Overview

Hungary has long been a strategically important territory in Central Europe and remains a strong location for mobile foreign direct investment, and is home to a strong domestic corporate sector. Since 2001 Hungarian growth levels have averaged 4.1% pa (Source: Export Opportunities in Hungary, Enterprise Ireland). Strong foreign direct investment and exports are the driving forces in the Hungarian economy and this investment should continue to create sales opportunities for Irish exporters. Hungary is easily accessible from Ireland, both Malév Hungarian Airlines and Aer Lingus fly direct from Dublin to Budapest. In the first six months of 2006, Ireland exported a128m worth of goods and services to Hungary.

Hungary offers many opportunities to Irish SME’s willing to enter the market. Hungary offers progressive and attractive incentives to incoming firms. Hungary also possesses a well educated professionals and semi skilled labour force.

Irish Exports to Hungary in 2005

* Food and Beverages

* Telecoms Hardware

* Industrial Machinery

* Data Processing Hardware

* Pharmaceuticals

* Electrical Machinery

* Chemicals & Oils

Main Business Opportunities

According the Enterprise Ireland, the main sectoral opportunities for Irish companies in the Hungarian market are: Electronics, engineering, software and life sciences. Opportunities also exist also in tourism, transport, retail, food, environment and construction.

Source: Export Opportunities in Hungary, Enterprise Ireland)

For details on Taxation issues click here

For details on Hungary Facts & Figures click here

For details on Hungary Real Estate click here

Hungary Facts

Government: parliamentary democracy

Capital: Budapest

Regional arrangement: 19 counties and the capital

Major cities:

Budapest (population: 1 775 203)

Debrecen (population: 211 038)

Miskolc (population: 184 129)

Szeged (population: 168 276)

Pécs (population: 162 502)

Gyor (population: 129 415)

The largest rivers: Danube (section in Hungary: 417 km), Tisza (section in Hungary: 596 km), Lajta, Rábca, Rába, Zala, Dráva, Ipoly, Zagyva, Sajó, Hernád, Bodrog, Szamos, Hármas-Körös, Maros

The largest lakes: Lake Balaton (596 square km), Lake Velence (26 square km), Lake Ferto (Southern part 75 square km)

Regions: Central Hungary, Northern Hungary, Southern-Transdanubia, Northern Great Plain, Western-Transdanubia, Central-Transdanubia, Southern Great Plain

Population: 10 032 375 (1st July 2004, preliminary figure)

Population density: 109.2 people/square km

Major national and ethnic groups: Hungarian, Croatian, German, Roma, Romanian, Slovakian, Slovenian

Official language: Hungarian

Major religions: Roman Catholic, Protestant (Reformed Church and Evangelical), Greek Catholic, Jewish, Orthodox

Per capita GDP: USD 13.900 (2003, ppp)

Currency: Forint (HUF) Official exchange rates

Composition of GDP: agriculture 3.3%; industry: 32.5%; services: 64.2%

Transportation: railway 7768 km (2530 km electric), public road 81 680 km (2003 figures)

Holidays:

* 1st January (New Year)

* 15th March (anniversary of the 1848/49 revolution and war of independence; a national holiday)

* 1st May (Labour Day)

* 20th August (foundation of the Hungarian statehood, holiday of King Stephen I, a national and state holiday)

* 23rd October (anniversary of the 1956 revolution and war of independence, a national holiday)

* 25-26th December (Christmas)

* Easter Sunday and Monday (27-28th March in 2005; 16-17th April in 2006)

* Whit Sunday and Monday (15-16th May in 2005; 4-5th June in 2006)

* 1st November (All Hallows' Day)

Real Estate

Office buildings

The development of the office building market has been spectacular from early in the nineties and has concentrated mostly in Budapest. At the end of 2002 the newly built modern office building stock exceeded 1,300,000 m2. Developments initially began in the center of the city, and then expanded outside of the downtown area and into the proximity of the motorways. The center area was developed so intensively that by the end of the past decade, no developable land remained in the downtown area, thus development was limited to the refurbishment of existing buildings. The construction for the new modern office buildings continuously increased from the beginning of the 1990-s, with the exception of 1994, when a short pause occurred, the volume of leasing of newly built offices also dynamically increased. Since 1998, however, the supply of new offices has continuously exceeded the demand, thus leading to considerable overcapacity in the Budapest office building market. In 2002 the average capacity rate ranged between 73% and 80%, depending on the location and quality of the office building in Budapest. The highest quality buildings with good location tend to have a higher use rate than those of lower quality buildings, or high quality buildings with less favourable geographic location. Estimates for the upcoming years forecast growing capacity rate, due to the decreasing volume of new construction and to the possible favourable effects of the EU accession in 2004.

