$Unique_ID{COW01620} $Pretitle{365} $Title{Hungary Regulation of Foreign Investments} $Subtitle{} $Author{Hungarian Stock Exchange Courier} $Affiliation{Embassy of Hungary, Washington DC} $Subject{real foreign estate investment privatization state property company hungary bank} $Date{1990} $Log{} Country: Hungary Book: Foreign Policy Basics Author: Hungarian Stock Exchange Courier Affiliation: Embassy of Hungary, Washington DC Date: 1990 Regulation of Foreign Investments In order to encourage foreign investment in Hungary, it is indispensable to back up the inflow of foreign capital with legal means. In the recent past several steps towards liberalization have been taken in this field: as a result the number of joint ventures has shown an exponential growth in Hungary. We asked Mr Csaba Repassy, Director in the Ministry of Finance, to sum up the principal rules relating to investments by foreigners. - What are the statutes applying to foreign investors? The Companies Act and the Act on Foreign Investment in Hungary both entered into force on the 1st of January 1989. These laws provide the legal framework. The latter Act re-states certain provisions of the former (of course adding specifics) in order that the foreigner may glean the necessary information merely by studying a single statute. - What are the positive changes which have a beneficial impact on foreign investments compared with the previous situation. Earlier, foreign individuals were not allowed to make investments in Hungary, only companies. Now this limitation has been lifted. It is even possible to set up a fully foreign-owned firm in Hungary. However the acquisition of a controlling interest is subject to the joint permit of the Ministry of Finance and the Ministry of Foreign Economic Relations. The said permit is granted, for practical purposes, automatically. - What are the tax allowances a fully foreign or a joint venture may count upon? In some priority fields (like electronics, hotel construction and operation, packaging techniques etc.) we grant a complete tax freedom for 5 years maximum. The relevant activities are listed in the Supplement of the Law. In other fields the lowest limit of tax benefit is at 20 percent. - What kind of guarantees does the Hungarian Government offer to foreign investors regarding the repatriation of their profits? The profit and dividend can be freely transferred-in hard currency, without any further permit or condition. This applies even when the revenues have accrued in forints. - How much profit has been repatriated in the first half of this year? About 20 million dollars. However, the inflow of foreign investment capital was much higher than that. - What happens when a foreigner wishes to sell his stake or wind up his Hungarian venture? Even so he can freely transfer his investment. Incidentally, the winding up of ventures is not a characteristic phenomenon; at most, sales of equity participation occur. - What weight does American capital represent in the investment of equity capital in Hungary? As to the number of investments, American investors rank third. For the time being small- and medium size investors prevail, but a few big firms have already made their appearance, e.g. General Motors, General Electric and Ford. Incidentally, Hungary-thanks to its attractive legal rules-should be an ideal place for those firms which do not yet have a network in this part of Europe, since the neighbouring countries are easily accessible from here. - So far we have only spoken about equity capital investment, yet in Hungary the Stock Exchange is already operating... In my opinion our country is not yet fully ripe for portfolio investments, as the Stock Exchange market is at present underdeveloped. On the other hand, when a foreigner has a concrete objective in mind, he will surely meet his expectations. Finally, I would like to mention another point: although we do not have a mutual treaty with the USA on the protection of investments, the investors are not unprotected; in fact, OPIC has extended its activities to Hungary so that the American investors may request a security on their Hungarian investments. Moreover, we are also members of MIGA. -er- Going Private STATE PROPERTY AGENCY Privatization in Hungary The strategy of the privatization processes in Hungary is identified by the theses called Ownership Reform and Privatization adopted by the government. According to this, the main directions of privatization cover the following: - State-initiated privatization, in the course of which the State Property Agency, in cooperation with various ministries, identifies the state enterprises to be involved in privatization, and makes arrangements for and carries out their privatization; - in the course of enterprise-initiated privatization state enterprises are, at their own initiative, transformed into economic associations or, in reliance on part of their resources, form economic associations together with external partners; - the privatization of state-owned internal trade and service enterprises takes place in accordance with a special law. The Agency This is the most important state institution of the privatization processes in Hungary. The setting up of the Agency was decreed by Parliament, through its Act VII of 1990. It is supervised by the Government, and the members of its Board of Directors are appointed by the Prime Minister. It began operation on March 1, 1990. Its primary responsibilities include the preparation and implementation of state-initiated privatization deals, control and approval of state enterprises' transformation into economic associations and of their autonomous initiatives at privatization, and keeping records of and management of the property of the State operated in economic associations. The State Property Agency regularly reports on its activity to Parliament. Its Objectives The state property management organization carries out its activity in accordance with the relevant legislation and the property policy guidelines as determined by Parliament and pays special attention to ensure that privatization deals are unimpeachable and transparent. In the case of every privatization deal it endeavours to make them unambiguous and comply with generally accepted professional criteria. With a view to ensuring this