also assets. During internal discussion at BD, we also enhance the long-standing tradition of value-added industries – such as pharmaceutical – in the country.

“A GOOD GEOGRAPHICAL LOCATION AND INFRASTRUCTURE ARE ALSO ASSETS.”

MAJOR PHARMACEUTICAL COMPANIES IN HUNGARY

MANUFACTURING COMPANIESRichter GedeonEGIS (Servier)TEVASanofi GlaxoSmithKline

COMPANIES WITH REGIONAL DISTRIBUTION CENTERSPfi zerAstraZenecaMylan

COMPANIES WITH REPRESENTA-TIVE AND SALES OFFICES NovartisEli LillyBristol-Myers Squibb MSDRocheBayerMerck

Csaba Vecsernyés, factory head at the Hungarian unit of Becton Dickinson


FOOD INDUSTRY

lthough its share in the output of Hungarian industry has decreased over the past eight-to-ten years, the food processing industry

still remains one of the most important sub-sectors of the economy. The food industry employed 124,000 in 2011.

Its export revenues are vital to Hungary’s overall trade balance. Hungary is the only net exporter of agricultural and food products in the CEE region. The industry generates 6% of the country’s exports.Most food industry companies (more than 85%) are micro-enterprises that

employ fewer than 10 people. The share of foreign capital in the industry is 47%. The processing of meat, coffee and tea, and the manufacturing of soft drinks are the sectors with the highest share of FDI in the Hungarian food industry.

Multinational companies involved in vegetable oil processing, and confection-ary and snacks, for example, dominate the sector. There are about 200 large food producers altogether, two-thirds of which are owned by investors from abroad. Large producers primarily use Hungar-ian raw materials. Recent data demon-strates the increasing share of FDI in the

production of vegetable oils, which was the recipient of nearly half of the infl ows of foreign capital into the food industry in 2011. The processing and preserving of fruits and vegetables and the manufac-ture of pet food have also been popular targets. Major foreign investors include Bonduelle, Bunge, Givaudan, Globus, Mars, Nestlé, POPZ, and Unilever.

Although industrial players can be found all over the country, the abundance of raw material resources determines cer-tain concentrations in the regions of cen-tral Hungary, the northern and southern Great Plain and central Transdanubia.

A

OF THE COUNTRY’S EXPORTS ARE GENERATED BY THE FOOD INDUSTRY6%

ICT SECTOR

overing telecommunications, IT outsourcing, IT services, and software and hardware production, the Hungarian ICT market has grown fast in the

last couple of years and leads the region in computer assembly and communications equipment manufacturing.

The ICT sector accounts for 10% of total Hungarian gross domestic product and it employs more than 100,000 people.

The major global software developers and hardware producers are present in the country. Hardware production is centered in central Transdanubia, including NOKIA in Komárom, and central Hungary, includ-ing IBM in Vác. The majority of large soft-ware companies are located in Budapest. Several IT companies operate technology service centers and many of them have relocated their R&D activities here.

ICT related R&D drives more than a quar-ter of total R&D expenditure. Hungary has become a regional incubator for software development, including process control software, game programs and geographi-cal information technology, focusing on car positioning (“sat-nav”) systems. Hungarian software developers have achieved international success in several fi elds, such as virus protection, bioinfor-matics, and IT security. The presence and successful operation of companies such as Ericsson, Oracle and Gameloft show further evidence of the high quality of workforce in Hungary.

THE ICT SECTOR ACCOUNTS FOR 10% OF TOTAL HUNGARIAN GROSS DOMESTIC PRODUCT AND IT EMPLOYS MORE THAN 100,000 PEOPLE.

C

SERVICE PROVIDERSIBMHPTATAEricssonOracleSAPInvitelBritish TelecomVodafone

PRODUCERSIBMSamsungFlextronicsAlbacompGENokiaPhilips

MAJOR ICT COMPANIES IN HUNGARY

2.0 WHY INVEST IN HUNGARY? Investing Guide Hungary 2013 IGH25

(EEA) NATIONALS

WHY INVESTIN HUNGARY?

2.0

REGIONAL AID INTENSITY MAP*

SOURCE: HITA, 2013*Please note that the indicated intensities can be increased by 10% in case of mediumsized enterprises and by 20% in case of micro- and small-sized enterprises.

ne of the competitive ad-vantages Hungary has com-pared to other countries in the region is the govern-ment’s strong commitment

to streamlining business processes and to increasing the competitiveness of both SMEs and large enterprises in Hungary through a wide range of avail-able incentives.

Both refundable and non-refundable incentives are available to investors com-ing to or expanding in Hungary. The main types of incentives related to investments are cash subsidies (either from the Hun-garian Government or from EU Funds), tax incentives, low-interest loans, or land available for free or at reduced prices. The regulations on incentive opportuni-ties are in accordance with EU rules.

Regional aid intensity map (2007-2013)The maximum available amounts of regional incentives are based on a regional aid map. All seven regions of Hungary are qualifi ed for incentives, and aid intensity varies between 10% and 50% for large corporations, while small- and medium-sized companies

O


(EEA) NATIONALS

CASH SUBSIDIES

Non-refundable cash subsidiesThe main types of cash incentives related to investments are focused on implementing the investment (e.g. purchasing assets, construction work, etc.), creating new jobs and training employees.

“VIP” investment subsidyThe Hungarian Government provides a negotiation-based “VIP” subsidy op-portunity for investments greater than EUR 10 million with a certain number of newly created jobs, depending on the purpose and location of the invest-ment. If the investment is between EUR 10 and 25 million, the Hungarian authorities will investigate the pos-sibility of subsidizing the project from available EU Funds.

The main areas that attract support are investments in manufacturing (green-fi eld, brownfi eld or capacity extension), shared service centers, research and development, and tourism projects.In order to be eligible for the subsidy, 50-100 new jobs have to be created by the investor in the case of manu-facturing investments, depending on the region where the investment takes

place. In the case of large investments of more than EUR 50 million, 100-200 new jobs have to be created, depend-ing on the place of the investment.

In the case of establishing or expand-ing SSCs, at least 100 new jobs have to be created in general, and at least 200 new jobs in central Hungary.

In the case of R&D related investments at least 10 new jobs have to be created in connection with the R&D activity. Subsidy applications can be submitted to HITA in either Hungarian or English. The terms and conditions of the VIP subsidy are determined in the negotia-tion procedure between the investor and the Hungarian authorities.

In order to obtain a subsidy as defi ned by the current regulation, grant deci-sions must be made by December 31, 2013, which is based on the negotiated subsidy agreement.

Manufacturing investmentsSince the introduction of the VIP subsidy opportunity in 2004, 80 companies have already received Hungarian Government support. These companies had decided to carry out investments with a value of more than HUF 1,906 billion (cca. EUR

6.57 billion) and to create, altogether, approximately 35,000 new jobs. The Hungarian Government decided to grant a total of HUF 160.5 billion (cca. EUR 553 million), paid in tranches, as the projects progress. A large number of projects have been located in Budapest, central Transdanubia, northern Hungary and the northern Great Plain. Furthermore, investment volume has been especially high in central Transdanubia and the southern Great Plain due to some very large investments.

Based on the negotiations initiated within the last three years (2010 - 2012), there is signifi cant interest in the VIP negotiation process, as 45 companies have submit-ted subsidy applications for a combined investment value of HUF 1,413 billion (cca. EUR 4.87 billion).

The most dominant sectors are car manufacturing, green energy and SSCs. The eligible costs for a manu-facturing investment can be the pur-chase of the plot, construction costs or rental fee for the building, infrastruc-tural costs, the purchase of new equip-ment and machines, intangible assets, etc. The investment period is deter-mined by the investor, and usually does not exceed fi ve years. The commitment period, starting after the completion of the investment, is fi ve years.

