Written by Steven Paul CEO, Kirra Advisory Ltd
Hungary enjoys a particularly strategic location in Central Europe. The country poses attractive business opportunities for international trade and small medium businesses or established corporates, thanks to its export-driven and open economy, which has been on a fast track to growth in recent years. Based on numerous sources Susanna Toth and Steven Paul of the Hungarian British Business Alliance (HBBA) shares a renewed perspective for firms wanting to explore or grow their businesses in the markets, and an outlook for 2023 and beyond.
Why is Hungary Important for International Business?
Foreigners doing business in Hungary will benefit from the educated and skilled workforce and business culture, which is close to that of Western countries.
Like many countries in the Europe, Hungary transitioned from a centrally-planned socialist economy to a market economy after the fall of communism in 1989 and has been a member of the European Union since 2004. The capital city, Budapest, hosts offices of many multinational companies, including Microsoft, Pfizer, IBM, and Ericsson, and is a center of technology and innovation.
According to Uniworld, Hungary has over 400 wholly-owned US companies, while the government states that US affiliates employ 110,000 Hungarians.
Foreign direct investment in Hungary has helped to improve infrastructure, modernize industries, boost exports, create jobs, and put growth on the fast track. Since 1989, the cumulative FDI stock accounts for more than $98 billion and is focused on key sectors like IT, automotive, agriculture, etc.
To stimulate even more foreign investments, Hungary’s corporate tax is at 9%, making it one of the countries with the lowest corporate tax rates in the European Union.
The country ranks 52nd out of 190 countries when it comes to ease of doing business. It landed the first spot when it came to trading across borders, was the 25th best country for enforcing contracts, and did quite well at registering property as well (DB rank 290.
Unique Features of Doing Business in Hungary
Hungary’s direct investment abroad expanded to $1.6 billion in March 2022. According to Trading Economics, Hungary’s Foreign Direct Investment is forecasted to rise to around 594.05 million Euro in 2023 and 598.26 million Euro in 2024.
Foreign investment has a considerable impact on Hungary’s business environment. As a result, business opportunities in Hungary are rife and quite accommodating to foreigners. Aside from an excellent geopolitical location, Hungary has various benefits to offer.
As a part of Central Europe, Hungary connects Eastern and Western Europe and continues to be a social and economic hub in the region, but also for global interconnection into Europe. The country is at the crossroads of three of Europe’s transport corridors, has the highest motorway traffic in Europe, and has four regional business and three international airports.
The country’s geographical location means it can make morning calls with Asian countries and afternoon calls with the US, which is why it is one of the preferred locations for shared service centers and a perfect place to establish a business hub.
Hungary also has one of the lowest capital requirements in Europe. For a corporation, the minimum capital requirement is 18,000 euros, and for an LLC, this requirement is further reduced to 10,000 euros. To put things in perspective, a joint-stock company in Germany will need a minimum capital requirement of 50,000 euros.
This means businesses will have less of their capital locked up, and it is another great reason to invest in Hungary.
Businesses that are looking to employ talented human workforce at a beneficial cost can do so in Hungary. As of December 2021, the labor force consists of 4.7 million individuals. The country has a low unemployment rate of 3.6%, a minimum wage of 563 euros, and a minimum wage for skilled workers of 732 euros.
Personal income tax is at 15%, and the employee’s contribution is 18.5%. Employers have a social tax rate of 13%, and they can apply for various social tax allowances for certain employees as well.
The country also has an advantageous corporate income tax rate of a flat 9%. There is no withholding tax or requirement for any outbound payments made to foreign business entities. Local businesses may be charged a tax anywhere between 0 to 2%. Dividends are also exempt from corporate income tax unless received from the CFC. Furthermore, it also operates a participation exemption regime for the purpose of capital gain taxation as well as a favorable group taxation regimen. Foreigners may also get the opportunity for VAT-free trading.
Keep in mind, though, that Hungary is not exactly a tax haven. It is a member of the EU, OECD, NATO, and the WTO and offers valid solutions for tax reduction.
As a part of the EU, much of Hungary’s legal business climate is in harmony with European law. The country allows new business entities to be established in various forms, but the most common type is a limited liability company.
In many simple cases, it takes no more than a day or two to register a Hungarian company. The associated costs are considered quite low in the EU. Another benefit of doing business in Hungary is the wide range of incentives offered by the government to increase competitiveness.
Hungary offers a maximum regional aid fund that varies from 30% to 50%. In some cases, the aid may be increased for SMEs. In addition, counties eligible for Just Transition Fund may get an additional aid of 10% if the EU Commission approves of their status.