The existing overcapacities resulted in moderately decreasing rentals both in Budapest and in the countryside. Rentals in newly built modern office buildings located in downtown Budapest range between EURO 13 and 22 /m2/month. In older buildings of downtown Budapest, the range is between EURO 13-17/m2/month, while in lower category offices one m2 is available from EURO 9/month. The overhead costs per m2 vary between EURO 2 to 4 per month. In countryside cities the prices are significantly lower, ranging between EURO 6 and 12 /m2/month.

Retail premises

Privatization passed the ownership of national chains and smaller outlets, previously owned by the state, to domestic and foreign hands, which dominated the Hungarian retail segment until 1995. In 1995 a spectacular construction wave of shopping malls, shopping centers and hypermarkets began, first in the Budapest area, but later in the countryside as well. This led to a fast penetration by these retail forms new to Hungary into the domestic retail market. In just a few years 42 shopping malls and 49 hypermarkets have begun to operate in the Hungarian retail market. They had an accumulated gross sales of HUF 650 billion (2.7 billion USD) in 2002, which is approximately 15.5% of the total Hungarian retail market. There is a clear tendency for large shopping malls and hypermarkets to gain markets share year by year over smaller outlets and large chains with less favourable geographic locations.

Currently, there are 1,150,000 m2 of shopping malls in Hungary, of which 756,000 m2 are located in or around Budapest and the remaining 394,000 m2 are located in other major cities. Hungary is number one in the Eastern European region in the m2 per capita shopping mall and hypermarket category. The largest shopping and entertaining malls are the West End City Center, Duna Plaza, Mammut and Polus Center. Major European hypermarket chains, such as Cora, Auchan, Tesco, Metro have already established presence on the Hungarian market. The monthly rental per m2 depends on the location of the mall and the size of the outlet. The range in 2002 was between EURO 5 and 70.

Due to the large number of shopping malls and the maturity of the retail segment, few new malls and hypermarkets are expected to open in the next few years.

Industrial and warehouse properties

The creation of modern warehouses, as well as the developments of industrial/logistics centers, to meet the needs of sophisticated customers increased significantly in the past four years. Most of the developments arise from the fact that many multinational companies consider Hungary's favorable geographic location to be the logistics center of Central and Eastern Europe. The road and railway network and the River Danube make it possible for freight carriers to reach quickly and easily the major harbours of the Black Sea, Adriatic Sea and markets of the northern and western countries. Multinational development agencies recognizing the opportunity, and with the support of the Hungarian government, implemented significant investments in Hungary in this area. The size of newly built modern logistics centers in and around Budapest already exceeded 280,000 m2 in 2002. All these facilities are capable of being expanded as demand arises.

Rental fees are slightly decreasing, moving around EUR 4 to 5 /m2/month plus EUR 0.5-1/m2 overhead costs.

Foreign ownership

The acquisition of real estate other than arable lands or land in protected areas, which cannot be purchased by foreigners, is subject to a formal permit. Such permit in nearly 100 percent of the cases is granted. No permit is needed if the real estate in question is acquired by a Hungarian registered company, whose owners can all be foreigners.

The purchase of real estate must be in written form and prepared and countersigned by a Hungarian-registered attorney or a public notary. Attorney fees are negotiable, but are usually around 1to 2% of the purchase value.The purchase agreement has to be submitted to the competent land registry office within 30 days after the date of signing. The final registration of ownership rights takes about 6 months.

The rental of real estate by a foreign owner is not subject to any permit or approval. The written form of the lease agreements is not required; to avoid disputes, however, it is useful. Most lease agreement are medium or long term; it is not uncommon, however, to make an arrangement only for a couple of months. Owners usually ask for a 2 to 3 month deposit.

Taxation

Regardless of the legal form taken by a company, revenues originating from company activities are subject to corporate income tax. The majority of companies, with the exception of the smallest business organisations, are also subject to value-added tax (VAT, or ÁFA in Hungarian). In addition to the above, corporations must also meet certain other tax obligations. Natural persons must pay income tax.