The Hungarian Government places special importance on the development and support of R&D activity, both in terms of supporting R&D investments (R&D property and asset costs or R&D-related salary costs), and R&D project-based costs (e.g. project-related sal-ary costs, materials costs, etc.). Because of the world-class scientifi c knowledge available in Hungary, it is an attractive environment for multinationals (e.g. telecommunications companies, the automotive sector, etc.), which often collaborate with Hungarian universi-ties on R&D projects and expand their R&D capacities here.The eligible costs for R&D investment can be the asset-related costs (purchase of the plot, new equipment and machines, intangible assets) or 24 months’ salary and contributions for new employees employed within a three-year period.

R&D Investments

BOTH REFUNDABLE AND NON-REFUNDABLE INCENTIVES ARE AVAILABLE TO INVESTORS COMING TO OR EXPANDING IN HUNGARY.

are able to increase the intensity of the received subsidies by 10 or 20 percent-age points. The maximum aid intensity for the capital city, Budapest, is 10% for large corporations.The maximum available aid intensity decreases if the investment is a large investment (exceeding EUR 50 million):

50% of the maximum aid intensity deter-mined in the regional aid map is available for that part of the investment between EUR 50 and 100 million, while 34% of the maximum aid intensity for that part of the investment beyond EUR 100 million. When calculating the maximum available amount of regional incentives, all regional

incentives – including cash subsidies, development tax incentive, etc. – need to be taken into account.

Grant decisions must be made by December 31, 2013 in order to receive subsidies based on the current regional aid intensity map.


KEY ARGUMENTS WHY TO INVEST IN THE HUNGARIAN SHARED SERVICE SECTOR • Availability of skilled labor• Cost savings• Cultural compatibility and language skills• Expertise in particular back-offi ce or service activities• Technological and other infrastructure• Business security and strong intellectual property regulation

(EEA) NATIONALS

Shared Service Centers

More than 70 SSCs operate in Hungary with around 30,000 employees. The number of inquiries and the expansion of already existing companies show that Hungary is an attractive location. Several companies looking to stream-line their global operations through BPO and SSCs (e.g. IBM, Vodafone, BP, Morgan Stanley, etc.) have already found attractive locations and a pro-ductive workforce in Hungary. In 2012 the following companies decided to in-vest or to expand their already existing operations in Hungary: Avis, Raiffeisen and Tetra Pak. The eligible costs for incentives aimed at creation or expan-sion of SSCs are 24 months’ salary and contribution for new employees employed within a three-year-period.

ungarian governments have been advocating the prima-ry importance of R&D within the country’s economy for several years now. Still,

R&D spending, and the pace of develop-ments in the area, undoubtedly has room for further improvement. Most importantly, the government aimed to overtake the EU average in terms of innovation by 2013, but currently ranks 22nd on the latest Europe-an Innovation Scoreboard (EIS). There are, however, positive signs, especially when it comes to newly developed Innovation and R&D centers.

“The core function of innovation centers is to create a possibility for SMEs to access innovative technologies, and to increase the added value of their activities,” explains Dr. Sándor Erdei, board member of the Hungarian Innovation Association.

In 2011 Hungary spent HUF 336.5 billion (1.2% of GDP) on R&D and innovation, the highest amount in the past two decades. The recently published National R&D and Innovation Strategy, however, aims even higher, and states that this ratio should be increased to 1.8% of GDP by 2020. The strategy notes that while increasing the available resources is crucial, harmoniz-ing government efforts with R&D policies is just as important. “Hungarian govern-ments deem the area of R&D a long-term

investment into the future, and make any specifi c steps concerning the industry in light of the above,” the analytical section of the strategy reads.

While government-level strategy focuses on the future, exactly as it should, there already exist great examples of pro-innovation environments within Hungary. Innovation centers, most of all, aim to create small, prosperous islands with an innovation-friendly environment, even if the Hungarian economy as a whole faces major challenges.

“Currently there are fewer than 10 innova-tion centers in the country that are working at full force, and that may substantially affect the entire sector’s output,” Erdei says. “It is important to highlight, however, that in many cases we are talking about projects in their developmental phase, and altogether it is not so much about quantity, but rather quality. We expect that those projects that are currently underway will become important players in the area in the near future, too,” he adds.

The National R&D and Innovation Strategy also acknowledges the importance of these innovation centers, and states that a certain critical mass needs to be met in order to use the country’s R&D potential at full effi ciency. Thus, the strategy targets a major growth both in the number and

the output of these centers. The specifi c objectives include the opening of 30 more R&D innovation centers by 2020, and ensuring that at least 30 of the existing centers join the world’s innovation elite.

Supporting knowledge transfer is anoth-er important role of innovation centers, both for SMEs and multinational compa-nies, with a special focus on knowledge transfer between the two. That aside, it is crucial that these hubs cooperate with other knowledge centers and universities in their region, for such cooperation can spawn a real competitive advantage for all parties involved.

Another aim of the Hungarian R&D sector is to change the ratio of state subsidized and privately funded projects by increasing the percentage share of the latter. Innova-tion centers also show a great example in this fi eld: while they are almost always de-veloped using EU funding, currently about 80% of their maintenance costs are cov-ered by multinational companies. Industry experts expect that this ratio will decrease in the coming years as more SMEs can be channeled into these innovation-friendly environments, providing them with the opportunity to create self-funding coop-eration themselves. Projects within the JEREMIE program are also expected to play a critical role in defi ning the pace and growth potential of future developments.

INNOVATION CENTERS FOCUSING ON QUALITY AND KNOWLEDGE TRANSFER

H

THE CORE FUNCTION OF INNOVATION CENTERS IS TO CREATE A POSSIBILITY FOR SMES TO ACCESS INNOVATIVE TECHNOLOGIES AND TO INCREASE THE ADDED VALUE OF THEIR ACTIVITIES

““


SHARED SERVICE CENTERS IN HUNGARY

In Hungary there are

more than 70 Shared

Service Centers (SSC)

employing more than 30,000

employees, most of whom

are highly qualified young

professionals. Besides these

investments the Hungarian

Investment and Trade

Agency (HITA) had about 20

SSC projects in the pipeline

at the beginning of 2013.

he high number of shared service centers indicates that Budapest is still an attractive location for such investments,” HITA vice president Péter Far-

agó said, announcing the establishment of a new SSC in January 2013. Technol-ogy product company Systemax’s EMEA Pan-European Technology Products Group will open its fi rst SSC in a leased facility in the Corvin Promenade (downtown Budapest) in the spring of 2013. The facility is expected to ramp up to approximately 200 employees by year-end. The new center will provide administrative and back offi ce services and serve as the hub for Systemax’s Central and Eastern European sales and marketing operations.

Choosing a location is an extremely com-plex procedure with an extensive review of several cities, usually including most of Budapest’s regional peers. HITA Director of Investment Promotion Katalin Németh pointed out that as there are only slight differences in what the major cities of CEE can offer, potential investors consider many details beside the obvious key factors. Hun-gary’s outstanding mathematical tradition,

for instance, was a major consideration, when Morgan Stanley chose Budapest to locate its Mathematical Modeling Center, to provide analysis to support the company’s global fi xed income trading business, in 2005. In the case of Systemax, the local expertise was a determining factor in its choice of location. As the opinion of those already here is of major importance to the newcomers, HITA regularly organizes site visits to existing service centers.

The main advantages of Hungary cited by companies already here are a skilled workforce with good language skills, the developed infrastructure and central location. Newcomers such as Systemax evidently agree. “After a careful study of where to locate our company, we decided on Budapest due to the quality of the workforce, the education level, the excitement of people and the quality of life in the city,” said Systemax chairman and CEO Richard Leeds. “We have found that cooperation with the authori-ties here was truly exceptional com-pared to other places that we looked at.” Systemax managers also pointed out that very few countries in Europe could

match the extent of the language skills in Hungary, adding that in Budapest there are plenty of people who speak more than two languages, including for instance, less common ones such as Swedish or Norwegian. As most of the employees are young graduates, infrastructure and public transport ac-cess was also a key consideration. They noted that the geographic location of the country provides a perfect platform for the company to start operations in new locations in Eastern Europe. The EMEA group currently serves custom-ers in the UK, France, Italy, Netherlands, Germany, Spain and Sweden, with a local presence and remote customer service in Ireland, Belgium, Austria and Switzerland.

