Country report Hungary

Economic overview

Hungary has adopted in 2021 and for the current year an economic policy strategy focused on fighting the pandemic and relaunching the economy, trying to preserve policies for families and pensions, business support measures, housing and employment programs. A further priority objective concerned the protection of the purchasing power of households from increases, implemented through the regulation of gas and electricity prices for domestic consumption and with the introduction of temporary measures such as the ceiling on the prices of certain food and fuel goods. and the freezing of interbank interest rates at October 2021 levels on mortgages and household loans.

Regarding growth, in 2021 the Hungarian GDP recorded an increase of 7.1%, higher than the forecast in the 2021-2025 Convergence Program (4.3%). The measures adopted by the government were effective and allowed the country to resume the growth path prior to the pandemic. The recovery of the economy and the increase in tax revenues have already favored the reduction of the budget deficit to 6.8% of GDP in 2021 (-7.8% in 2020) and the level of public debt to 76.8% of the product (79.6% in 2020). The consolidation of the recovery also allowed the government to reduce stimuli to the economy and to set the deficit / GDP ratio for the current year at 4.9%, one percentage point lower than the target set in the Budget Law. 2022.

The main objectives of the Hungarian Convergence Program 2022-2026 concern the maintenance of growth prospects, financial stability and the sustainability of public finances in the medium term. Fiscal policy priorities include further reductions in the taxation of labor income and social security contributions to be borne by businesses, and the strengthening of employment support measures. On the monetary policy front, in order to stem the inflationary push, the Hungarian Central Bank adopted a more restrictive approach in the period June 2021/2022 by gradually raising the reference interest rates. As long as the medium-term inflation outlook is not aligned with the 3% rate (+/- 1% fluctuation band) set by the Hungarian central bank, further rate hikes cannot be ruled out at the moment.

In the period 2022-2026, an economic growth of around 4% is estimated. By 2026, a progressive decrease is expected in the budget deficit (up to 1% of GDP) and in public debt, which should fall to 63.1% in relation to output. The achievement of public finance objectives would guarantee room for maneuver to face the challenges arising from climate change and demographic aging in the future.

The draft budget for 2023 presented to Parliament on 7 June is based on an economic growth forecast of 4.1% and an inflation rate of 5.2%. The public finance framework for 2023 sets a deficit target of 3.5% in relation to output and a public debt / GDP level of 73.8%. Among the factors taken into consideration for the drafting of the document, the impact of the conflict in Ukraine and the sanctions against Russia, the high rate of inflation, the slowdown of the European economy and the current phase of uncertainty at the level global.

Main sectors of industry

Today, the Hungarian nation has an economy based mainly on industry and agriculture, with an average level of development in constant growth. Its markets today are totally open to foreign markets and exports, and since 1 May 2004 its economy has been integrated into the large family of the European Union.

Thanks to the fertility of the land, almost two thirds of the Hungarian territory is destined for agricultural cultivation, in the sector more than 12% of the active population find employment. 

The crops have an extensive character, with production of cereals, sugar beets, potatoes, wine grapes. We also find the cultivation and production of the traditional red pepper from which paprika (the Hungarian one well known internationally) is obtained. The country has a shortage of raw materials and energy resources, with the exception of some minerals such as bauxite. For this reason, heavy industry has been forced to turn to more technologically advanced sectors such as the automotive and electronics sectors which make a considerable contribution to exports; in this context, a large part of the economic activity is carried out by foreign companies which have their production plants in Hungary. 

The industrialization process in Hungary has assumed significant dimensions since the 1950s but the dependence on imports of raw materials has always been strong. Today the Hungarian industry, which is mainly based on the manufacturing sector, produces about a quarter of the GDP. Relatively developed sectors are the chemical and textile industry. Services that contribute about two thirds to the national GDP have also grown in the last decade. In this context, financial activities, real estate, economic services, community services (administration, medical and social assistance) and tourism have received a strong boost, which is currently going through a phase of considerable growth.