Taxes are collected by the tax authority, (Adó- és Pénzügyi Ellenorzési Hivatal, or APEH, in Hungarian), based on self-assessment.

Domestic income tax regulations are overruled by international agreements aimed at the avoidance of double taxation. To date, Hungary has entered into tax treaties with 56 states. Based on taxation laws, double taxation can also be avoided (to a certain extent) even where such an agreement is not in force or is not applicable in the given situation.

Answers to the most significant tax questions based on the regulations effective as of 2004 are listed below.

1. Taxation by corporations

Corporate income tax

With the exception of individual entrepreneurs, businesses (commercial enterprises, branch offices of foreign enterprises) are subject to corporate income tax. As of 2004, the corporate income tax rate is 16 percent - one of the lowest rates of all the twenty-five member states in the European Union.

Amortisation

When determining taxable income for the corporate income tax, the tax law allows for calculating with amortisation. Accounting is done on a gross value basis: depreciation increases a corporation's pre-tax earnings, while amortisation under the tax law reduces a corporation's earnings before taxes. In certain cases, the tax law allows for amortisation or permits accelerated depreciation (e.g. immaterial assets, leased equipment).

Typical depreciation rates:

* Property: 2-6%

* Vehicles: 20%

* Machinery, equipment: 14.5 or 33% (50% for all new equipment installed in 2004)

* Computers: 50%

Losses carried forward

All losses can be carried forward without any time limit. Beginning with the fourth tax year from the start of operations, corporations may, with a permit from the tax authority, carry forward their losses if they produced losses for the previous two years or if revenues did not reach 50 percent of all expenses in the given tax year. The tax authority issues such a permit only if the loss was caused by unavoidable external circumstances. Losses by credit institutions can not be carried forward.

Tax credits

Tax credits reduce corporate income tax and can also reduce taxable corporate income. You can find more information on tax credits in the investment incentives section.

Transfer fees

The prices applied in transactions between associated companies must be equal to the market prices they would have applied towards independent partners. If a rate different than the market price is applied, the tax authority or the taxpayer may modify the amount of taxable income. Corporations may opt for the comparative pricing method specified by OECD, the retail price method, or the cost-benefit method. If the abovementioned methods cannot be applied, a customised method may be used. Until their annual tax return, corporations must document whether the price set in a contract executed with an associated company is equivalent to the market price determined in accordance with the method selected.

Corporate withholding tax

All interests, royalties, or remunerations for performance, artistic, sporting or demonstration activities paid to companies with foreign headquarters are exempt from tax at source.

Corporate dividend tax

Domestic corporations subject to corporate income tax do not pay dividend taxes. Dividends received reduce the taxable corporate income. Those receiving dividends abroad must pay a 20 percent tax on dividends, but this amount may be reduced on the basis of a tax treaty. Parent companies and subsidiaries of EU Member States are exempt from the dividend tax if the foreign national receiving dividends has had a minimum 25 percent stake in the Hungarian company for two consecutive years.

2. Taxation of private individuals

The income of private individuals resident in Hungary is subject to taxation (complete taxation liability), whereas private individuals living abroad can only be taxed for earnings originating in Hungary or foreign earnings taxable in Hungary in accordance with a tax treaty. Wages earned by foreign nationals employed in Hungary are also taxable, excepting where the foreign employer cannot be taxed in Hungary in accordance with a tax treaty. Earnings abroad do not need to be transferred to Hungary in order to be eligible for taxation.

In accordance with the income tax law, Hungarian citizens are classified as private entities with domestic residence. Foreign nationals are classified as private entities with domestic residence if their permanent address or usual residence or the centre of their interests is located in Hungary. If a tax treaty is applicable to a case, then it overrules the provisions of domestic law.

Tax schedule of 2005

Tax rates paid after the following incomes:

* up to 1,500,000 HUF 18 percent

* over 1,500,001 HUF 270,000 HUF, plus for the portion over 1,500,000 HUF: 38 percent.

The minimum wage (amounting to 57,000 HUF per month, approx. 230 EUR as of 1 January 2005) is tax exempt. This tax exemption is realised by means of tax refunds.

Tax credits are available through deductions from the amount of tax calculated for consolidated earnings. Titles of tax credits include: voluntary insurance, support for adult education, intellectual activities, grants, etc.

Certain types of income are taxed separately. As an example:

* Dividend: 20/35 percent (up to 30% of the equity capital there is a 20% tax rate; over that it is 35%).