There are currently even more projects to expand existing facilities than to open new ones, Mrs. Németh said. SSCs typically hire 20 to 50 new people at a time when they add new activities to their existing portfolio. Morgan Stanley, Citibank and Diageo are among the biggest employers.

Mrs. Németh said that the most popular locations besides downtown Budapest are the Váci corridor, the Corvin promenade and the Lechner Ödön alley. The majority of the centers are in Budapest, but some are located on the countryside, for instance in Debrecen, Pécs and Miskolc.

“T

CHOOSING A LOCATION IS AN EXTREMELY COMPLEX PROCEDURE

“VIP” training subsidy

The Hungarian Government also of-fers what is known as the VIP subsidy opportunity for training employees for new positions. The subsidy is avail-able to investors creating at least 50 new jobs. The maximum amount of the training subsidy for creating 50 to 500 new jobs is EUR 1 and 2 million for creating more than 500 new jobs. It is provided for both general and special training. The maximum aid intensity is 60% in the case of general training and 25% for targeted training. The aid intensity can be increased further in the case of small- and medium-sized enterprises and for training of disabled or disadvantaged workers. The training subsidy is not a regional incentive, thus it can be granted on top of the maxi-mum regional aid intensity.

“VIP” job creation subsidyThe Hungarian Government provides a job creation subsidy for those in-vestments entitled to VIP investment subsidies and that create at least 250 new jobs in disadvantaged or least-developed micro-regions. The maximum available subsidy is EUR 3 million, de-pending on the location and the number of new employees.

Vocational training facility subsidy granted by individual decision

A subsidy opportunity is available for establishing vocational training facilities and the development of the equipment for practical training. In

order to be eligible for the subsidy, the number of vocational school students with training agreements has to be in-creased by at least 50 compared to the average number of trainees in the two school years prior to the submission of the subsidy request.

The maximum subsidy amount is EUR 8,000 per student, and the total subsidy received cannot exceed EUR 2 million per benefi ciary.

Non-refundable cash subsidies from the research and technol-ogy innovation fund1

Subsidy opportunities are available from the Hungarian national budget, primarily aimed at R&D activities involving a broad

IGH33Investing Guide Hungary 20132.0 WHY INVEST IN HUNGARY?

STUDENTCONTRACTS IN 201250,000+STUDENTCONTRACTSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS IN 2012

REALIZING GROWTH BY VOCATIONAL EDUCATION

ocational education, despite popular belief, is embedded in Hungarian business cul-ture. In the early days of the previous century, it was com-

monplace in Hungary for young would-be professionals to acquire hands-on ex-perience at respected fi rms besides their academic training. However, it seems that up until the investments of mostly German companies, such as Audi, Rob-ert Bosch, Mercedes and Siemens, this well-grounded and widespread practice was not in the limelight in Hungary.

But as it appears now, it is a good thing that it was not. Straight after launching their local operations, these fi rms sought to create an education system that resembled their native one, which is almost identical to the Hun-garian system of the early 1900’s that mixed rigorous academic training with professional on-site practice. These ef-forts are slowly gaining ground with the assistance of the Hungarian national and local governments, as well as that of vocational schools that have real-ized the potential in this opportunity. Of course, change cannot come fast, but all examples show that companies, schools, students and the government now all understand the need to create a German-style dual training system that fully adapts to both present and future business needs.

Today, the focal point of the Hungarian vocational training system is the student contract. While in 2005 there were only a little over 21,000 student contracts in the country, in 2012 more than 50,000 students had the opportunity to receive their practical training at companies. These students can make use of this new ar-rangement of spending half of their time in classrooms and the other half at compa-nies practicing what they have learned in school. There are two distinctive advan-tages to this system. First, students receive training that is academically relevant and skills that are marketable; and second, it

provides students with direct employment opportunities at companies that provide training facilities for vocational education.

The government tries to foster the devel-opment of the vocational training system by providing non-refundable subsidies for the establishment and development of vo-cational training facilities at the companies’ sites. The aim would be to increase the number of students with student contracts, meaning that more students would obtain perfectly up-to-date technology-based training and would get to know the culture and the functioning of a given company.

V

cooperation of companies, universities and research institutions. The subsi-dies are available through a tendering process.

Non-refundable cash subsidies from EU Funds2

A wide range of tender opportunities is available from EU Funds, for which investments of less than EUR 10 million can also qualify. The conditions for the EU tender application, the timing, and the total amount of the subsidy available vary from tender to tender. The tenders refl ect the importance given to support-ing R&D activities, the creation of new workplaces, environmental investments,

and technological investments (with preference given to small- and medium-sized enterprises).Cash subsidies from EU Funds for 2011-2013 are available through the New Széchenyi Plan (Új Széchenyi Terv in Hungarian, also known by its initials ÚSzT), which was announced in January 2011. The plan focuses on the following areas:• Health industry• Green economy• Enterprise development• Science – innovation• Employment• TransportationHungary’s aim is to utilize the EU tender opportunities as much as possible due to the fact that the current programming period of the EU is valid until December

31, 2013. R&D activities and investment activities (e.g. technology investments, property investments) are also subsi-dized for large corporations; the avail-able subsidy amount and conditions are specifi ed in the tender calls. Based on the number of foreign direct investments undertaken in the last couple of years in Hungary, it has become more impor-tant to subsidize suppliers; therefore, a special tender call for suppliers was launched in 2012 with a maximum avail-able subsidy amount of HUF 500 million (cca. EUR 1.72 million) per project.

1,2 The tenders are published by the National Development Agency (Nemzeti Fejlesztési Ügynökség or NFÜ) only in Hungarian: http://nfu.gov.hu. All applications have to be submitted in Hungarian and the subsidy contract is also in Hungarian.

IGH35Investing Guide Hungary 20132.0 WHY INVEST IN HUNGARY?

TAX INCENTIVES

Tax incentives are

available for companies’

future transactions.

Applications have to

be submitted to the

competent authority

in Hungary or to the

competent EU institution

before projects start.

ach development tax incen-tive may be claimed for a 10-year period (beginning after completion of the develop-ment) in Corporate Income

Tax (“CIT”) returns within a maximum period of 14 years from the original ap-plication for the incentive.

EDevelopment tax incentives

In any given tax year, the tax incentive is available for up to 80% of the tax payable, but in total up to the state aid intensity ceiling. Applications for tax incentives have to be submitted to the Ministry for National Economy, and the Hungarian Government has the right to grant permission if the aggregate eligible costs of the invest-ment exceed EUR 100 million. If the investment is below this threshold, taxpayers only need to notify the Ministry for National Economy before starting the investment.

Tax incentives are available for invest-ments if, among other conditions:• The current value of the investment is at least HUF 3 billion (cca. EUR 10 million); or• The current value of the investment is at least HUF 1 billion (cca. EUR 3.33 million) in certain designated areas; and provided that:• The investment results in the crea-tion of new facilities or the extension of existing facilities; or

• The investment results in substan-tially changed products or production processes (excluding investments in basic research, applied research and experimental development); and• In the four years following the year in which the tax incentive is fi rst used against the tax base:

• The annual average number of employees has increased by at least 150 (excluding the number of employees who are employed by a foreign branch) compared with ei-ther the year before the investment was made or the average number of employees for the three years preceding the investment (by 75 in certain designated areas); or• Annual wage costs have increased by 600 times the minimum wage (excluding the wage costs of the employees who are employed by a foreign branch) effective on the fi rst day of the tax year (by a multiple of 300 in certain designated areas) compared with either the annual wage costs of the year before the in-

vestment was commenced or the av-erage annual wage cost for the three years preceding the investment.

Provided that the investment results in the creation of new facilities or the extension of existing facilities, or substantially changed products or production processes, the govern-ment may also grant tax incentives to companies that invest in, e.g., envi-ronmental protection projects, broad-band Internet services, R&D projects, motion picture and video production, etc. if the amount of the eligible costs is at least HUF 100 million (cca. EUR 0.33 million).

