FOREIGN DIRECT INVESTMENTS IN HUNGARY – PART I – LEGAL FRAMEWORK
nov 11, 2024
What are the basic principles and legal frameworks for foreign direct investments in Hungary?What institutions ensure the protection of foreign investors? In the first part of our series of articles, we address these questions.
ILF’s Hungarian member, Smartlegal Schmidt&Partners summarizes this issue in the article.
1. Introduction
Hungary, as a pioneer among the Central Eastern European countries, made the transition to a market economy from the previous planned economy in the late 1980s and early 1990s.
In this context, the objective of encouraging foreign investment in Hungary was supported by the progressive Business Companies Act and the Act on Foreign Investment in Hungary, both adopted in 1988.
Since then, Hungary has become fully integrated into the international economy and has joined to several organisations, most importantly, to the WTO in 1995 and to the EU in 2004 and concluded several bilateral and multilateral treaties.
In the following we provide a brief overview of the current Hungarian legal environment for foreign investment.
2. Principles
As a starting point, it is worth noting that international investment law has established a number of principles that are applied by almost all civilized countries, including, of course, Hungary.
First, we mention the principle of national treatment (régime national) according to which foreign investments have to receive no lesser standard of treatment than investment made by domestic persons.
The principle of fair and equitable treatment (FET) shall be also mentioned, which is enshrined by almost every bilateral investment treaty (BIT) concluded by Hungary. This principle consists of, among others, the prohibition of manifest arbitrariness in decision-making, prohibition of the denial of justice and disregard of the fundamental principles of due process, prohibition of abusive treatment of investors, including coercion, duress, and harassment etc.
In addition to the above, the core element of the Hungarian investment law is the principle of most favoured nation treatment (MFN) which has a narrower scope than the national treatment as its aim is the equal treatment of foreigners in the field of the international economic relations.
3. International treaties
3.1. BITs and MITs
To encourage foreign investment, Hungary, on its own or as a member of the EU has concluded bilateral / multilateral international investment agreements (BITs and MITs) with a number of third countries. Besides the above principles, these BITs and MITs also declare the so-called Hull rule, i.e., the “Prompt, adequate and effective” compensation for the expropriation of foreign investments.
Regarding the numbers, Hungary has currently 40 BITs in force. Most recently, Hungary has concluded BITs with San Marino, Oman and Kyrgyzstan, United Arab Emirates.
These BITs and MITs play an important role in the security of foreign investment as most of them make it possible for a foreign investor to initiate arbitration proceeding against Hungary as host country based on the ICSID (International Centre for Settlement of Investment Disputes) Convention.
3.2. Other international treaties
Hungary has been a member of the World Trade Organization (WTO) since 1995 and of the Organisation for Economic Co-Operation and Development (OECD) since 1996.
Moreover, BITs and MITs concluded by Hungary often contains a dispute resolution clause, according to which the foreign investor can initiate an arbitration proceeding against Hungary before ICSID. ICSID is an independent forum to conciliate, mediate, and arbitrate international investment disputes. The ICSID Convention has been in force in Hungary since 1987.
Hungary is also the member of the Multilateral Investment Guarantee Agency (MIGA), which aim today is to promote foreign direct investment into developing countries.
Besides, Hungary is a member of another important treaty, the Energy Charter, which aim is to protect the foreign investment in the field of the energy sectors.
4. EU & EEA – Free movement of capital
Furthermore, as part of the EU’s single market, Hungary provides the free movement of capital from other EU Member States as well as from third countries with exceptions in certain circumstances.[1]
5. Domestic Act on Foreign Investment
Finally, we mention that the Act on Foreign Investment in Hungary[2], which was adopted at the beginning of the transition period in the late ‘80s also lays down, the basic principle of protecting foreign investments and the obligation to compensate for the expropriation of foreign investments.
SMARTLEGAL is a team of agile business & litigation lawyers in Budapest, Hungary, helping international corporate clients and individual entrepreneurs doing business in Hungary. For more information please visit our website at smartlegal.hu