The government also offers a VIP investment cash subsidy, which is designed to attract investments in the manufacturing and shared service center sectors.
Another major cash subsidy opportunity based on individual government decisions is the Investment Aid Scheme for Large Enterprises, which was created to promote investments in the industrial sector and in storage and warehousing.
Furthermore, businesses may also be eligible for various tax incentives for energy-efficient investment projects as well as subsidies from the EU funds.
Market Challenges in Hungary
Hungary’s regulatory climate can make it a bit more challenging for companies to set up businesses in the country. The value-added tax is at 27% for more products and services, which is the highest rate in the EU. The country is also unfortunately plagued by persistent corruption, which has a big impact on the public sector. Hungary is listed among the top most corrupt EU states. In 2016, the government withdrew from the Open Government Partnership after it refused to address concerns about good governance and transparency.
To start a business in the country, you may have to follow some extra requirements. Companies need to be represented by a lawyer when setting up a business in Hungary. Half of the subscription amount needs to be deposited into the bank amount when subscribing. Plus, the business also needs to submit the Registry Court applications before social security can be set up.
To get a construction permit, a business needs to navigate 26 complex procedures, which take about 102 days. Several inter-governmental departments will carry out inspections before the company can get a statement from the Municipal Planning Committee and a letter from the Tax Authority. After this, the business needs to get the Occupancy permit and finish the registration of the company.
Hungary is also in the bottom 50 countries in the world when it comes to ease of electrical connection. It can take 252 days to complete the entire process.
The country offers cheap trading across borders; however, the procedure can take a long while. Exporting goods can take an average of 17 days and importing goods can take an average of 19 days.
Opportunities in Various Business Sectors in Hungary
Hungary is currently focused on key business sectors, including agriculture, automotive, electronics and ICT, tourism, healthcare, and technology, which have shown to have a lot of impact on its economy.
About 70% of the total land area in Hungary is available for agriculture, while 40% is arable. Prior to its political and economic transition, agriculture accounted for about 17% of the GDP and 22% of the total food exports. Today, agriculture accounts for just 3.3% of the GDP and 7% of the export. Despite the reduction, the Hungarian agriculture sector remains self-sufficient, and export focused.
The country is a leading producer of poppy seeds and the second large producer of foie gras. It also exports wheat, corn, potato, sugar beet, sunflowers, and various fruits. It has several wine countries which produce famous wines and has 33,000 farmers engaged in animal husbandry.
Hungary is one of the preferred destinations for investment in the automotive industry. Major car manufacturers have their plants in Hungary, including General Motors, Suzuki, Mercedes-Benz, Audi, and Opel.
There are 350 car component manufacturing companies in the country that employ over 100,000 people.
The electronics industry accounts for about 22% of Hungary’s manufacturing production. As the largest electronic manufacturer in Central Europe, the country is responsible for 26% of the region’s electronics manufacturing and directly employs 115,000 people in the industry.
The ICT sector consists of IT, hardware, software, and telecommunication services and is responsible for 10% of the GDP and employs 100,000 people. Today, the country is the leading manufacturer of communication tools and computer assembly.
Hungary is one of the hottest travel destinations in the world. The tourism sector employs over 150,000 people directly as well as offers indirect jobs related to the media industry.
The country is home to the breathtaking Lake Balton, which brings in one million tourists annually. Budapest is the most visited region in the country, bringing in 3 million tourists each year.
The country has a well-established and solid healthcare system that is run by the National Healthcare Fund. Pharmaceutical businesses thrive in the country and offer significant contributions to the economy.
As far as technology and AI (artificial intelligence) is concerned, the government is placing significant focus on the ICT sector since the COVID-19 pandemic accelerated the digital transformation momentum in both the private and public sectors.
Currently, software development in Hungary contributes a growing portion to Hungary’s economy and represents about 6% of the total GDP. The country also outsources many IT services within the region with over 80,100 specialists employed in the IT sector.
The country has also implemented IT-friendly policies like offering financial support, assistance, and incentives for R&D that have helped the country bring in multinational tech companies like Microsoft, Nokia, Deloitte, Siemens, TATA, and more that have built their research centers in the country. The country is now seeking to bring IT-related growth to the healthcare, banking, and transportation sector.
The IT spending is expected to grow at 2% throughout 2022 and is driven mostly by increased spending in the public sector.