Tax incentives are also available for investments that create new jobs. In the case of job creation projects, the tax incentives are calculated based on 24 months’ salary for new em-ployees employed within a three-year period. There are limitations neither on the amount of the eligible costs nor the number of newly created jobs.

TAX INCENTIVE RELATED TO R&DA CIT base allowance and Local Business Tax (“LBT”) base allowance apply to R&D activities if the taxpayer carries out R&D activities itself. The direct costs of an entity’s own R&D, and also the value of purchased R&D services – if it was not in-curred in connection with R&D services purchased from a Hungarian resident taxpayer, a private entrepreneur or a Hungarian permanent establishment of a foreign company – are deductible from the tax base.

TAX ADVANTAGES FOR SHARED SERVICE CENTERSJobs created by SSCs may entitle the companies to obtain CIT and LBT incentives. For CIT purposes, SSCs may obtain a tax allowance for job creation and in this case, depending on the location of the SSC, the amount of the allowance may be up to 12 months’ total salary expenses and contributions for newly hired employees. The LBT base may also be reduced by HUF 1 million (cca. EUR 3,333) per each additional employee in the year they are hired.

FILM, PERFORMING ARTS AND SPECTATOR SPORTS INCENTIVESIn Hungary companies are encouraged to subsidize fi lm production, performing arts and spectator sports through the high rate of tax savings available. As sponsors, companies are able to achieve tax savings up to 119% of the fi nancial support they provide for fi lmmakers, performing artists or sport clubs.

Other tax incentives

IGH37Investing Guide Hungary 20133.0 HOW DOES ONE INVEST IN HUNGARY?

HOW DOES ONE INVEST IN HUNGARY?

3.0

he same rules for establishing a business in Hungary apply to foreign individuals and legal entities as to Hungarian citizens and Hungarian entities. In the following table we have summarized the four main types of business associations most commonly established in Hungary. Foreign businesses may also conduct business activities in the form of a branch offi ce or representative offi ce established in Hungary.T

LIMITED PARTNERSHIP (Betéti társaság or Bt)

LIMITED LIABILITY COMPANY (Korlátolt felelősségű társaság or Kft)

PRIVATE COMPANY LIMITED BY SHARES (Zártkörűen működő részvénytársaság or Zrt)

PUBLIC COMPANY LIMITED BY SHARES (Nyilvánosan működő részvénytársaság or Nyrt)

MAIN CHARACTERISTICS

• Business association without legal personality;

• At least one member with unlimited liability;

• At least one other mem-ber is only obliged to provide a capital contri-bution (limited liability).

• Business association with legal personality;

• Established with an ini-tial capital contribution, the amount of which is predetermined by law;

• The members are only li-able up to the amount of their capital contribution (limited liability).


• Established with share capital consisting of shares of a pre-deter-mined number and

face value. • Invitations to the public

to subscribe for shares are prohibited.


• Established with share capital consisting of shares of a pre-deter-mined number and

face value. • The shares can only be

subscribed publicly.

FOR WHOM RECOMMENDED

Founders who do not have the minimum capital required for a limited li-ability company.

Generally recommended because of limited liability.

Founders who have the required minimum capital and intend to provide different rights to the members of the company in the form of preference shares (i.e. preferred divi-dends, preference related to voting rights, etc).

Founders who do not have the required minimum capital or if the company’s activity will be costly.

MINIMUM NUMBER OF FOUNDERS

Two One One Two

MINIMUM AMOUNT OF INITIAL CAPITAL

HUF 1/member HUF 500,000 (cca. EUR 1,724)

HUF 5,000,000 (cca. EUR 17,241)

HUF 20,000,000 (cca. EUR 68,965)

Establishing your business


tatutory accounting records must be maintained in ac-cordance with local GAAP. Bookkeeping has to be coordinated and reviewed,

and SFS has to be prepared by an accountant certifi ed and registered as an auditor or a chartered accountant at the Hungarian Ministry for National Economy. They are responsible for the Hungarian bookkeeping and for compiling and supplying true and reliable information, for maintaining and ensuring that the data disclosed

in the SFS conforms to legal provi-sions, provide a true and fair view and are suffi ciently documented in compliance with Hungarian account-ing principles; furthermore their name and individual license number are in-cluded in the SFS. Documents can be stored outside of Hungary. However, if audited by the tax authorities, original documents and records must be made available within a minimum of three working days. Documents must be stored in a readable format in hard copy for a minimum of eight years. Hungarian companies must fi le their local GAAP SFS and founder’s resolu-tion (regarding profi t distribution) annually within fi ve months of their fi nancial year-end. They must be fi led

electronically (not XBRL) using the mandatory pre-defi ned special pdf fi le format that is uploaded onto the website. Printed documents convert-ed into an image fi le format (scanned) will not be accepted. A special fi le received from the Ministry of Justice must also be fi led in order to sup-port the payment of the publication fee. Non-compliance with the above-mentioned accounting requirements can trigger penalties and criminal law consequences.In the event of non-compliance with the obligation to deposit and to pub-lish the SFS – following penalties – the tax number of the company will be withdrawn and the company will be declared terminated.

SAccounting requirements

Foreign currency bookkeeping

A company can prepare its annual fi nancial statements in the convert-ible foreign currency specifi ed in its founding document, provided that at least 25% of its (i) income, costs and expenditures; and (ii) fi nancial assets and fi nancial liabilities were earned or incurred, as applicable, in that convertible currency in both the cur-rent year and the previous year.

A company is in compliance with the conditions if the total amount of items listed in both points (i) and (ii) is at least 25%. Point (ii) does not include off-balance-sheet items.

Additionally, since 2010 all compa-nies are permitted to prepare their annual fi nancial statements in Euros (without the above limitation) if this is specifi ed in their accounting policies. However, the accounting currency cannot be changed for fi ve years after that.

Audit cycleA company’s supreme body is obliged to elect an auditor for a fi xed term of not more than fi ve years. Audits of annual fi nancial statements are not compulsory if both of the fol-lowing conditions are satisfi ed:• the company’s annual net sales revenue (calculated for the fi nancial year) does not exceed an average of HUF 200 million (cca. EUR 0.69 million) for the two fi nancial years preceding the fi nancial year under review; and• the average number of company employees for the two fi nancial years preceding the fi nancial year under review did not exceed 50 persons.

TYPE OF ACCOUNTING

RECORD

REQUIRED BY LOCAL

LAW

GAAP TO BE USED

SPECIFIC FORMAT

CURRENCY TO BE USED

LANGUAGE TO BE USED

FREQUENCY OF UPDATE

REQUIRED FOR TAX PURPOSES

Nominal ledger

Nominal ledger

Yes Local Yes (specifi c chart of ac-

counts)

Hungarian forint, Euro or

functional

Hungarian Monthly/quarterly (depending on

frequency of VAT return)

Yes – for CIT

Journal book Yes Local No Hungarian forint, Euro or

functional



No

Trial balance Yes Local Yes (specifi c chart of ac-

counts)

Hungarian forint, Euro or

functional

Hungarian Annually Yes – for CIT

Prime Books/ Sub ledgers

Fixed asset register

Yes Local No Hungarian forint, Euro or

functional

Hungarian Annually Yes – for CIT and VAT

Cash book Yes Local No Hungarian forint, Euro or

functional

Hungarian Continuous (to refl ect all events affecting liquid assets immedi-

ately)

Yes – for CIT

Purchase day book


functional



Yes – for CIT

Sales day book


functional



Yes – for CIT

Other - VAT sub ledger*

Yes Local No (to be based on

performance date)

Hungarian forint



Yes – for VAT


STEP 1 Preparation of corporate documents by a Hungarian attorney-at-law (certain documents must be coun-tersigned by a Hungarian attorney). Time to complete: minimum one day. Costs: Attorney fees range widely.

STEP 2Opening of a bank accountTime to complete: one day.Costs: depending on the bank.