latter aspect it avails itself of the services of external consultants as well as of the available international privatization experience. In carrying out privatization, the State Property Agency aims at - improving the economic efficiency and profitability of the enterprises undergoing privatization; - intensifying economic competition relations; - satisfying small investors' intentions to utilize their savings, thereby increasing the global level of savings; - helping the new Hungarian stock exchange to gain strength; - facilitating the spread of various forms of employee share ownership; - ensuring suitable incomes for the state for reducing public debt. The State Property Agency takes into consideration the effects privatization exercises on employment, in order that the various deals should not result in a large-scale and unmanageable increase in unemployment. The Agency pays considerable attention to the protection of national interests. First Privatization Program In September 1990 the State Property Agency announced the First Privatization Program covering twenty state enterprises. One important goal of the program initiated by the state and to be carried out under state direction is to gain suitable experience of privatization. In reliance on that, the process of privatization can later be speed up in Hungary. The First Privatization Program starts by the selection of consultants through public competition. The consultants draw up the privatization plans of the individual enterprises for the State Property Agency and then carry them out in accordance with the Agency's decisions. The Program is expected to take two years to be implemented. During this period the greater part of the state property share of the enterprises included in the Program will get into private hands. The State Property Agency expects both foreign and domestic investors to show interest in the realization of the Program. Turning to good account the experience gained with the First Privatization Program, the state property management organization has begun the drawing up of further privatization program packages. The launching of two or three programs a year is planned. Lajos Csepi Executive Director State Property Agency In the offing Investment trusts are - as yet - missing from the palette of the Hungarian securities market. However, a Bill regulating their activities is going to be submitted to Parliament soon and is likely to enter into force at the beginning of next year. The objective of the law is to enable the accumulation of the citizens' and small investors' savings so that the capital thus collected can be invested to the benefit of the depositors in the most advantageous manner, by ensuring the necessary expertise and reducing the risk to the minimum. All this will permit the influx of additional capital in the Hungarian economy. The Law aims to provide a blanket regulation of the real-estate and securities funds. It will open the possibility of creating both open-end and closed-end trusts. Each trust may administer several types of funds; of course they must be well separated from one another. In view of the - as yet - not fully developed state of the Hungarian Stock Exchange, the regulations relating to the securities trusts will be, initially, laxer compared with European standards. Here is an outline of the major points of the draft statute. - Investment notes may be emitted by any investment company possessing the permit empowering it to manage investment funds. Such permits are issued by the State Securities Supervision (SSS). - The said permit may be granted exclusively to a limited liability company (LLC) or to a company limited by shares (Co. Ltd.) possessing registered shares only, under the following conditions: - the LLC must show a paid-up primary stock of at least 5 million forints, - the Co. Ltd. must show a paid-up capital of at least 10 million forints; further in either case - the administering of funds must be the company's sole activity, and - the company shall be a member of the Stock Exchange. - Before the emission of the investment notes, the trust shall publish a proper prospectus. In addition, the investment trust must provide half-yearly and annual reports to the holders of investment notes, on the fund(s) administered by it. - It is up to the investment trust to determine the emission value of the investment notes. - The dividend on the investments is due to the holders of the investment notes, after the deduction of the handling fee in proportion of the value of their investment notes to the day-to-day quotation of the fund. The dividend must be paid at least once a year, except when the re-investment of the proceeds has been provided for in the prospectus. - The investmemt company acts as a jobber, in its own name, on the strength of a commission given by, and on behalf of, the owner of the investment note. The activity consists of sales and purchase of securities and/or real estate. - The investment trust may charge quotation and repurchase commissions, as well as a handling fee for the said activities. - In the event of a securities fund only publicly floated securities may be purchased (for the client) which have a daily measurable current price. The proportion of securities not quoted on the Stock Exchange may not exceed 25 percent of the assets of the fund. (Projected proportion) - The real estate fund must consist of at least 10 real estates and the value upon acquisition of any single real estate shall not exceed 15 percent of the value of the fund. (Projected proportion) - Real estate under construction shall not exceed at any time 10 percent of the value of the fund. (Projected proportion) - The investment trust shall entrust a separate deposit-administration company (independent from its own organization) to deal with the administrative and technical tasks. -majer- Buy Some Land ACQUIRING REAL ESTATE In order to facilitate the foreign businessmen's orientation in the maze of Hungarian statutes on real property, we asked the Legal and Fiscal Division of the Ministry of Finance to brief us on the essential rules. The following information was provided by Section-Chief Dr. Gyorgy Kiraly. According to Act I of 1987 - the Land Act - as amended several times, Section 38, para. (1): "a foreign legal