How Are Foreign Investments Protected in Hungary?

The Fundamental Law: A Constitutional Investment Guarantee

The highest level of protection for foreign investments in Hungary comes from the Fundamental Law, the country’s constitution. It emphasizes the right to property and inheritance, stating that property can only be expropriated under exceptional circumstances. Even in such cases, expropriation must serve a public interest, comply with Act CXXIII of 2007, and ensure full, unconditional, and immediate compensation to the property owner.

Importantly, these rights extend beyond Hungarian citizens to all property owners, including non-residents. If a foreign investor faces any act affecting their property or investment, they have the right to seek legal remedy through Hungarian courts. The Fundamental Law guarantees recourse against any decision—whether by a court, authority, or administrative body—that violates one’s rights or legitimate interests.

Independent Courts and Dispute Resolution Mechanisms

The Fundamental Law also ensures that Hungarian courts are independent and responsible for administering justice, including in criminal matters, civil disputes, and cases involving the lawfulness of administrative decisions, such as those affecting investments. Hungarian judges operate independently, adhering strictly to the law, which ensures fair and impartial decisions.

In practice, Hungarian courts have been effective in offering remedies to foreign investors, including in disputes with the State. This judicial independence further bolsters the security of foreign investments in Hungary.

Act XXIV of 1988: Special Legislation for Foreign Investments

Hungary safeguards foreign investments through Act XXIV of 1988. The goal of this law is to promote international economic cooperation by encouraging foreign direct investment and technological advancement. The act guarantees national treatment for foreign investors, ensuring they are free from discriminatory disadvantages.

The law clearly defines what constitutes a foreign investor and an investment in Hungary. It also outlines the forms of economic establishments, such as sole proprietorships, commercial representative offices or branches, and participation in economic companies. Furthermore, the act regulates cross-border service provision and the activities of enterprises established in EEA member states operating within Hungary.

Additionally, if an international treaty or a general EU legal act differs from this law, the provisions of the treaty or EU act will prevail.

Expropriation Risks in Hungary

The risk of expropriation in Hungary is generally low. As an EU member, Hungary respects property rights, but investors should remain aware of certain risks:

• Taxation: There have been instances where the Hungarian government introduced taxes targeting specific industries, such as the advertising and tobacco sectors. However, these taxes were deemed discriminatory by the EU and were eventually repealed.
• Historical Expropriation: Hungary has a history of expropriation during the communist era. In the early 1990s, the government launched a comprehensive compensation program ("kártalanítás") to address past injustices, offering compensation to individuals and entities whose property was nationalized during that period.

Legal Guarantees Against Expropriation

Act XXIV of 1988 ensures that foreign investments in Hungary receive full protection and security. In cases of nationalization, expropriation, or any similar measures, foreign investors are entitled to prompt compensation at fair market value. The compensation is paid in the currency of the original investment, and the administrative body responsible for the expropriation is obligated to make the payment. If a legal violation occurs, the courts can review the compensation decision.

European Union Investor Protection

As an EU member state, Hungary is also subject to the EU's investor protection frameworks. The EU aims to strengthen its single market by eliminating barriers to cross-border investment, harmonizing regulations, and ensuring effective enforcement of EU rules.

Directive 97/9/EC on investor-compensation schemes provides additional layers of security for EU investors, safeguarding their investments according to EU law. This EU affiliation adds credibility and reassurance for foreign investors considering Hungary.

The EU's multifaceted approach to investor protection, particularly within the framework of its Capital Markets Union (CMU) initiative, includes:

• SOLVIT: An online platform helping citizens and businesses resolve issues with public authorities in other EU countries.
• Single Market Enforcement Task Force: Addresses obstacles to the single market, including those impacting investors.
• Single Market Obstacles Tool: Allows businesses and citizens to report obstacles they encounter in the single market.
• Rule of Law Report: Assesses the rule of law situation in EU member states, which is crucial for investor confidence.
• European Semester: A annual exercise of economic and fiscal policy coordination within the EU, promoting investor-friendly policies.
• Judicial Training: Ensures judges and legal professionals are well-versed in EU law and investor protection rules.
• EU Justice Scoreboard: Monitors the effectiveness of national justice systems, impacting investor confidence and access to justice.
• InvestEU Portal: Provides information and support for investors, including on EU funding opportunities.
• Your Europe: Offers practical information to citizens and businesses on their rights and opportunities in the single market.
• Infringement Proceedings: Legal action taken against member states that fail to comply with EU law, including investor protection rules.

Hungary’s Strong Investment Protection Record

In practice, Hungary has a strong track record of protecting foreign investments. Since the political regime change in 1990, there has been no instance of nationalization or expropriation of foreign-owned property. The country has cultivated a business environment that respects property rights and upholds the rule of law, making it an attractive destination for foreign investment.

Foreign investors can feel confident that Hungary’s legal system provides them with a solid foundation for investment protection. The multi-layered approach—from constitutional guarantees in the Fundamental Law, to adherence to EU investor protections, and specific provisions under Act XXIV of 1988—ensures that foreign investments are treated fairly and securely.

Conclusion

Hungary provides a stable, legally secure environment for foreign investments. Its multi-faceted legal structure, grounded in the Fundamental Law and reinforced by EU protections and national legislation like Act XXIV of 1988, offers substantial assurance to foreign investors. As a result, Hungary is known as a favorable investment destination with a strong commitment to upholding property rights and investor interests.

For those seeking a secure, transparent, and legally protected market in Central Europe, Hungary stands out as a reliable choice, offering the necessary security and confidence for international investment.

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