STEP 3Registering the company at the Hun-garian Court of Registry and obtaining a tax identifi cation number. Time to complete: in the case of companies established using template constituting documents – one working hour from the issue of the company’s tax identifi -cation number (NB: this simplifi ed reg-istration procedure is not available for public companies limited by shares), otherwise the registration procedure takes 15 working days. It should be noted that the process could be more time-consuming if the procedure is suspended because the tax authority needs more than one day to provide the court with the tax identifi cation number. Costs, registration fees:• for limited partnerships: HUF 50,000 (cca: EUR 172);

• for limited liability companies and for private companies limited by shares: HUF 100,000 (cca. EUR 335)• for public companies limited by shares: HUF 600,000 (cca: EUR 2,069) Simplifi ed registration procedure:• for limited liability companies and for private companies limited by shares HUF 50,000 (cca. EUR 172);• for limited partnerships: HUF 25,000 (cca. EUR 86)Publication fees: uniformly HUF 5,000 (cca. EUR 17). In the case of the sim-plifi ed registration procedure, publi-cation is free of charge.

STEP 4Registration with the Hungarian tax authority, municipality, chamber of commerce and the Hungarian sta-tistical offi ce. A representative of the company or an authorized tax expert can perform the administration required for the registration. Time to complete: one day.Costs: free of charge.

One-stop shopCompanies automatically receive tax iden-tifi cation and social security numbers at the time they fi le their registration documents with the Court of Registration. The Court of Registration also forwards requests for VAT and statistical registration to the relevant authorities, at the company’s request (thus steps 3 and 4 may be combined).

Hiring and employment

Labor costsCompared with other EU countries, labor costs in Hungary are in the lower third, as shown in the following table:

UnemploymentThe global economic crisis deeply affected the Hungarian labor market: due to the fall in export orders and companies’ cost cutting measures, many employees lost their jobs. To decrease the unemployment rate the Government introduced certain measures to encourage employers to create new work places and to em-ploy certain groups of employees. The unemployment rate in Q4 2012 was 10.4%, a slight decrease compared with the previous quarter’s data (10.9%). One of the most important goals announced by the Hungarian Government is to encourage companies to create jobs.

HOURLY LABOR COSTS (EUR)

SOURCE: EUROSTAT – HOURLY LABOUR COSTS 2012

UNEMPLOYMENT RATE (2012 Q3)

SOURCE: KSH, 2012

ide Hungary 2013

7.6EURHOURLY LABOR COST IN HUNGARY

Establishing a business in Hungary step-by-step


On December 11, 2012 the government amended legisla-tion on foreigners entering Hungary in order to support special investments in the country. The legislation, if cer-tain conditions are met, will offer an advantageous struc-ture for non-EU nationals to obtain Permanent Residence Permits (or PRPs) for fi ve years.

The PRP is a Schengen residence permit that allows free movement within the European Economic Area. It is basi-cally a Hungarian ID card issued to foreigners, although it does not provide the holder with the right to vote in Hun-garian elections.

The legislation change offers an opportunity to non-EU nationals – or to companies with majority ownership by non-EU nationals – to obtain a PRP, provided they invest in Hungarian Government bonds for fi ve years. The value of the investment will be EUR 250,000, and the bonds will be issued specially to serve this purpose.

Based on the new legislation, individuals who invest in government bonds would be entitled to receive a resi-dence permit issued for “other purposes”. Having this res-idence permit for a defi ned six months period opens the right for its holder to apply for a PRP valid for fi ve years.

The new system provides signifi cant advantages com-pared to the usual process. Going through the regular im-migration process, a PRP application would only be possi-ble after having a residence permit issued for three years for working purposes. This is only given if the individual is in the possession of a valid work permit, which would assume the existence of a Hungarian company who sup-ports the application. Furthermore, before granting the work permit, the authorities would also investigate wheth-er the Hungarian or EU labor market would be harmed in any way, meaning whether there is a Hungarian or EU na-tional who would be qualifi ed to fi ll in the job in question.

The new legislation does not restrict the PRP application to having an employment relationship, the EUR 250,000 investment can be made by private individuals (although it is still worth considering the opportunities that forming a legal entity can also bring). Furthermore, there is no need to have a regular residence permit for three years for em-ployment purposes before being able to apply for the PRP.

Permanent Residence Permit in Hungary under a special scheme

Labor Law

n employment relationship can only be established through a written employment contract, regardless of the anticipated dura-tion of the employment. The employment contract must specify the employee’s base

salary and the employee’s position. After the employment contract has been signed, the employer must provide the employee with a written description of his or her most important rights and obligations within 15 days.

Effective as of January 1, 2013, the mandatory minimum gross monthly wage is HUF 98,000 (cca. EUR 338), but for workers employed in positions requiring a secondary school diploma or advanced vocational training (or higher education) it is HUF 114,000 (cca. EUR 393) per month. Employers must pay additional premiums for shifts, night work and overtime.

Standard working hours for full-time employment are eight hours a day. The employer may set out a variable work schedule within a certain period of time, which allows an unequal allocation of working hours of given employee. This period may last for four months or 16 weeks in general, but in specifi c cases i.e. seasonal work, standby, it can reach six months or 26 weeks. A specifi c provision in the collective bargaining agreement may extend this period to 12 months or 52 weeks. Employers may not order more than 250 hours of over-time a year, or more than 300 hours if a collective bar-gaining agreement is in place.

The minimum amount of paid leave is 20 days, which increases with the employee’s age (the fi rst increase is when the employee reaches the age of 25). The maximum amount of paid leave is 30 days, which applies to em-ployees over 45. Minors and employees with children are entitled to additional days. The paid leave days must be granted in the year in which they are due; however, there are options for forwarding the annual leave.

Employment may be terminated by mutual agreement, or by termination with notifi cation, or immediate termination. Employers may not dismiss employees (except during the probationary period) without suffi cient justifi cation that clearly describes the reasons for the termination. The option of immediate termination may be exercised if the other party violates an employment obligation substan-

A

tially and willfully or by gross negli-gence, or acts in a way that renders the continuation of the employment impossible. The reasons for termina-tion with a notifi cation period can be related to the employee’s perfor-mance, to the employee’s conduct in

connection with the employment, or to the employer’s operations.Special rules apply to layoffs in which numerous employees are dismissed at the same time. There are specifi c situations during which the em-ployer cannot effectively terminate

employment (i.e. during maternity leave). If the employer terminates an employment during such periods, the notifi cation period shall start immediately after the given situation ceases to exist (i.e. once maternity leave has ended). There are certain consequences if the employer unlaw-fully terminates employment (i.e. the employee may claim compensation). In the case of ordinary termination of employment, the termination period is at least 30 days, but the length of the termination period increases in proportion to the number of years the employee has spent at the employer, with 90 days as the maximum termi-nation period.

Employees are entitled to a sever-ance payment if:(a) the employer terminates the employment by termination with notifi cation; or(b) the employer ceases to exist without a legal successor; or(c) the employee terminates the employment by immediate

termination.Depending on the number of years

the employee has spent at the employ-er, the amount of the severance payment

can be between one and six months’ salary (in specifi c cases, e.g. when the employee would reach the relevant age for retirement within fi ve years, it can be an even higher amount). However, the employee is only entitled to a sever-ance payment if he/she has worked for the employer for at least three years. No severance payment shall be paid, if (a) the employee qualifi es as retired at the time of the termination notifi cation’s delivery or when the employer ceases to exist with-out a legal successor; or (b) if the grounds for termination are related to the em-ployee’s conduct in connection with the employment or related to the employee’s skills (except for health issues).

employleave). employthe notimmediceasesleave hconseqfully teremployIn the cemployis at leathe termproporemplowith 9natio

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THIRD COUNTRY NATIONALSThe Hungarian entity is obliged to submit a workforce demand application form before a work permit application can be submitted.

When the workforce demand application has been accepted, the work permit application can be submitted. The permit must be obtained before commencement of the employment.

A Schengen visa has to be obtained for the individual to enter Hungary. The application should be submitted with the work permit application at the Hungarian embassy in the individual’s home country.

After receiving the visa and entering Hungary, the individual needs to go to the Immigration Offi ce to obtain the residence permit and register his/her Hungarian address.