entity or private person - unless the law or international treaty provides otherwise may acquire the ownership of real estate through purchase, exchange or present, subject to the permit of theMinistry of Finance." A foreign private person is a) a non-Hungarian citizen, b) a Hungarian citizen permanently domiciled abroad. A foreign legal entity - according to Decree 26/1987 (Jul. 30) MT, section l/f, as amended - is a legal entity having its seat abroad, as well as a foreign organization not constituting a legal entity which has its seat abroad. Subject to the conditions laid down in Decree 145/1989 (Dec. 27) MT the above-said entities or persons may acquire real estate in Hungary provided any of the following conditions exist: a) if he/it enjoys equal treatment with Hungarian citizens of entities on the strength of an international treaty; b) if he is in possession of an immigrant visa or personal legitimation enabling permanent residence; c) when his (former) real property has been expropriated; d) when he exchanges his property against another one; e) is in possession of a Hungarian private passport, provided he/she intends to purchase a flat (house-building lot), holiday home (holiday lot), either for himself/herself, or for a close relative (cf. Civil Code, art. 685, clause b.), his/her parent's brother/sister including the latter's children, for the purpose of their stay in Hungary; f) when the object of the acquisition consists of the termination of common property; g) in the event of the expropriation of the real estate in foreign ownership, the foreign owner may be permitted to acquire new real estate provided he/she intends to purchase the new real estate from the amount of compensation paid on expropriation. A person (organization) having his domicile (seat) abroad, shall pay the purchase price of the real estate either in foreign currency or in forints obtained through the exchange of foreign currency except in the case of compensation received from expropriation (eminent domain). Applications for the acquisition of property must be submitted to the Central Corporation of Banking Companies. Against the decision of the latter an appeal for revision lies with the Ministry of Finance. The permit includes the permit of the Foreign Exchange Control. For this reason, the authority deciding on the issue may refuse the permit even in the existence of the conditions listed above, by referring to the interests of foreign exchange management. Some associations (companies), entities, specially mentioned in separate statutes are not subjected to the outlined permit proceedings. According to Act XXIV of 1988 on Foreign Investment in Hungary, section 19: "the association may acquire ownership or other real estate rights necessary for its activity as defined in the Contract of Association (Memorandum)." In this case it need not have a separate permit for such acquisition. For the present purpose the term "Association" means an economic association, in other words a company. Foreigners may be founders or members in an economic association (company) only if they control a firm (corporation) under their national laws, or else they have been entered, according to their national laws, in a company (or other economic) register. (Cf. Company Act, sec. 7.) In the event of the existence of the conditions listed in the Company Act, the Court of Registration shall enter the association in the company register. Such associations, thereupon, may acquire real estates under equal terms and conditions with domestic associations. In the future the acquisition of real estate by foreigners will be regulated in a separate statute, thus the foreign private persons or investors will have easier access to the relevant information. Real Estate Bank Ltd. The Hungarian banking system boasts a new participant: the Real Estate Bank Ltd. established at the beginning of the year with a registered capital of Ft 840 m. Its principal shareholders include some of the most renowned and experienced banks and establishments of the country: the Hungarian Credit Bank Ltd., the Hungarian Foreign Trade Bank Ltd., the Post Bank and Savings Institute Ltd., as well as the National Social Insurance Directorate. We asked general-director Zoltan Nagy to describe the Bank's activities in a business branch that is nowadays very much in focus. - What kind of real property is in demand in Hungary? Among foreign investors the most popular items are construction sites for office buildings as well as locations for industrial projects. Domestic demand is on a much narrower scale, although we have quite a lot of clients. In our experience, foreigners are willing to become partners in various real estate ventures expecting - as they do - that the, for them, puzzling Hungarian legal relations will soon clear up. Hungarian real estate is good business, I daresay it is the future's business: in fact our real estate prices match the world level. - Are our services, too, on a par with the world market requirements? All this relates closely with our special business policy in which we rely on both private and institutional investors, domestic and foreign entrepreneurs alike, hoping for example to achieve an important role in the preparations of the World Exhibition. We are aiming at complexity in our activities, where the conventional banking operations are complemented with various financial, economic and technical services. Such are, for example, financial, legal and investment consultancy, and the carrying out of investment projects from design to construction. Moreover we are dealing with conveyancing, real estate agency, value assessment, as well as consulting on the exploitation. - What are the main activities of the Real Estate Bank. Touristic and "medical tourism" projects and facilities; and the organization and financing of the construction of office buildings and flats, business centres and industrial parks - this is one group of our activities. Another division concerns the privatisation of state property - the organization of joint ventures with equity participation. In addition we offer our clients the full range of classic banking services including several types of saving programs. - Will you offer long-term investment programs? We intend to achieve this aim, too, both in the