* Interest is normally not taxable.

* Exchange gain: 20%

* Securities, sale of real estate property: 20%

* Stock market transactions: 0%

3. Indirect taxes

Value-added tax (VAT, or ÁFA in Hungarian)

VAT is the most significant indirect tax in Hungary. Its major characteristics are as follows:

* The general tax rate is 25 percent,

* There are two preferential rates: 5 percent (certain medications and medical accessories, books) and 15 percent (e.g. food items)

* Banking services and certain other business activities are tax exempt. Exports have a 0 percent VAT rate. With the exception of banks and other companies conducting VAT-free activities, the VAT paid to others can generally be deducted from the VAT a company has invoiced and thus from the total VAT to be paid to the tax authority.

The portion of the VAT paid in excess of the VAT invoiced may be reclaimed for the next tax return period. The tax authority pays a tax refund if the amount of sales liable to VAT exceeds 4 million HUF (approx. 15,000 EUR) within the tax year, or if the VAT related to assets acquisition exceeds the amount of VAT to be paid by at least 200,000 HUF (approx. 750 EUR).

Excise tax

This type of tax is paid upon the domestic production and import of products liable to excise tax. Products burdened with excise tax are as follows: Petroleum products (e.g. unleaded gasoline (except for Octane 98): 103.5 HUF/litre, diesel: 85 HUF/litre), Alcoholic beverages, beer, wine, champagne, intermediary alcohol products (e.g. grape-wine and other wine types at 8 HUF/half litre), Tobacco products (.e.g. cigarettes at 6,450 HUF/1000 sticks and at 23 percent of the retail price).

4. Other taxes

The general characteristic of these is that they can be accounted as expenses, and they therefore reduce the amount of taxable corporate income.

Local taxes

As empowered by law and at maximized values, local governments have the right to levy local taxes within their jurisdiction. These may include the following:

* Property tax

* Utility tax

* Tourist tax

* Local industrial tax.

Among these, the local industrial tax is the one that has a significant bearing on companies. This tax is calculated on the basis of the combined amount of consolidated net earnings plus 50 percent of interests received, minus the purchase cost of goods sold, material costs, and intermediated services costs. The upper limit of the tax is 2 percent, but each local government has the right to determine an exact rate within this range. Local governments may grant tax-free status or tax discounts only to those companies whose taxable income for the local industrial tax does not exceed the amount of 2.5 million HUF.

Vehicle tax

The owner or the operator must pay a vehicle tax for each vehicle registered in Hungary and for all trucks registered abroad (except for those registered in EU Member States). The taxable amount for trucks is determined on the basis of the empty weight plus 50 percent of the load weight; for other vehicles the amount of tax is calculated on the basis of the empty weight. The rate of this tax is an annual 1,200 HUF (approx. 4.50 EUR) per 100 kg.

Innovation contribution

All commercial enterprises must pay this tax except for micro-companies and commercial enterprises without a legal predecessor in the year of their foundation. The general rate of contribution in 2004 is 0.2 percent, 0.25 percent in 2005 and 0.3 percent in 2006. For small enterprises it is 0.05 percent in 2004, 0.1 percent in 2005 and 0.15 percent in 2006. This contribution is calculated on the basis of consolidated net earnings minus the purchase cost of goods sold, material costs, and intermediated services costs. The direct costs of research and development may be deducted from the calculated amount of this contribution.

Environmental pollution fee

Those companies emitting environment-polluting materials into the air, the waterways, or the soil must pay this tax in proportion of the type of materials emitted, their concentrations and the location as specified by the prevailing laws.

Energy tax

This tax must be paid in certain cases on natural gas (at a rate of 56 HUF/GJ) and electric power (186 HUF/MWh) (e.g. when selling energy products outside the scope of the residential range, to service providers, energy brokers, or so-called authorised main energy consumers).

Relevant legal statutes:

* Act LXXXI/1996. On Corporate and Dividend Tax

* Act CXVII/1995 On Personal Income Tax

* Act LXXIV/1992 On the VAT

* Act CIII/1997 On the Excise Tax and the Specific Regulations Governing the Distribution of Products Subject to Excise Tax

* Act C/1990 On Local Taxes

* Act XCII/2003 On the Rules of Taxation

* Act LXXXXIX/2003 On the Environmental Pollution Fee

* Act LXXXVIII/2003 On the Energy Tax