HUF 98,000Job protection action planTo improve the situation of unqualifi ed/unskilled employees, jobseekers, the young (under 25 years of age) and old (above 55 years of age) employees, and mothers with young children, the Government set in place a 10-point job protection action plan. With these steps the Government would like to reduce the employment costs relating to these employee types. With employ-ment of young or old people, unskilled or long-term unemployed people or mothers with young children, the em-ployer can apply social tax allowances

(50 or 100 percent). The allowance could be applied on the gross wage but at the maximum on the fi rst HUF 100,000 of the gross wage. As part of the job protection action plan the Government introduced two new taxes for small- and medium-sized enterprises. By choosing these meth-ods of taxation, SMEs can reduce their administration costs.

Tax allowance for researchersThe Government introduced a new allowance to help improve R&D. An

employer who employs researchers (with at least a Ph.D.) can apply social tax allowance (100%) on the gross wage to a maximum of the fi rst HUF 500,000 of the gross wage.

Free enterprises regionIf an investor invests at least HUF 100 million in a government-designated free enterprise region, the employer can apply social tax allowance (100 and 50 percent) in the fi rst three years, per employee. The allowance can be applied on the gross wage but to a maximum of the fi rst HUF 100,000 of the gross wage.

THE STATUTORY GROSS MINIMUM WAGE FOR 2013 IS

REMUNERATIONThe remuneration received for work should refl ect the activity carried out and the qualifi cation required for the job. The statutory gross minimum wage for 2013 is HUF 98,000 (cca. EUR 330) per month. Employers must pay additional wages for evening and night shifts, weekend work and overtime. Average monthly wages vary by region, as shown in the table below.

Total 758

Southern Great Plain 600

Northern Great Plain 594

Nosrthern Hungary 621

Southern Transdanubia 629

Western Transdanubia 689

Central Transdanubia 699

Central Hungary 908

Budapest 962

AVERAGE MONTHLY GROSS WAGE 2012 Q1-’3 (EUR)

Demographic capital, education, languageIn 2010/2011, more than 67,000 students graduated from Hungarian universities and colleges with diplomas and post-graduate degrees. The most popular fi elds of study are economics, law, IT, technical sciences, engineer-ing, health and medical sciences and human sciences.

An increasing number of primary and secondary schools teach English and German as second languages. French, Spanish and Chinese bilingual schools are also available in Hungary.

Foreign workersForeign nationals can work in Hungary under the terms of a Hungarian work contract or as assignees. The legal requirements for staying and working in Hungary applicable to EEA (European Economic Area) and third country nationals are different, as outlined on page 41.


KEY TAXRELATED ISSUES

n general, Hungarian companies are subject to corporate income tax (“CIT”), which is based on profi t before tax and is subject to certain modifi cations.

The most common deductions from the tax base include:• Losses carried forward (see details below);• Reversal of provisions;• Deductions relating to research and development (“R&D”) activity (see details below);• Depreciation based on rates pre-scribed in the CDTA;• Reversal of impairment losses;• Capital gains from the alienation of registered shares;• 50% of royalties received by Hungarian entitiesThe most common additions to the tax base include:• Provisions for prospective obligations and for future expenses;• Depreciation based on accounting rules;

• Penalties and fi nes levied by the Hun-garian tax authorities;• Costs and expenses not incurred in the interest of the company’s business activity;• Interest expenses in excess of the al-lowable amount under the thin capitali-zation rules (see details below).

The CIT rate is 10% on the fi rst HUF 500 million (cca. EUR 1.73 million) of the posi-tive CIT base without any further precon-ditions and 19% on the CIT base above this limit. If a company’s CIT base or the pre-tax profi t (whichever is higher) is less than 2% of its total revenues reduced by the cost of goods sold, the value of mediated services and the income of the foreign permanent establishments (“minimum tax base”), the company can choose to fi le a declaration presenting its cost settlement and pay CIT in accord-ance with the general provisions or pay CIT on its minimum tax base.

A special regime applies to income from royalties, under which half of the general tax rate may be applicable on royalties. Thin capitalization rules may apply to interest on any non-banking debt and noninterest-bearing loans received from related parties in excess of three times the equity. Tax losses can be carried forward indefi nitely and their use is no longer sub-ject to the Tax Authority’s approval. As of 2012, tax losses are deductible up to 50% of the positive tax base.Hungary has concluded double tax trea-ties with 79 countries, including all EU member states, Brazil, Canada, China,

Hong Kong, India, Japan, Mexico, South Korea, Switzerland, the USA, and others. A double tax treaty is also being negotiated with Qatar, while those with India and the USA are in the process of re-negotiation.Dividends, interest and royalties are exempt from withholding tax under the domestic rules.

Capital gains realized by foreign persons are exempt from CIT in Hungary. However, this exemption does not apply to capital gains related to stakes in Hungarian real estate companies; in these cases, transfer tax may also apply.

From January 1, 2012, there are further incentives available for holding intellec-tual properties. Any gains on the sale (or a capital increase that is not in cash) for qualifying intellectual property would be exempt from corporate income tax if the seller reported the acquisition to the tax authority and held the property for at least one year. Alternatively, if such reporting was not made, gains realized on a sale would still be exempt if the taxable gain is used to purchase qualifying intellectual property within three years of the sale.

Local business taxEntrepreneurs must pay the local business tax (“LBT”) in the municipalities where their activities are located.LBT must be paid on the amount of ad-justed annual turnover determined by law. When calculating the LBT base, the an-nual turnover can be reduced by the cost

ICorporate income tax

Resident taxpayers are

subject to unlimited tax

liability. Non-residents

are subject to corporate

income taxation on

the income from their

Hungarian branch’s

business activities.

of goods sold, the costs of intermediated services and subcontractors’ activities, the costs of materials and the direct costs of R&D. However, as of 2013 taxpayers are only allowed to deduct from the LBT base part of the cost of goods sold and part of the value of intermediated services as calculated based on brackets deter-mined in relation to their annual sales revenues. Royalty and interest income are exempt from LBT. The local government within whose jurisdiction the company carries out its business activities deter-mines the tax rate, but it cannot exceed the maximum determined in the Local Tax Act (2%). If a company carries out its business activities within the jurisdiction of more than one Hungarian local munici-pality, its LBT base has to be allocated amongst the different municipalities. LBT has to be paid even if the company had a tax loss for CIT purposes. The LBT base of a foreign permanent establishment of

a Hungarian company is included in the Hungarian LBT base, however the LBT base of a foreign permanent establish-ment of a Hungarian company is exempt-ed from the Hungarian LBT.

Innovation contributionCompanies fi tting the defi nition in the Ac-counting Act are subject to this contribu-tion, except for small- and medium-sized enterprises. The innovation contribution is calculated on the LBT base, furthermore, no innovation contribution is payable with retroactive effect from 2012 on that part of the tax base allocated to foreign perma-nent establishments. The tax rate is 0.3%. Value added taxAs a general rule, Value Added Tax should be charged on the following transactions:• supplies of goods and services provided

for consideration in Hungary;• intra-Community acquisitions of goods in Hungary; and• imports of goods.Certain services are exempt from VAT, in-cluding but not limited to medical, cultural, sporting, and educational services pro-vided as public services; and fi nancial and insurance services. Intra-Community sup-plies of goods and services and exports are also treated as exempt transactions.

Generally, the supply of a building or parts of a building and the land on which it stands and the rental of real estate are VAT exempted. The supply of building plots is, however, not VAT exempt. An option is available to apply VAT on the supply or rental of these real properties.

There are some special transactions that may be out of the scope of Hungarian VAT, provided that special conditions are met. These are the acquisition of any contributions in kind, the acquisition of any assets by way of succession and the transfer of a going concern.

Based on the general rule to be applied in the case of business-to-business services, the place of supply is where the customer has established its business.

The standard VAT rate in Hungary is 27% (currently the highest in the EU). There are also two reduced rates: 18% and 5%. The 18% VAT rate is applicable to certain dairy products and products made from cereals, fl our, starch and milk. The 18% VAT rate should also be applied to com-mercial accommodation services and to services that grant admission to musical and dancing events. The 5% VAT rate is applicable to certain pharmaceutical products, audio books, printed books, newspapers, district heating services and certain live performance activities.

