First 5 Calls: Hungary

Canada and Hungary have close bilateral relations, and many large Canadian companies have operations in the country. Two-way merchandise trade between Canada and Hungary totalled $634.4 million in 2012, with Canadian exports at $213.0 million consisting primarily of electrical machinery, followed by machinery, vehicles, optical and medical equipment, and plastics.

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Growing market for companies that provide logistics for special products and complex logistical services, according to the Embassy of the Republic of Hungary.

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10% annual growth rate of IT exceeds overall GDP growth of 1.97% between 1992 and 2015, according to World Bank figures.

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With more than 160 industrial parks, which serve as home to 39 multinational companies accounting for 40% of total exports and 25% of industrial output, every town in the country has an industrial park within 30 kilometres.

OVERVIEW
Klaus Houben
Klaus Houben
Chief Representative, Hungary, Export Development Canada
khouben@edc.ca
+49 211 17217 45
What are some of the key challenges for Canadian companies that want to do business here?

There are several areas of business operations that can be difficult to navigate for foreign companies. The World Bank and International Finance Corporation (IFC) rank Hungary outside the top 100 nations in the world for ease of getting electricity, investor protection and paying taxes, which is why having local expertise to help navigate these tricky areas is crucial.

Hungary’s top five challenges are:

1. Starting a business. When setting up a corporate entity in Hungary, companies must engage a lawyer who will represent the company, create the company deeds and prepare all other legal documents. Half of the subscription amount (at least HUF 250,000) must be deposited into the bank account designated at the time of subscription; Registry Court applications are to be submitted before social security can be set up.

2. Dealing with construction permits. It takes 102 days to deal with construction permits and involves navigating 26 procedures. Inspections are to be completed by numerous intergovernmental departments before companies receive a statement from the municipal planning committee and a letter from the tax authority. Once the criteria have been met, an occupancy permit must be obtained and registration of the building completed at the land registry office.

3. Getting electricity: The World Bank and IFC rank Hungary in the bottom 50 countries in the world for ease of getting an electrical connection, taking 252 days to complete in total. Inspection, work and registration are completed by ELMŰ Hálózati Kft. Once the grid usage contract has been signed, the meter will be installed followed by final connection.

4. Registering property: Property registration is by far the most streamlined task of organizing a residence for the company, taking just over two weeks to complete. Once again, legal advice must be sought when completing the process.

5. Getting credit: Other than the legal rights index, Hungary has weak indicators in terms of getting credit. The private bureau coverage is less than 20 per cent of adults, and there is no public registry coverage.

Which sectors offer significant potential for Canadian businesses?

EDC sees increasing business and investment potential across a wide range of sectors in the market. Key sectors include:

• ICT
• Transportation
• Life Sciences
• Alternative Fuels
• Construction and Infrastructure

Hungary is an automotive hub with a lot of OEMs producing there, among many others, Audi being an example.

What surprises foreign businesses most about Hungary?

Well-educated and trained people, good investment climate despite the current political situation.

MARKET ENTRY
Martin Barratt
Martin Barratt
Senior Trade Commissioner, Embassy of Canada to Hungary, Slovenia, and Bosnia and Herzegovina
Martin.barratt@international.gc.ca
+36 1 392 3351

“Hungary is small market, and Canadian exporters that are capable of supplying smaller volumes can have a competitive advantage.”

Breaking into the Hungarian market can be challenging. What critical success factors must Canadian companies have to succeed here?

The exchange rate has been fluctuating past few years, which is a challenge for both importers and exporters. Hungary is small market, and Canadian exporters that are capable of supplying smaller volumes can have a competitive advantage. Finding the right partner is crucial.

What traits do Hungarian companies look for in potential partners?

Importers in Hungary are looking for partners who can provide additional service as well as the assurance of reliability and after-sales support and commitment to the market. Commitment to the market is one of the areas where Canadian companies have a competitive advantage, because we have a knowledgeable active Hungarian community in Canada.

Top of mind, of course, is the 50th anniversary of the Hungarian Revolution and the number of refugees that Canada accepted at that time. That’s still known here and still greatly appreciated.

What cultural considerations do Canadian companies need to be aware of?

Language is a big issue. The manner of speaking tends to be very formal in a business context, and you have to be prepared for that. Where we may come across as a little informal, Hungarians tend to be very correct. You should not take offence where none is intended.

Over the past 25 years, a certain business culture has developed that has been dominated by a few large oligarchs. While there are thousands of SMEs, and they want to business as well, a lot of the economy is driven by these larger companies.

LEGAL
Gábor Helembai
Gábor Helembai
Senior Associate, Bird & Bird
gabor.helembai@twobirds.com
+36 1 799 2011

“It is advisable to consider a Hungarian investment not only as a business established for the local market, but as a gate to the whole market of the European Union with low entry costs.”

Are there any aspects of Hungarian company law that appeal to Canadian investors?

Setting up a basic company is quick and does not require significant investment. The registration could be completed even within five days by authorities, and the minimum registered capital is approximately 1,000 euros in case of a limited liability company.

Directors do not need to be Hungarian nationals, and company/board meetings do not need to be held in Hungary. Hungarian company law keeps up with the latest trends and demands of the globalized economy (with) company filing and registration procedures electronic-based. The e-operation of a company is also supported. For example, members’ meeting could be carried out via video-conference, or official liaising with authorities could be done via e-mail. Thus, no paper-based communication is required.

