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Doing business in Hungary: What investors need to consider when entering the market

August 14, 2023
This article is also available in
Hungarian

Thanks to its strategic geographic location, globally acknowledged human capital and generous investment incentives, Hungary is definitely on the list of countries to go to when thinking about entering the European market or expanding your business activities in the region.

New investments and R&D can benefit from a wide range of tax allowances, such as tax exemption on holding structures or 50% tax allowance on royalty incomes. Additionally, Hungary has a wide international treaty network with more than 80 double tax treaties.

Being home to approximately 700 automotive companies, Hungary has become a major player in the fields of autonomous driving related R&D activities and e-mobility in the CEE region. Similarly, the ICT sector has ranked no. 1 in the Quality of scientific research institutions in the CEE region.

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Industries

In Hungary, largest industries are the following:

Automotive

Business Service Centres (BSC)

Electronics

Pharmaceuticals and Medical Industry

ICT

Food Industry

Logistics and Transportation

As for the automotive industry, Hungary has become a major player in the CEE region in the fields on autonomous driving related R&D activities and e-mobility. This industry generates a significant part of total exports. More than a 100,000 people are active in this sector. There are production facilities of four large OEMs in the country: Suzuki, Audi, Opel and Daimler and also, serial production is taking place in Hungary. Altogether Hungary gives home for around 700 automotive companies.

The ICT sector with its 250,000 employees ranked no. 1 in the Quality of scientific research institutions in the CEE region. The sector has several R&D Centres in the country and has the most advanced IT outsourcing market in the CEE region as well. For the ICT sector Hungary can offer a large pool of exceptional professionals at reasonable cost. The ICT industry has several cooperation between higher education institutions and enterprises.

There are more than 90 BSCs in Hungary with more than 60,000 employees. Developed higher education with 67 institutions is a great base for this sector.

Hungary is also the most productive sector of electronics in Central Europe with more than 110,000 employees in this sector and by generating 5,3% of the GDP. Specialized education also corresponds with the needs of the industry.

The food industry is significant in the country as the geographical conditions are ideal with available quality ingredients being 100% GMO free. The climate and soil characteristics are also ideal for the food industry.

With 85 biotech companies and having 40% of Hungarian R&D spending owned, the sector of life sciences is the most innovative sector in Hungary. The higher education can fulfil the industry’s requirements and it currently has 14,000 direct employees. With a remarkable history of life scientists and high-quality education, a globally acknowledged human capital is available in the country at a reasonable cost.

Having the Pan-European corridors crossing Hungary, Logistics & Transportation is also a significant sector in the country with generating 6% of the GDP and employing 120,000 people around the country.

In Hungary, the strongest workforce belongs to the industries that are listed above.

In Hungary, around 63% of the workers are employed in sectors of services (ICT sector, BSCs, Logistics etc.) and 22% in manufacturing, such as in industries of automotive and electronics.

Investment incentives

One of Hungary’s competitive advantages over other countries in the region is the Government’s strong commitment to streamlining business processes and increasing the competitiveness of SMEs and large firms in Hungary. To help achieve this, Hungary offers wide-ranging incentives – both refundable and non-refundable – to facilitate foreign direct investments and reinvestments by local enterprises. The main types of incentives are:

Cash subsidies (either from the Hungarian Government or from EU Funds)

Tax incentives

Low-interest loans

Special incentives of the free enterprise zones

Most incentives are available regardless of the sector itself.

There is a wide range of tax allowances for new investments and R&D. Hungary provides tax exemption on holding structures, capital gains on shares and intellectual property under certain conditions are tax free, and a 50% tax allowance is applicable on royalty incomes. There is no withholding tax on dividends, interest and royalty paid by a Hungarian company to a foreign company. Hungary has a wide international treaty network with more than 80 double tax treaties.

The maximum aid intensity is 50% in Northern Hungary, Northern Great Plain, Southern Great Plain and Southern Transdanubia; 25% in Western Transdanubia; 35% in the Central Transdanubia region; and 0%, 20% or 35% in the Central Hungarian region. Parts of Central Hungary are ineligible to receive any funding because they are much closer to the EU average in development terms. The maximum available aid intensity decreases if the investment is a large investment (i.e., exceeds EUR 50 million).