Related companies that have estab-lished business presences in Hungary

EMPLOYEE Personal income tax 16%

Pension contribution 10%

Health insurance and unemployment contribution 8.5%

EMPLOYER Social tax 27%

Training fund contribution 1.5%

Personal income tax and social security rates applicable on employment income – 2013

IGH49Investing Guide Hungary 2013

TAX AND SOCIAL SECURITY LIABILITIES

The aim of the Hungarian Government over the next few years is to simplify administrative obligations and decrease the labor costs borne by employers.Employers can provide their employees (and in certain cases the employee’s close relatives) with fringe benefi ts (e.g. meal, vacation and recreation vouchers, local travel passes, etc.). These benefi ts are taxed at preferential rates compared with the taxation of employment income.

Benefi ts available to all employees of the employer can also be provided at preferential tax rates.

Although there is no special expatriate tax regime in Hungary for assignees, they can be provided with certain tax-free benefi ts.

EC Regulations 883/2004 or 1408/71 govern the social security coverage of international assignees from EEA countries. Third-country nationals assigned to Hungary become subject to Hungarian social security if the length of their assignment exceeds two years, unless a bilateral social security agreement stipulates otherwise

Personal income tax

3.0 HOW DOES ONE INVEST IN HUNGARY?

are entitled to form a VAT group. The es-sence of a VAT group is that its members act under a single VAT number in their transactions (i.e. they issue invoices un-der a shared VAT number and submit a single, joint tax return), and product and service supplies between the members do not qualify as business transactions for VAT purposes.

The VAT act allows Hungarian taxpayers to apply the domestic reverse-charge mechanism to the following transactions:• services related to immovable property (e.g. construction, maintenance);• sales of waste materials;• sales of carbon quotas;• sales of real estate and land if the ap-plication of VAT was chosen;• sales of certain agricultural products (e.g. maize, wheat, barley, rye, etc.);Under the general rule, VAT returns have to be submitted quarterly. However, in some circumstances monthly or annual VAT returns have to be prepared.

In the case of intra-Community trans-actions, the taxable person has to sub-mit recapitulative statements (monthly or quarterly). These statements can only be submitted to the Hungarian tax authority electronically.

From January 1, 2013 taxpayers reg-istered in Hungary have to submit a domestic recapitulative statement about any transactions where the VAT amount reaches or exceeds HUF 2 million (cca. EUR 6,900), together with the basic data of the related business partner. In re-spect of incoming invoices, those cases also have be considered and included in which the sum of the VAT on all transac-tions carried out by the same partner in a given VAT period reaches or exceeds HUF 2 million. If a domestic recapitula-tive statement has to be prepared (i.e. there are transactions with a VAT amount higher than the threshold), the VAT return can only be submitted electronically.

If a taxpayer has a negative VAT balance in a return period, this amount can be recovered, provided the tax balance reaches or exceeds an absolute value of HUF 1 million (cca. EUR 3,450) for monthly fi lers, HUF 250,000 (cca. EUR 860) for quarterly fi lers or HUF 50,000 (cca. EUR 170) for annual fi lers.

Environmental protection product fee

Businesses engaged in manufacturing, importing and intra-Community purchases of certain products must pay an environ-mental protection product fee (“product fee”). The following products are subject to the product fee in 2013:• certain petroleum products;• tires;• packaging materials (included as part of the packaging);• batteries;• commercial printing paper; and• electrical and electronic products.The parties liable to pay the product fee are the fi rst domestic distributor or the user for own purposes; in the case of domesti-cally manufactured petroleum products, the fi rst buyer from the domestic distribu-tor or the user for own purposes; and in the case of toll manufacturing, the party that orders the toll manufacturing. The product fee is calculated on the basis of the weight of the product multiplied by the fee rate.The tax returns have to be fi led quarterly, and an advance payment has to be made for the fourth quarter of the year. The National Tax and Customs Authority will be responsible for tasks related to the product fee from the beginning of 2013.In certain cases the product fee can be reclaimed if the taxpayer meets the requirements.

Transfer pricingIn Hungary transfer pricing rules apply. Accordingly, if the prices applied in related-

party transactions are not arm’s-length prices, the tax authority is entitled to modify a company’s CIT and special tax base by the difference between the prices applied and the arm’s-length prices.

Taxpayers are obliged to prepare transfer-pricing documentation on intragroup transactions and also on transactions carried out between Hungarian companies and their foreign branches. The docu-mentation has to be prepared for every contract (transaction) between related par-ties (including in-kind contributions made at the time entities are established).As of 1 January 2012, it will not be required to prepare transfer-pricing documenta-tion for transactions between a resident taxpayer’s permanent establishment and related company if the resident taxpayer under the provisions of an international treaty adjusts the corporate tax base en-suring that it does not include the foreign taxable income.

RulingsThe tax authority and the Ministry for National Economy provide the following types of ruling on submission of a formal request:• Non-binding rulings on the interpretation of regulations, provided free of charge.• Binding rulings may be requested by tax-payers and foreign entities regarding any type of tax, provided the ruling has bearing on the tax consequences of a future con-tract, transaction or chain of transactions, and a detailed description is provided.• Binding rulings may be requested regard-ing CIT, PIT, LBT and SME tax, provided the ruling has bearing on the tax conse-quences of past and ongoing transactions.• Super rulings (binding for three years, even if there are subsequent changes to the CIT law) are also available.• Advance Pricing Agreements are avail-able for the purpose of setting a transfer price or price range with the tax authority.• As of 2012, the Hungarian IP offi ce is

authorized to classify whether a specifi c future project can be treated as an R&D project. This classifi cation is binding for any other authorities.

Other taxesSeveral new taxes have come into effect in the last few years. The bank tax is levied on various fi nancial institutions, including, among others, credit institutions, fi nan-cial enterprises, fund managers, etc. The rates are different for the different types of tax payers. The majority of the bank levy is paid by the credit institutions and the applicable tax rates are: 0.15% on the fi rst HUF 50 billion of the adjusted balance sheet total, and 0.53% on balance sheet total above HUF 50 billion.

Telecommunication service providers are subject to a special tax with rates of HUF 2 per minute for calls made and HUF 2 per message sent. The monthly ceiling of the tax payable is HUF 700

per phone number for private individu-als and HUF 1,400 per phone number for entities other than private individu-als. In addition to corporate income tax, energy suppliers and public utility service providers are subject to an-other income tax, popularly known as the “Robin Hood tax”. As of 2013, the government increased its rate from 8% to 31%, although, it is possible to claim development tax incentive up to 50% of the tax liability.

Insurance tax is levied on insurance com-panies. The rates are 15% on insurance premiums for Casco insurance services provided, and 10% on property and ac-cident insurance services provided.

The buyer and fi rst domestic distributor of certain products are liable to pay a public health product tax. The products which fall under this tax are beverages, energy drinks, cocoa powder with added sugar, other pre-packed products with sugar,

salty snacks, seasonings, fl avored beer and alcoholic beverages, and fruit jam. The rates vary depending on tariff number and salt, sugar, cocoa, methylxanthine, and taurine content.

Payment service providers, credit institu-tions and special services intermediaries are subject to the fi nancial transaction tax levied on payment services, e.g. bank transfers and direct debits. The amount payable is 0.2% of the amount of the transaction but may not be more than HUF 6,000 per transaction; how-ever, all forms of cash withdrawal are subject to a 0.3% tax rate.

In addition to the above listed main taxes, Hungarian taxpaying entities are subject to several smaller taxes, e.g. excise tax, customs duties, stamp duties, registration tax, community tax, tourism tax, sector-specifi c taxes (energy tax, pharmaceutical taxes), accident tax, etc., which are not covered in this booklet.