The hardware sector is expected to be flat through 2023; however, systems integration is forecasted to grow at 2% through 2022 and software at almost 7%. As for artificial intelligence, Hungary has a vision to benefit from the opportunities provided by AI. The country has already established a National AI Laboratory and partnered with Finnish projects to provide 1 million people with basic AI knowledge through several training courses.
According to Innovation Minister Palkovics, artificial intelligence is expected to contribute 11-14% of Hungary’s GDP by 2030.
Keeping in mind these variations in growth rates in different technology sectors, the Hungarian market offers opportunities in new technology including cyber security, fintech, digitization, machine learning, business acceleration, artificial intelligence, and Industry 4.0 enablement.
The beautiful panorama over the Danube in Budapest
Outsourcing and Nearshoring Opportunities in Hungary
Although most companies that opt for outsourcing do so to cut costs, finding the perfect location for offshoring is a complex process. Businesses need to find out if the country offers a talented and skilled labor force, has a language barrier and a compatible culture, has expertise in the back office or service sector, business security and intellectual property regulation, and of course, results in cost savings.
Hungary ranks high in all of these aspects. When it comes to cost-cutting, although Hungary may not be able to compete with countries like India in terms of labor cost, it does very well in comparison to Western Europe, the United States, and Canada.
The minimum wage for skilled labor is 732 euros per month and labor productivity is very high in the Central Europe region. Budapest and other university cities have resulted in a new and highly educated generation of Hungarians that are contributing groundbreaking research and innovation to the fields of science and technology. In addition, multinational companies also report that Hungarians are eager to learn and quick to understand.
As such, the country is an offshoring haven for foreign businesses looking for affordable, young, and talented workforce.
In fact, for European countries and particularly Western Europe, it makes more sense to look closer to home when considering outsourcing. Hungary is only within a 2-hour flight of Europe’s major metropolis and capitals and a gateway between Western Europe and the fast-developing economic market in Eastern Europe.
A growing labor shortage in many CEE countries has resulted in Hungary being targeted for nearshoring, which is responsible for the country having the highest share of outsourced IT services in the region.
In recent years, Hungary has seen an influx of significant foreign direct investment, which has encouraged it to rapidly adopt best business practices. Since 2004, when it became a part of the EU, Hungary has witnessed an increase in labor mobility and a stable tax, business, and legal environment.
The country has made heavy investments to build the largest, most extensive motorway network in the Central and Eastern Europe region, which has also resulted in easy access to the country by neighboring states. It has a very technologically aware population and a sophisticated telecommunications infrastructure.
Much of the economic activity is strongly centered around Budapest which has attracted two-third of FDI and one-third of the employed workforce. As such, dozens of companies have chosen to nearshore many of their operations to Hungary.
Opportunities for British Businesses in Hungary
A high-growth business hub, Hungary offers a liberal and modern business environment that offers various opportunities for British companies to set up shop.
Hungary’s economy has become quite liberal, thanks to the injection of FDIs, privatization, and the introduction of commercial laws. The country has a DB rank of 52 and a score of 73.4. The culture of Hungary is similar to the United Kingdom’s, and English is widely spoken, so British companies may find it easy to work with local businesses and partners.
Because of its strategic geographical region, Hungary is a perfect business hub for British companies to expand their footprint in Central and Eastern Europe — the country is a nexus to three major trade pathways. As such, many businesses from across the world have selected Hungary to be their regional center or global office.
The country also has a high rate of education and offers a highly skilled and educated workforce. This makes it particularly advantageous for UK businesses who want to set up shop in the country and need local staff.
UK businesses can reap various opportunities across various sectors, particularly energy and life sciences. The country’s clean energy, renewable energy, and nuclear sector can benefit UK companies. There are also many opportunities in electrical machinery and equipment production. The life science sector also offers opportunities in research and development and supply chain-related services.
Made-in-UK products have a very good reputation in Hungary, particularly when it comes to medical equipment and healthcare. The country imports most of the equipment needed to run its strong healthcare sector, which creates various opportunities for British businesses to offer high-quality products at competitive pricing.
There are a significant number of small and medium biotechnology companies in Hungary, which are showing steady growth. This offers excellent collaboration opportunities to British biotech firms with Hungarian ones.
Setting Up a Foreign Business in Hungary
To set up a Hungarian company, businesses need to register it with the Hungarian Court of Registration. As we mentioned before, the registration process will be represented by a lawyer who will prepare and countersign all corporate paperwork and file the application electronically for registration.