Taxation for businesses in Hungary

Hungary, together with other EU countries (Luxembourg, Belgium, Holland, Malta, Cyprus and Ireland), has implemented an innovative tax system that can also attract foreign investors. By focusing on a highly advantageous taxation of income (9% for companies and 15% for individuals) in recent years the country has managed to stimulate economic growth even if it has been repeatedly recalled by the European Commission for its strategies. of tax planning judged aggressive.

To balance the low taxation on businesses and individuals, Hungary has chosen to increase consumption taxes. VAT is generally 27% even if there are 18% and 5% rates. Still on the subject of income taxes, the country has not only focused on reduced rates but has also introduced tax relief and advantage / flat rate systems that are very attractive for small businesses and professionals. To incentivize investments in research and development, additional tax rebates (halving the already low rates) and tax rulings with the tax agency (Ntca – National Tax and Customs Administration) were introduced.

Corporate income tax (társasági adó)

All companies resident and incorporated in Hungary (partnerships and capital companies) are subject to corporate income tax. Non-resident companies are taxable only on income derived from activities carried out in Hungary through a permanent establishment. The expected tax rate is 9%.

The tax system does not provide for the application of withholding tax on outgoing dividend, interest and royalty payments.

Advantage and flat schemes

In recent years, numerous subsidized and advantageous schemes have been introduced for small and medium-sized enterprises and professionals:

Eva, simplified tax regime (in force until 31/12/2019)

The regime, applicable to companies whose annual turnover does not exceed 30 million huf (about 90 thousand euros), provides for the application of a single rate of 37% on the total turnover of the company, adjusted for some elements.

Kiva, small business tax

Limited liability companies with a single member, cooperatives and foreign operators with a permanent establishment in Hungary can opt for the subsidized tax regime called Kiva. To be admitted to this regime, the following criteria must be met, among others: the average number of employees during the year must not exceed 25; turnover and total assets in the balance sheet must be less than 500 million florins (approximately 1.5 million euros). The Kiva tax rate is 13% calculated on the difference between the liquid assets of the current year and the previous year, adjusted for personnel costs and some other costs. The tax base thus obtained cannot be less than the cost of personnel.

Kata, flat rate tax for small businesses

The subsidized scheme provides for the payment of a flat-rate tax of 50 thousand huf (about 150 euros) per month for each employee hired full-time (or, optionally, 75 thousand huf – 225 euros to have greater social security coverage) and 25 thousand huf (75 euro) for each part-time worker (employed for less than 36 hours per week, retirees, qualified employees insured abroad, entrepreneurs carrying out non-auxiliary activities in another company). Where the subject’s annual turnover exceeds 12 million huf (36,000 euros), an additional tax equal to 40% of the excess turnover is collected.

Personal income tax (személy jövedelemadó)

The income of individuals is normally subject to tax at a rate of 15%. To mitigate the taxation of employees, the remuneration system with fringe benefits and corporate welfare commonly referred to as “cafeteria elements” has spread.

Value added tax (általános forgalmi adó)

As already mentioned, Hungary traded low income taxation for high indirect taxation on consumption. In particular, the VAT rate is the highest in the EU with an ordinary rate of 27%. There are two reduced rates of 18% (hotel, food, cultural services, etc.) and 5% (drugs, books, etc.).

Investing in Hungary

  1. Growing economy and lowest corporate tax rate in Europe | Its economic growth indicators have steadily increased over the past decade. The corporation tax is 9%.

2. Large logistics and infrastructure in central Europe | In addition to being a member of the EU, located in the Central-Eastern European region, it is very well connected with both Western and Eastern Europe.

3. Strong financial support from the government and the EU for business opportunities | Positive climate for investments | Clear and time-efficient bureaucracy and company incorporation procedures.

4. Destination of investments | Hungary also offers excellent investment opportunities compared to the real estate market (probably the best performing residential market in the EU in 2019).

5. Highly educated workforce with a competitive cost.

6. Dynamic, safe and vibrant atmosphere | High quality of life for all ages. The growing number of tourists visiting Hungary and expatriates define it as the most livable and touristic place.