IGH51Investing Guide Hungary 20134.0 ABOUT THE HUNGARIAN INVESTMENT AND TRADE AGENCY (HITA)

A: HOW DO YOU SEE FOREIGN IN-VESTMENTS TO HUNGARY IN 2012?Q: In this period foreign investment to Hungary can be divided into two groups: reinvestment and the booming of the automotive sector and shared service centers. The volume of reinvestment shows that companies already settled in Hungary are satisfi ed with the economic and legal environment and thus plan to develop further. For the country, it means newly created jobs and expansion. By expand-ing, automakers in Hungary such as Audi, Daimler and GM attract further investments: many suppliers have come here because of them. Both for automakers and SSCs, a highly skilled workforce able and willing to work hard also plays an important role in bringing investment here.

A: IN INVESTMENT TERMS, WHAT IS HUNGARY’S EDGE OVER OTHER COUNTRIES IN THE REGION?Q: Most recently it was Systemax Technol-ogy that chose Hungary. The reasons they listed are in general true for most other fi rms

FOSTERING FOREIGN INVESTMENTEstablished in 2011, the Hungarian Investment and Trade Agency (HITA) is tasked

with boosting foreign investments and facilitating bilateral trade. Two years into the

job, HITA has helped numerous multinationals establish themselves in Hungary. The

agency has also worked on training Hungarian companies and cities beyond Budapest

to be ready to cooperate with foreign fi rms. The president of HITA Erzsébet Dobos

talks about recent achievements and also explains why she thinks Hungary performs

better in attracting foreign investments than its peers.

that have invested here. Chief among them is the highly skilled Hungarian workforce. One major consideration for Systemax is language command. “We could fi nd peo-ple speaking two or even three languages,” pointed out Pim Dale, CEO of Systemax Group, at the press conference announcing the investment. In the case of SSCs, lan-guage and other skills often overwrite the rate of subsidies, which vary greatly based on the region. That is, a fi rm is more likely to opt for the central region and receive less state subsidy than go to a region with higher support but less chance of fi nding the appropriate workforce.

A: WHAT DO YOU CONSIDER LAST YEAR’S BIGGEST SUCCESS?Q: The above example of Systemax is truly a success story. Systemax EMEA will open a new SSC in a rebuilt quarter of Budapest, creating about 200 new jobs. The expan-sion of the AVIS SSC, Lego, Raiffeisen and Agco are also good examples.

HITA is also proud of its Reinvest program. Launched in 2012, the program maps out the needs and problems of foreign inves-tors in Hungary by organizing company surveys and visits. Last year, we got in touch with 26 fi rms from various sectors including automotive, machinery, plastics, logistics, R&D, and renewables. We have learnt much of what they are concerned about (uncertainty, demand shortage) and what they need (more cooperation with ministries and related bodies). As part of investment promotion, HITA runs supplier trainings. The aim of these pro-grams is to familiarize domestic suppliers with international practice and also prepare them to become part of the MNC sup-plier chain. ‘Fit For Automotive”, an event at which 15 domestic companies partici-pated, helped local fi rms understand better the workings of a French carmaker. We

have held numerous such training courses in the food, electronics and machinery industries as well.

A: WHAT PROGRAMS AND EVENTS DO YOU PLAN TO HOLD THIS YEAR?Q: We will continue the Reinvest program, which is an ongoing process. So is Investor-friendly Locations, a series we started last year in cooperation with our domestic regional network department. To preserve our competitive edge and also improve employment fi gures, potential invest-ment locations need to be ready and well prepared to receive investments from within and outside the country’s borders. To date, 63 cities have created their own investor-friendly strategies.

HITA will also organize investment promo-tion seminars abroad involving Hungarian diplomats. We will go on with targeted company visits and supplier training. This latter is of extreme importance as it gives Hungarian SMEs, the biggest contributors to the country’s GDP, a chance to grow on both direct and indirect export markets.

ABOUT THE HUNGARIAN INVESTMENT AND TRADE AGENCY (HITA)

The Hungarian Government founded the Hungarian Investment and Trade Agency with the aim of promoting foreign investment and bilateral trade, as well as helping SME development orientated towards EU integration. HITA has representative offi ces in six regional centers in Hungary and a foreign network operating under Hungary’s diplomatic services and special assignments in more than 50 countries. HITA’s Investment Promo-tion Department’s main tasks are:

During the pre-decision stage• Tailored information packages on the economy, industrial sectors, incentives, business environment, supplier network• Assistance in location search and evaluation• Organization of site visits and partner meetings

ERZSÉBET DOBOSPRESIDENT

+36 1 872 6500, [email protected]

KATALIN NÉMETHInvestment Promotion Director+36 1 872 [email protected]

TAMÁS KOKASHead of Department – Supplier programmes+36 1 872 [email protected]

ESZTER VARGAHead of Department – Knowledge-based Industries and Services+36 1 872 [email protected]

DOMONKOS LAKNERHead of Department - Manufacturing Industries and Energy+36 1 872 [email protected]

GYÖRGYI SOMFALVI-PETÉNYIHead of Department - Incentives +36 1 872 [email protected]

During implementation• Supplier search• Supplying information on permitting procedures• Assistance in applications for VIP incentives

In operations• Expansion assistance• After care services• Intermediary body between the government and the companies

CONTACT DETAILSHungarian Investment and Trade AgencyH-1055 Budapest, Honvéd u. 20.Telephone: +36 1 872 6520Fax: +36 1 872 6699E-mail: [email protected]: http://hita.hu

Investing Guide Hungary 2013 IGH535.0 WHY CHOOSE PWC?

We operate responsibly, and we extend the same to-wards our stakeholders. Since our principal activity is audit, creating transparency is both an integral part of our daily work and its main principle. We care about our business and social environment, and we make sure to communicate this to our stakeholders, e.g. clients and our current and future employees. We approach corporate responsibility from four perspectives which we call the four quadrants – community, environ-ment, workplace and marketplace. By considering the wider impacts of our actions and decisions in these four quadrants, we are able to make respon-sible and value-creating decisions. As a responsible business, we believe in sustainable development and strive to put the above principles into practice every day in all key areas of our operation: in corporate values, management systems, and the services we provide. This is our common goal.

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We specialize in your industry. As auditors and advisors, we need to know more about our clients than simply numbers, in order to successfully work with them. We need to know what factors are driving the in-dustries in which our clients operate, and how these factors infl uence the prospects of their business. We therefore strive to continually expand our industry expertise and experience. Our experts have up-to-date and in-depth knowledge, which enables us to understand our clients’ problems and provide solutions tailored to their specifi c needs.

We build trust. We believe that trust-based relationships are key to success in business. Therefore, our goal for the last two decades has been not only to assist our clients – whether they are multinational corporations or Hungarian privately owned businesses – as advisors, but also to become their long-term trusted partners in everyday decision-making.

We create value. We know that value is defi ned by our clients, not by us. That is why we strive to not only offer services, but to create solutions tailored to our clients’ specifi c needs. Our global professional network and decades of expertise also guarantee that we always choose the best solution for you.

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We shape our environment, rather than adapting to it. Our opinion is equally important in the business world as it is for our clients. As a leading audit and advisory fi rm, it is of special importance for us that we not only react to the events that take place around us, but take an active role and become opinion leaders in the Hungarian business community.

We listen to you. There is only one thing that is more important than our opinion, and that is our clients’ opinion. We listen to and follow the issues and challenges our stakehold-

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We are proud of what we represent. Through our work, we make companies and, in the long run, the whole business environment more transparent. It is important for us both as opinion leaders and advisors that we assist in the development of ethi-cal and sustainable business models. We have grown to become a lead-ing audit and advisory fi rm, because we have been gathering experience from all over the world ever since our establishment in 1854. We combine this knowledge with local expertise to deliver the best services to our clients. These are the achievements that we are really proud of.

WHY CHOOSE PWC?

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Investing Guide Hungary 2013 was prepared by PricewaterhouseCoopers Hungary Ltd. in cooperation with the Hungarian Investment and Trade Agency. Additional content was provided by Absolut Media Co. Ltd. as publisher.

Neither PricewaterhouseCoopers Hungary Ltd. nor the co-authors accept any responsibility for losses arising from any action taken or not taken by anyone using this publication. It should not be regarded as a basis for ascertaining tax liability in specifi c circumstances. Professional advice should always be sought before acting on any information contained in this booklet.

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