In Hungary the government can provide subsidies based on individual government decision. The Hungarian Government considers asset investments, R&D projects and the creation or expansion of business service centres as priorities in the field of investment promotion. The subsidies aim at facilitating projects with high added value in Hungary.

One of the main objectives of the post-financed cash grant system is the promotion of R&D activity (industrial research and experimental development) of large enterprises and the creation of R&D centres in Hungary in accordance with the aim of increasing emphasis on “Invented in Hungary” type of investments. This provides opportunity to grant aid for R&D projects everywhere in the country up to the maximum aid intensity of 25%.

Hungary provides development tax incentives as well for the post-investment period which means an exemption for parts of the corporate income tax payable for 13 years following installation. 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. The minimum investment volume is HUF 3 billion and minimum of 50 new jobs, or HUF 1 billion and 25 new jobs in certain regions.

Further available subsidies are:

  • Workshop establishment and development subsidy
  • Training subsidy
  • Subsidies from EU funds

Company formation

In Hungary, limited liability company is the most common legal form of businesses (abbreviated in Hungarian as ‘KFT.’). Beside limited liability companies, several legal forms are available, however this is the one to be usually chosen. To form a ‘KFT.’ it is not required to be a Hungarian citizen, however the minimum contribution is HUF 3,000,000 altogether. The registration process is done by Company Court. The liability of its members is limited to the provision of the company’s initial capital. As a general rule, members are not otherwise responsible for the company’s liabilities, meaning that the private property of the members cannot be touched by the liabilities of the company, except few cases which are specified by relevant legislation.

Incorporation

The Tax Office provides a tax ID to the new company within 1 working day if there is no legal obstacle of the registration. In case of applying the simplified procedures the incorporation if done by the resolution of the Court within 1 working day after assessing the tax ID by the Tax Office. In case of general procedures, the decision on the incorporation shall be made within 15 working days after submission of the application. The bank account opening requires personal presence from the MD of the company.

The duty (official fee) for establishing such a legal form of business depends on the nature of the legal form of the company, however it is duty free in case of limited liability companies – both in simplified and regular proceedings. If a foreign person (who is not resident in Hungary) will be the member or executive officer or the shareholder of the company, a delivery agent shall be mandated by the person. The mandated person shall have a registered Hungarian address.

For establishing a limited liability company one shareholder is required. As for the maximum, there is no upper limit regarding the number of the members.

It is possible to appoint either one or more managing director in a ‘KFT.’. The managing director(s) can also be legal persons, in this case a representative shall be appointed who is entitled to act on behalf of the managing legal person.

Official company register in Hungary is open for public and can be accessible at  https://www.e-cegjegyzek.hu.

Corporate taxes

Corporate income tax

The corporate income tax rate is 9% of the positive amount of the tax base. The tax base both for domestic and foreign businesses is the pre-tax profit modified by items declared in Act LXXXI of 1996 on corporate income tax such as loss carried forward, provisions, depreciation, declared share, declared intangible good, dividends, received royalties, research and development, costs incurred that are not in relation with the business’ interests, imposed penalties, thin capitalization, CFC.

The tax period for CIT in Hungary is the calendar year or accounting year.

Business associations need to submit their CIT returns by May 31st following the tax year. For taxpayers with a different tax year, the filing deadline is the last day of the fifth month following their business year.

Tax residence

A company is considered a resident in Hungary for CIT purposes if it is incorporated in Hungary.

Foreign companies may also be considered as Hungarian tax residents for CIT if their place of effective management is in Hungary, or a permanent establishment is formed based on the Hungarian legal provisions or on the corresponding international treatments.

VAT

The general VAT rate in Hungary is 27% in accordance with the EU VAT directive. On specific goods, a reduced rate of 5% and 18% applies.

VAT registration

In Hungary, all resident taxpayers are obliged to register for VAT by law. Before starting any business activity, taxable persons must be registered at least for a VAT number. It is possible to register for VAT retrospectively, but it brings a penalty risk for delay. There is no threshold that makes the registration obligation applicable or non-applicable.

Non-resident companies are obliged to register for VAT in Hungary before doing any activities subject to VAT, and whose place of performance is in Hungary. Distance sale falls under exception.

Other taxes

Excise taxes

  • Excise is applied for energy products, alcoholic drinks and tobacco products in accordance with EU regulations.