Foreign investors do not have to come to Hungary to sign the relevant documentation. This can be done aboard as well, though the presence of a signatory will be needed to open a bank account of the company.
The business registration process is not too complicated and follows the steps below:
- The investor will need to decide the company’s name, management, registered office, type and amount of share capital, a person of delivery agent, etc.
- The lawyer will then prepare your relevant documents, which will include the articles of association and statutory declarations.
- The corporate documents will need to be signed in front of the Hungarian lawyer or abroad. If signed abroad, notarization or super legalization by the Hungarian embassy certification consular or Apostille will be necessary.
- Your presence will be required to open a business bank account in Hungary, where the share capital will be placed.
- The Hungarian lawyer will file the executed and countersigned documents and electronically apply for the company’s registration.
- The company will be registered by the Court of Registration that will provide the company with the VAT number and statistical number.
The companies will be able to start their business operations as soon as the filing is done, with some restrictions. The registration process will take about 1 to 2 days from the date of the filing.
Businesses can also apply for expedited registration, which may be completed in a week; however, you will need to prepare the articles of associations based on a template without making any additions or deletions.
Registering a general partnership, the limited liability company, and a limited partnership does not require any fee. To register a private company, you will need to pay a duty fee of HUF 100,000 and HUF 50,000 for registering a branch office. Additional charges like statutory publication fees, legalization, translation, and courier fees will also apply.
Outlook for 2023 And Beyond for Companies Doing Business in Hungary
The economy of Hungary continued to grow rapidly in the first half of 2022 due to the strong fiscal stimulus injected by the government, which resulted in higher consumption and more investment in the public sector. In addition to higher employment rate and income growth, household income was also boosted by one-time income tax rebates and pension and public wage increases during the year.
In the coming years, the labor market will continue to show signs of improvement. In the meanwhile, the high wage growth and currency depreciation may lead to higher inflation as well.
Industries are expected to continue to recover. Industrial production and exports exceeded the pre-pandemic level, resulting in increased business confidence. The labor market has also improved, showing an increase in the employment rate.
Some risks that businesses may continue to encounter are supply chain problems, which can delay the export of goods. On the flip side, a quick recovery is expected from major trading partners in Europe, which can result in growth, considering Hungary’s focus on exports.
If supply chain constraints continue or recovery remains slow due to unforeseen circumstances, it would be worthwhile for Hungary’s government to keep their focus on maintaining its supportive fiscal policies and aid in the rest of 2022 and beyond. Labor taxes can be further reduced by cracking down on tax evasions, broadening the consumption taxes base, or increasing environmental taxes.
Enabling of key sectors such as Hospitality, Tourism, Technology and Innovation, and several other key industries will continue to be a rise, with Hungary becoming one of the hottest hubs for EU regional and global interconnections.
Creating strategies to decarbonize the economy to meet environmental goals would be another priority. In addition, structural reforms are also needed to increase labor force participation and enhance productivity to improve the potential for growth.
Where to Get Help to Do Business in Hungary?
If you are interested in starting a business in Hungary, you need to get the right information. The Hungarian British Business Alliance and the Institute of Directors can offer assistance to companies seeking to expand their businesses in Hungary. The platforms allow investors to become a part of the community and grow their business by gaining access to tools and resources like information, education, and high-profile networking opportunities in Hungary, the UK, and Central European countries.
Here are how these resources can help businesses:
Consultancy: Offer expert guidance and consultancy services on a variety of business-related topics.
Business Promotion: Offer word-of-mouth, referrals, and members-only events to help SMEs and established businesses grow.
Networking: Offer opportunities to meet with the big names in the industry and form partnerships that can lead to growth.
Workshops: Offer masterclasses, seminars, and workshops on a variety of business, legal, economic, and political matters.
Embassy Access: Provide you access to the Hungarian Embassy in London during classes and presentations.
Susanna Toth, Chairwoman of HBBA
Paul Steven, Economic Advisor of HBBA
About the authors
Susanna Toth is the Founder & Chairwoman of the Hungarian British Business Alliance, and Founder MD of H-Net Global, where she helps businesses set up, expand, and invest in the UK and Oversees, whilst enabling international trade and business development consultancy network via boutique agency work.
Steven Paul is the Economic Advisor to the Hungarian British Business Alliance and MD of Kirra Advisory, where he works with businesses, c-level executives, and boards across sectors to build, launch, expand and transform businesses on their strategic, business and leadership agenda locally and internationally. Steven is also a Chartered Director and brings excellence to the Boardroom of businesses.