The corporate income tax rate is very competitive: 19 per cent on the positive tax base exceeding HUF 500 million (approx. 1,670,000 euros), and 10 per cent up to this limit of the tax base. Foreign investors are free to remit profits and investment capital to their home country in the event of partial or complete termination of their enterprise.

What is your top advice for Canadian companies coming to Hungary?

The Hungarian government offers a wide range of tax benefits and other direct or indirect incentives for foreign investors. Thus, a thorough planning of the investment could ensure to make the most of the return of the investment. It is also advisable to consider a Hungarian investment not only as a business established for the local market, but as a gate to the whole market of the European Union with low entry costs.

From a regulatory and legal point of view, what do Canadian companies need to know about doing business here?

Foreign companies should be aware of any industry specific laws that apply to their businesses. Very often, these laws are based on EU legislation and are relatively consistent across the EU.
EU legislation applies in Hungary and regulates consumer protection, sales agents, distance selling, government procurement, direct marketing, etc. Hungarian law restricts certain consumer contracts terms, including limits on liability. Hungarian law, harmonized by EU competition law, prohibits anti-competitive behaviour where there is an appreciable effect on trade in Hungary and/or between EU Member States. The Hungarian labour law is broadly similar to employment legislation in other EU countries. Social security contributions are mandatory for Hungarian employees.

Legal representation is compulsory during the company registration procedure in Hungary, thus it is advisable to contact a Hungarian qualified attorney-at-law first when considering setting up a business in Hungary.

FINANCE
Mike Carlson
Mike Carlson
Partner, KPMG Hungary
mike.carlson@kpmg.hu
+36 (1) 877-7123

“Successful investors tend to effectively bring their markets with them and use Hungary as a lower cost production/service base to export to more mature markets, as the cost/benefit of employees is still attractive.”

What’s the most important piece of information Canadian companies need to know about the Hungarian market?

The ease of doing business in Hungary can be considered about middle of the range, i.e. not as straightforward as in Canada or much of Western Europe, but easier than going farther south or east. Companies should plan to be actively involved in their investments, including placing key management or oversight to ensure that the business moves in the direction wanted by the investor. Integrate the Hungarian operations into the larger organization and work to embed the corporate culture.

A source of macro information is the Hungarian Investment Promotion Agency (www.hipa.hu), which is a government body mandated to assist foreign investors. They have a number of publications and information that give a good overview on investing in Hungary.

How can Canadian companies prepare for entering the Hungarian market?

Understand clearly why they are coming to Hungary. Is it the domestic market? A lower cost production, R&D or service centre?

Successful investors tend to effectively bring their markets with them and use Hungary as a lower-cost production/service base to export to more mature markets, as the cost/benefit of employees is still attractive. You can find well-educated and motivated people at reasonable cost, although there are currently signs of shortages of qualified labour in some sectors that will likely drive up costs in the medium term. Plan a bit more time to get staffed up.

How can you help Canadian companies with their entry into Hungary?

Our role is to help our clients make decisions and manage their risk. We are a full-service professional firm integrated into KPMG’s Global network providing audit, accounting, tax and advisory services with 27 years in Hungary helping foreign investors find their way around Hungary’s regulations and business culture. We work with some of the world’s biggest companies, as well as owner-managed businesses across virtually all sectors and business needs.

ANTI-CORRUPTION
Danielle Rowland Lindahl
Danielle Rowland Lindahl
Associate, TRACE International
info@TRACEinternational.org
410.990.0076

“Money laundering, tax evasion, human trafficking and organized crime are all present, and bribery is an issue when dealing with administrative processes.”

How would you characterize the risk of corruption in Hungary?

While Hungary receives a moderate risk score of 51 and a ranking of 57 out of 199 countries on the 2016 TRACE Matrix, a global business bribery risk index, businesses in Hungary nevertheless face a high risk of corruption. In 2014, several Hungarian officials were barred from entering the United States for their alleged corrupt activities. Money laundering, tax evasion, human trafficking and organized crime are all present, and bribery is an issue when dealing with administrative processes. Many institutions lack independence from the government, including the judiciary, the media, anti-corruption authorities and others. Corruption and inefficient government bureaucracy were listed as some of the most problematic factors for doing business in Hungary in the World Economic Forum’s 2015–2016 Global Competitiveness Report.

There is a particularly high risk of corruption in public procurement. Officials show favouritism towards state-owned entities and businesses closely associated to the officials, and local-level tenders are vulnerable to strong connections between local businesses and officials. Foreign companies have complained that public tenders are not competitive, with a number believing that corruption prevented their company from winning a contract. Public tenders also suffer from a lack of transparency.

How do these risks typically impact Canadian businesses?

There are more than 60 key state-owned entities, and in sectors like financial services, the state owns a majority of the market. That increases the likelihood that businesses will be dealing with officials and requires more diligence and precaution. Pervasive bribery in administrative processes may hinder the ability to conduct business and lead companies to pay small bribes to encourage officials to perform their required tasks. Favouritism in public tenders may lead to companies paying bribes or kickbacks to secure a contract.

Generally speaking, how can Canadian companies reduce their risks and exposure to corrupt business practices?

Foreign companies looking to operate in Hungary should build and implement an effective anti-corruption compliance program. Training on public procurement issues and small bribes is key, and approval and review processes should be put in place for any bids for public contracts. Foreign companies should also thoroughly vet their business partners through a comprehensive due diligence review, analysis and approval process such as TRACEcertification. Companies may wish to refer to TRACEpublic, the first global register of beneficial ownership information, which allows companies to share and search for beneficial ownership information at no cost. The database supports the efforts of companies seeking to conduct business ethically.