Energy taxes

  • Energy tax is payable by the energy suppliers, the non-private energy users and commercial entities who produce energy. The amount of the tax is assessed based on the quantity sold, used or produced.

Property tax

  • General property is not taxed, however, motor vehicles are subject of taxation by the local governments based on their age and performance.

Road tax

  • Road tax exists in Hungary in form of road fees which must be paid after some vehicle category using designated (not only motorways) routes. The amount of the fee is paid by kilometres.

Real estate tax

  • Real estate tax is a tax paid to the local governments. All local governments must apply this tax, however the method of assessing its base can differ. The subject of this tax is the private or legal person owning real estate on the first day of the calendar year.

Wealth tax

  • There is no general wealth tax in Hungary.

Company car tax

  • Passenger cars owned by legal persons (or by private persons but subject of detailed cost reimbursement) are subject of monthly company car taxes. The tax payable is based on the details of the cat (environmental class and performance).

Retail tax

  • Hungarian retail activities are subject of retail tax. The tax is only payable when exceeding HUF 500 million revenue and only after the exceeding amount a year from retail activities (commercial activities to private persons). The tax is determined by a tax rate after the revenue (0,1-4,1% depending on the revenue itself).

Green tax

  • Green tax is due by the first Hungarian supplier or user after goods which are harmful for the environmental (e.g., plastic, packaging materials, tires, electronic appliances etc.). The tax is determined by the nature of the goods and by measure units. With July 2023 the Extended Producer Responsibility system was introduced within the EU, which show similarities regarding the products affected. The EPR obligation is to be paid after circular products by the manufacturer or the first distributor. When both EPR and green tax is affected, the green tax should be decreased by the EPR fee paid.

Public Health Product tax

  • Public Health Product Tax is to be paid by the first domestic supplier or the acquisitor after some consumable product based on their ingredients. The amount of the tax payable is determined by the nature of goods and by measure units.

Any type of local or regional income tax

  • Companies operating in Hungary are required to pay local business tax (LBT) at a maximum rate of 2% in addition to the 9% corporate income tax. The exact tax rate and whether to apply LBT at all is up to the corresponding local government. The tax is payable on entrepreneurial activities performed in the administrative area of the municipality on a permanent or temporary basis. The tax base is the net sales revenue less the cost of goods sold, intermediated services, subcontractor performance, direct cost of research and experimental development and material cost.

Labour law and employment

Entitlement to work

All Hungarian citizen above the age of 16 is entitled to work and also all foreigners who hold a permit for working (in case of EU workers a registration with the Immigration Office is required in accordance with EU regulations).

Employment contracts

Employment may be based on the general rules or atypical characteristics (such as part-time, remote working, definite time, occasional employment). The most important rules of employment are regulated in the Labour Code in order to protect both parties of the employee-employer relationship.

Employment must always be declared to the competent authorities and not being compliant with regulations may pose significant number of penalties and temporary termination of business.

There are essential items in the contract, which has to be included. The parties of the employment contract must agree, by all means, on both the personal base wage and the position of the employee – these terms are essential under Hungarian labour law.

Employee taxes and contributions

Taxes on personal income

15% is the applicable personal income tax rate without threshold. For resident taxpayers, the tax base is their whole income, while for non-resident taxpayers it represents only their locally taxable incomes.

For personal income tax purposes, the taxable period in Hungary is set as the calendar year.

The due date for filing a PIT return falls on May 20 with the possibility of extension, however, the tax office needs to be notified beforehand.

In Hungary, a tax resident is:

  • a person who is a citizen of Hungary (except for dual citizens)
  • a citizen of the EU who spends more than 183 days in a calendar year in Hungary
  • a third-country citizen with permanent residence status, whose vital interests are in Hungary
  • any natural person who has a permanent home (i.e., habitually resides in the country) or has a habitual stay in Hungary (where they stay for more than 3 months without an intention to leave)

Taxable income of an individual

Taxable income, that falls under personal income tax obligation in Hungary, is:

  • income acquired in Hungary – such as income from employment
  • income acquired abroad, provided that the individual is resident in Hungary.

Social security and health insurance contributions

The social security contributions rate paid by the employer is 13%. The social security contributions rate for the employee is 18.5%.

The health insurance paid by the employer or employee is included in the social security rate. However, employees must register for health insurance as an insured person.

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