Hungary: New Hungarian Foreign Exchange Rules

Last Updated: 3 July 1996
by Dr Eva Hegedus (1)

Act XCV of 1995 ("Act") on Foreign Exchange which entered into effect January 1, 1996 along with Decree 161/1995 (XII. 26.) of the Government and Decree ("Decree") 15/1995 (PK. 18.) of the Chairman of the National Bank of Hungary ("NBH") invalidated a great number of foreign exchange regulations and brought about a certain unity into the previously confusing maze of foreign exchange rules. Inspired by the desire to comply with OECD standards in the area of foreign exchange law, thereby acquiring OECD membership status, the Act liberalised most current payment transactions but left certain restrictions in the area of capital transactions. Despite such restrictions Hungary was successful in obtaining its long desired OECD membership and thereby came a step closer to also becoming a member of the European Community.

The Following Were The Most Important Changes Brought About By The Act:

1. The dividing criteria between "foreigners" and "non-foreigners" (domestic/Hungarian persons) for foreign exchange purposes in the case of natural persons is not the place of their permanent residence any more but rather the existence or lack of a personal identity card and in the case of legal persons the seat of the company. (2)

2. As of the entering into effect of the Act the NBH will enjoy exclusivity in the area of foreign exchange control. The Center for Financial Affairs (Penzintezeti Kozpont) and the Ministry of Finance will no longer be involved in foreign exchange control.

3. Despite significant liberalisations, the Act maintained the obligation to have certain capital transactions authorized by and certain current payment transactions and some capital transactions to be declared to the NBH.

THE FOLLOWING TRANSACTIONS NEED TO BE DECLARED TO THE NBH:

  • a person (legal or natural) qualifying as a non-foreigner/domestic person must declare to the NBH (a) all of his/her claims against a foreigner for foreign exchange purposes, (b) all his/her claims regarding a real estate outside of Hungary and (c) all of his/her claims regarding shares in a foreign company;
  • in the event hard currency is used for other than its originally intended purpose, the new intended use must be declared to the NBH within 8 days after such use;
  • an acquisition or sale by a domestic person of an interest exceeding 10 % in a foreign company registered in any OECD member state or in any other country with which Hungary has signed a bilateral agreement for the protection of foreign investment, must be declared to the NBH within 8 days from entering into the respective agreement; the Act contains a list of conditions which have to be complied with. In the event such terms and conditions are not fulfilled, the transaction is subject to the authorization of the NBH in lieu of a mere declaration; In the event the interest in the foreign company does not exceed 10%, the acquisition of such interest will be subject to NBH authorization.
  • loans exceeding USD 50 million by non-foreigner/domestic legal persons from a foreign bank to be repaid within 366 days or more must be declared to the NBH 60 days prior to executing the loan agreement in question; the NBH is entitled to postpone the execution of the loan agreement until all terms and conditions of such agreement have been sufficiently clarified and/or amended to the satisfaction of the NBH;
  • loans not exceeding USD 50 million by non-foreigner/domestic legal persons from a foreign bank to be repaid within 366 days or more must be declared to the NBH within 8 days from executing the loan agreement in question;
  • payments postponed for longer than 3 months must be declared to the NBH;
  • transfer of title to personal property by a non-foreigner/domestic person to a foreigner without consideration (gifts/presents of personal property) must be declared to the NBH, even if the receiver of the property is closely related to the transferor of such property;
  • transfer of title to securities for consideration must be declared to the NBH within 8 days from entering into the transfer agreement;
  • transfer of title to real property outside of Hungary must be declared to the NBH within 8 days from entering into the real estate purchase agreement;
  • transformation of foreign-origin loans by a Hungarian company into the registered capital of such company must be declared to the NBH within 8 days of such transformation;

An important change brought about by the Act is that legal persons qualifying as non-foreign/domestic for foreign exchange purposes, conducting foreign trade, do not have to declare such foreign trade activity to the NBH prior to commencing it, as was their obligation under the old legislation.

In the event of non-compliance with the obligation to declare, the sanction may be that the transaction must be authorized by the NBH instead of merely having to declare it to the NBH.