case of citizens' savings and foreign investors. We have a real estate investment fund in mind, the property notes of which would be floated in the market as a new type of security. I am confident that Parliament will enact the Bill on Investment Companies to be tabled in October, and subsequently we will get the permit for issuing new investment notes. - Knowing the present conditions, how long a processing time can you promise to your foreign clients? I wouldn't go into actual figures, since the laws to be enacted this autumn are likely to solve many problems. Still, I can promise to come up each time with actual results within the agreed terms. Ildiko Klarik Subsidiary Formed Though the Real Estate Agency, a subsidiary company of the Real Estate Bank, has only been in existence for nine months, it can announce a successful year on the basis of its achievements to date. In this exciting field of business life both the name of the bank and of its subsidiary company are already well-known. Gyorgy Egerszegi, the manager, undertook to give an account of the functions and activities of the company for our supplement. Our company was launched in January of this year with a capital stock of approx. 50 million Forints following the decision of the management of the Real Estate Bank Joint Stock Company. The bank's aim was the establishment of an independent organization which would discharge duties related to the real estate financing of the bank but not easily accommodated within bank organization due to its order of magnitude and operations. Our relations with the "mother company" are business-based: we undertake tasks such as brokerage, investment arrangements and real estate assessment for a commission. In addition we offer the following services to our customers: the mediation, sale and purchase and seeking out of various real estates, the assessment, technical and current market evaluation of dwellings and other properties, the elaboration of projects in connection with the utilization and profitable exploitation of real estate. Apart from this we also handle the sale of state-owned properties and arrangements of building investments as well as the organizing of such enterprises. To sum up and elaborate: we are progressively expanding the range of our real estate trade and mediation. Our commissions number around 150-200 at present, comprising flats, weekend houses, offices and industrial premises. In the course of our activities we have found that it is the smaller flats and the luxury dwellings in the green belt - properties at the extreme ends of the supply pole-that are in steady demand; while customers from abroad are primarily interested in building sites suitable for the construction of office-blocks and hotels, or old buildings which can be converted with a view to such ends. In the course of real estate marketing we handle the sale and purchase of dwellings under our own construction investment but also dwellings belonging to other proprietors. We were among the first to handle the sale of state-owned flats and have in the course of marketing these signed contracts of agency with eight Communal Management Enterprises. We have passed 3000 state-owned flats into private hands and we also market flats using life-annuity contracts. In addition, we handle construction, either under our own building investment or commissioned by the bank. The flats at 49-53 Dobozi Street (8th district) as well as the blocks in Sasad and Pesthidegkut are among them. I would like to call our foreign clients attention to the fact that we also handle the arrangement and preparation of project enterprises in connection with various kinds of real estate, as well as securing opportunities for foreign capital investment. Two companies are on the point of being launched, both with foreign investors; the properties in question are to be utilized with a view to foreign tourist traffic. In our opinion this will be a popular and expansive branch of business in the next three years, besides the drawing up of suggestions as to the assessment and profitable exploitation of real estate. We have already taken part in the preparation of the value assessment, and on occasion in the assessment itself of several extremely valuable properties in association with the state privatization program. Proof of the success of this line of business is the revealing fact that by the end of August the assessment of 650 flats and 10 extremely valuable properties had been completed, commissioned by various firms. To sum up our results to date: in the first six months of its operation our company pursued a moderate/controlled economy and built up the basis of its subsequent activities. Our business policy or "ars poetica" if you will, is: co-operation, honest trade, reliable and reasonable profit. In the real estate business you have to plan ahead. The banks and the financing of development In recent years the banks did not play an active role in the transformation of the economic structure in Hungary. In the rechanneling of foreign resources participation in the financing of the World Bank programs played a decisive role. Taking account of the programs which have been closed or which are still going on, the total amount of the 23 program loans is USD 2496.5 million. In these programs the financial institutions play a role of passing on the credits, implementing them and also using them, but their passing on of the loans is the decisive activity. In respect of the transfer of program loans, the share of the three large commercial banks - Hungarian Credit Bank, Commercial and Credit Bank, and Budapest Bank - approaches 95%. In the first half of 1990, out of the World Bank credit resources approaching 53 thousand million forints, 50 thousand million were lent by these three large commercial banks. This outstanding share in participation is due to the fact that when the two-tier banking system was established these financial institutions inherited the then existing programs from the National Bank of Hungary, while the other financial institutions became active in this area mainly from 1989. Partly from the end of last year, but mostly this year new opportunities for foreign resources were opened up for entrepreneurs and thereby also for the financial institutions mediating them.