The Challenges and Benefits of Doing Business in Hungary
In a World Bank survey, Hungary had the top ranking for trading across borders out of 190 surveyed nations. Their GDP has been rising year-over-year since 2010 and growth peaked at 5.2% in 2019. Forecasts for 2020 suggest further growth well above the average in Europe.
Taking all this into account, it’s easy to see that Hungary is becoming an outstanding place to do business. In this article, you’ll read about the reasons why Hungarian investment is attracting so much foreign business and some potential challenges faced by newcomers to the area.
The Benefits of Doing Business in Hungary
Foreign investment in Hungary reached over three billion euros in the first quarter of 2019. Foreign investment is a major part of Hungary’s economy, and Hungarians are keenly aware of its impact.
As a result, the business environment in Hungary is welcoming and accommodating to foreigners. Besides low taxes and great geopolitical location, Hungary has a lot to offer. Here are some of the most notable benefits of doing business in Hungary:
Amazing Business Location
Centrally located in the very heart of Europe, Hungary is a member state of the European Union. it’s a place that historically connected Eastern and Western Europe and continues to be an economic and social hub in the area.
Establishing a business in Hungary creates a direct gateway to all of Europe. Every corner of the continent is easily accessible in a few hours and it allows tremendous ease of travel.
In an even broader view, it sits at a midway point between the Americas and Asia as well. It’s a perfect place for a global company looking to establish a base of operations.
Starting a Business in Hungary Is Easy
Another major benefit is a straightforward process for starting a business in Hungary. From start to finish, starting a business takes about five business days. All you need is a valid form of identification, and you don’t even need a local business partner.
You’ll need a registered address in Hungary, an English-speaking accountant, and a Hungarian bank account. You can expect the whole process to set you back around €180 for a limited partnership, €335 for LLCs, and around €2100 for the equivalent of a corporation.
Compare that to the cost of opening a business in (say) Germany, where the costs start at €1800 to open a legal entity.
It’s Also Very Cost-Effective
Hungary is a business environment with great opportunities and low risk. Doing business there is very cost-effective, especially compared to Western Europe.
The main contributing factors to this environment are business-friendly tax rates, cheap real estate, and low export barriers.
The Hungarian company tax system is very pro-business and accommodating to legal entities. The payment procedures are accessible and simplified and the corporate tax rate is expected to trend at around 9% through 2020.
Furthermore, the local business tax is anywhere between 2% and zero. You read that right, local business can end up owing no tax. Finally, foreigners have the opportunity to get VAT-free trading and to have a zero-tax dividend.
Despite its friendly tax rates, Hungary is not what you might call a tax-haven. It’s a member of the EU, as stated above but also NATO, the OECD, and the World Trade Organization. It provides a legitimate solution for tax reduction.
You Don’t Need A Lot of Starting Capital
A big concern when expanding or starting a new business venture is the capital requirements. You’ll be pleased to know that Hungary has some of the lowest minimum capital requirements in Europe.
For a corporation, the MCR is around €18,000 while an LLC only requires approx. €10,000. Again, comparing this to a joint-stock company in Germany you see an MCR of €50,000.
Having less of your capital locked up is an important competitive advantage and another great reason to invest in Hungary.
They Provide a VAT Number Instantly
In other countries in the EU, VAT registration can take up four to six weeks for foreigners. VAT registration is mandatory for any company selling in the EU that exceeds the VAT registration threshold.
If you set up a company in Hungary, that company receives a VAT number for free and the process is an automatic part of registration. That represents massive savings in time and money spent filling out forms and meeting additional requirements.
The Main Challenges of Doing Business in Hungary
As a member state of the European Union, Hungary is subject to the rules and regulations that all other members are. Hungary is one of the countries in the Union that’s least affected by the arrangement but that doesn’t make it immune to certain restrictions.
Construction permits in Hungary are a bit of a hassle. Getting a basic construction permit takes around three months. There is no good way to phase the construction permit, either.
The permit itself and subsequent building inspections are carried out by many internal departments of the Hungarian government. That means getting authorizations from the Tax Authority, the Municipal Planning Committee, and the Land Registry Office.
Unfortunately, investor protection in Hungary isn’t as good as it could be. According to the IFC and the World Bank, Hungary is rated 128th in terms of investor protection, which is low compared to many other European countries.
The main drivers of this low ranking are the poor disclosure of requirements and liability indices. Meaning that investment products can have hidden stipulations and legal entities can obfuscate their real financial standings.
You Need a Lawyer for Everything
In Hungary, you absolutely must have a lawyer for any business activity. A lawyer has to represent the company in the drafting and preparation of all the relevant documents.
This includes opening a Hungarian bank account and push applications through the Registry Court to receive a social security registration.
The legal procedures in foreign affairs and trade are markedly complex in Hungary. Litigation over simple contract enforcement can take over a year and involves byzantine legal procedures.
Insolvency cases can be even worse. If you are faced with a business partner that is unable to pay their debts, it can tie you up in court for up to two years.
This is a challenge, but one that can be avoided by being careful when doing business in Hungary.
Overall, Hungary is one of the best locations to do business in Europe. It won’t suit every type of business, but most companies will find investing in Hungary to be a fantastic opportunity.
Between the tax system, educated workforce, and how easy they make it open a company, it’s a veritable haven for business. The only real downside is the intricate legal system. However, a good lawyer (which you need to hire anyway) will go a long way towards ameliorating that aspect.
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