More Reason to Invest in Hungary: The New Economic Stimulus Package

Hungary has announced a new multifaceted package of proposals on fiscal and monetary measures, which provide new and existing entities additional reasons to invest in Hungary. There are only six states in the European Union that will spend more than sixteen percent (16%) of their 2019 GDP on mitigating the economic damages caused by COVID-19. In our summary, you can find the job creation and economic recovery action plans introduced by the Hungarian government, as well as the related tax reliefs and loan reductions which make investing, operating, or establishing a new business in Hungary currently a good long-term decision.

The new economic protection plan contains the establishment of three separate funds: (i) an Epidemic Control Fund, (ii) an Economic Protection Fund, and (iii) an Anti-Epidemic Grants Fund from the European Union.

The Economic Protection Fund will be used to protect and restart Hungarian jobs and the Hungarian economy, i.e., to implement the economic protection action plan. The three-pillar action plan addresses job retention, job creation and the strengthening of key sectors of the national economy, which includes tourism, healthcare, food related businesses, agriculture, construction, logistics, transport, and employment. These areas can expect additional resources and accordingly, the listed sectors will receive investment and development subsidies, tax cuts, favorable loans, and capital programs. To assist in recovering from the toll the tourism industry took during the COVID-19 pandemic, HUF 600 billion will be allocated to support tourism specifically.

The action plan will also implement a strategy for business financing, corporate liquidity loans, guarantees, as well as equity programs. Under this plan, VAT refunds will be accelerated – with the process taking place in 30 days or less instead of the usual 75 days for normal taxpayers, and the process will be reduced from 30 days to 20 days for certain pre-established reliable taxpayers. For entities which retain their employees and have done so throughout the pandemic, there will be special tenders for technology development, environment protection, and energy efficient investment published which will potentially be worth hundreds of billions of forints.

1. Loan Programs Announced by the Hungarian Government

1.1 Growth Loan Program(s)

In order to support domestic companies as they recover from the effects of COVID-19, the Hungarian National Bank launched a new program to help micro, small, and medium-sized enterprises, to which the Bank allocated HUF 1 trillion in addition to the HUF 500 billion available through a previous program. The maximum amount which may be taken out under the new program is HUF 20 billion, which comes with a 3 to 20 year term and a maximum interest rate of 2.5%. The loan can also be applied for payment of wages in the absence of sales revenue, or it can be used for loan redemption. The National Bank also set a 2-week credit assessment deadline for banks to be able to provide immediate help.

Loans can be used for operation expenses, growth, and modernization. As such, these loans are very flexible in their applicability, and provides domestic entities with the capital to ensure not only their survival, but also their growth post-COVID-19.

1.2 Growth Bond Program(s)

Through an increased liquidity in the bond market, the Hungarian National Bank intends to ensure that domestic companies can rely on other forms of financing in addition to bank loans. This contributes to improving the efficiency of monetary policy transmission - as healthy competition between markets that provide funds to companies to ensure that the National Bank of Hungary’s interest rate decisions are more effective. The National Bank of Hungary reduces the surplus of the banking system resulting from central bank purchases within the framework of the program with a preferential deposit instrument with an interest rate on the base rate, in line with the current monetary policy framework.

2. New Job Saving Measures and Tax Incentives

In order to assist in the preservation and creation of new jobs, the Hungarian government will pay up to 70% of an employee’s wages for up to 3 months if the employee works part-time and their work is not being conducted from a home office. Additionally, individuals working in research and development fields receive a 40% wage subsidy.

The rate of the social contribution tax will permanently be reduced by 2% starting on July 1, 2020. The rate of the small business tax called “kiva” will be lowered to 11% from January 1, 2021.

In addition to tax reductions, several tax deadlines (such as the corporate tax deadline) will be changed to September 30, 2020 from May 31, 2020, primarily assisting companies that have financial difficulties due to the state of emergency situation that was declared as a result of COVID-19. These entities and individuals will have the option to defer payments for 6 or 12 months but the maximum deferred amount cannot exceed HUF 5 million. Those entities and individuals who can show that the COVID-19 state of emergency situation severely impacted their operation, can apply to have their tax liability reduced by HUF 5 million.

For those in the tourism sector, the Hungarian government suspended the payment of the tourist tax until the end of 2020, and the government will inject up to HUF 600 billion into the sector to aid in recovery.

3. Starting a Business in Hungary Post COVID-19

3.1 Cost Related Barriers to Entry are Low

The costs associated with establishing a limited partnership is effectively zero when doing so through a simplified company formation procedure. The establishment of a limited partnership generally requires a small depositpaid by the external and internal members (typically HUF 15,000 per person) and legal counsel fee.

The simplified company formation of a limited liability company is also duty-free. The minimum founding capital of a limited liability company is HUF 3 million of which 30% must be cash while the rest can be in-kind, such royalty transfer, real estate, or other property.

The simplified formation of a joint stock company costs HUF 50,000 in formation duty. The company must be established with a minimum capital of HUF 5 million of which at least 30% must be provided in cash.

3.2 Favorable Loans

As described above, in the framework of the Hungarian Economic Recovery and Protection Action Plan, the Hungarian government is offering loans and incentive programs to help companies obtain financing on favorable terms. In addition to the priority sectors, such as tourism, healthcare, food and food service related businesses, agriculture, construction, logistics and transportation, the state is willing to reduce the employment related costs and offer support to employment retention programs.