THE FOLLOWING TRANSACTIONS NEED TO BE AUTHORIZED BY THE NBH:

  • all transfers of title to personal property within Hungary by a foreigner to a non-foreign/domestic person;
  • gifts of hard currency by a domestic natural person to a foreigner;
  • all transactions with securities the term of which is shorter than 365 days;
  • all purchases of real estate outside of Hungary by Hungarian/domestic natural persons with the exception of purchases by Hungarian/domestic persons employed by an employer outside of Hungary; time-share agreements are considered the same for NBH authorization purposes, as actual real estate purchase agreements; NBH authorization may be avoided, if the Hungarian/domestic natural person does not purchase the land outside of Hungary directly, but rather sets up a company in the country, where the land in question is located and has such company registered abroad purchase the land involved.
  • although purchases of real estate by foreigners within Hungary do not require NBH authorization any more, an approval of the transaction is required by both the municipality on the territory of which the real estate in question is located and by the Metropolitan or County Administrative Office (Fovarosi vagy Megyei Kozigazgatasi Hivatal); the purchase of agricultural land by foreigners within Hungary continues to be limited to a maximum of 6,000 m2 agricultural land belonging to a farm house. Even the lease of agricultural land is limited to 300 hectares;
  • all loans by domestic legal persons from a foreign bank from abroad with a term of less than one year;
  • all loans by domestic natural persons from abroad independantly of their term;
  • an acquisition or sale of an interest not exceeding 10% in a foreign company by a domestic person;
  • giving guarantees to foreigners by domestic persons;
  • granting loans to foreigners by domestic persons

It is worthwhile to mention that the NBH's authorization may be subject to conditions; for example although legal persons qualifying as domestic for foreign exchange purposes have the right to open bank accounts outside of Hungary, they continue to have to transfer all of their export related income back to Hungary. 80% of such income may, however, be kept in the bank account outside of Hungary, if the domestic legal person provides the NBH with a bank statement on the foreign account every three months.

The Act has also provided financial institutions with the right to request persons qualifying as domestic for the purposes of foreign exchange rules to submit certain documents in order to process transactions. The list of such transactions and documents is set forth in Exhibit 1 to the Decree. In the absence of such documents the processing of the transaction will be refused by the financial institution. The Decree also lists all documents which have to be submitted to the NBH in connection with certain transactions and documents which have to be kept by clients of financial institutions for five years. This provides an additional guarantee of control and supervision over foreign exchange transactions by the NBH.

Although the Act and the Decree have broadly liberalized the rights of natural persons qualifying as domestic for foreign exchange purposes in the area of foreign exchange, such persons continue to have an obligation to transfer all hard currency acquired abroad to Hungary within 8 days from acquisition, with the exception of (a) monies necessary for maintaining a representative office abroad; (b) salaries and stipends received abroad and (c) income generated by the sale of a share in a foreign company (including dividends), provided the above amounts are used up abroad, e.g. the dividends are used for reinvestment in the foreign company.

Under the Act the consideration for the purchase of goods and services may be set in hard currency; the so called value stabiliser clause does not require NBH approval. Actual payment, however, must occur in HUF.

Foreign natural persons may exchange their HUF back into hard currency, if they are able to demonstrate that such HUF amount was derived from the exchange of hard currency. An additional novelty affecting foreign natural persons working within Hungary is, that they may exchange all of their HUF income into hard currency. Under the old regulations only foreigners in management positions had such right and only with respect to 50% of their HUF income.

Hungarian/domestic natural or legal persons may only accept payment in HUF from a foreigner, if such HUF is derived from the proven exchange of convertible hard currency or from the convertible HUF account of such foreigner.

According to the NBH, the Hungarian government will in all likelihood gradually delete many of the currently remaining restrictions in the area of foreign exchange, while the NBH will continue to liberalise its foreign exchange practices. Therefore, further liberalization efforts may be expected in the area of Hungarian foreign exchange law in the near future.

Footnotes

1. The author is an associate with Beiten Burkhardt Mittl & Wegener in Budapest, Hungary
2. The terms "foreigner", "non-foreigner"/"Hungarian" and/or "domestic" are used in this article to indicate the nature of the natural or legal person for foreign exchange purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information please contact Beiten Burkhardt Mittl & Wegener Lawyers, Jozsef Nador ter 9, H-1051 Budapest, Tel: (36) (1) 266 1810., Fax: (36) (1) 266 1811, or enter text search 'Beiten Burkhardt Mittle & Wegener' and 'Business Monitor'.

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