By the time of Hungary's accession to the European Union, the free movement of capital within the territory of the European Union ("EU"), which is one of the basic principles of the EU has to be complied with, as it is a pre-condition of Hungary's accession to the Economic and Monetary Union – and to the euro zone. However, in certain cases, EU allows a transition period for the implementation of the relevant rules.
Community law rules
As a general rule all movement of capital from one country to another one should be considered as a movement of capital. Provisions of the EU Treaty regarding the free movement of the capital authorize any private individual and/or legal entity resident in one of the Members States to pursue financial services in another Member State without any special licenses.
Under Community law any activity with respect to foreign currency can be pursued and any amount of money can be purchased and hold in any currency without any limitation. In addition, anyone is entitled to invest in any of the Member States, anyone can obtain a business share in an existing company registered in a Member State or can establish a new entity. The competent authorities have no right to reject or limit such rights based on economic reasons.
Pursuant to the principle of free movement of capital, the acquisition of a real-estate located in any county within the territory of the Member States cannot be limited, the rules restricting the acquisition of a real-estate on the basis of the citizenship of the concerned person can not stay in force.
Further, a citizen in a Member State can acquire any bonds or shares and this is also relevant for the operation of the investment funds. Transactions with the credit institutions and banks cannot be restricted (deposit, credit, bank account statement, transfer).
Harmonization of the Hungarian rules
Hungary is to accept and implement the Community rules of the above Chapter with respect to the free movement of capital.
As part of the harmonization process the liberalization of the currency has been started after the change of the political system in Hungary (in 1989-90) and has been finished in 2001. The total liberalization resulted the convertibility of the Hungarian Forints.
By the time of Hungary's accession to the European Union the limitations of the free movement of capital provided by the institutional investors (private pension funds, insurance companies) has to be abolished. Currently a Hungarian pension fund is obliged to keep certain percent of its portfolio in Hungarian security. Such restrictions shall be considered as a discrimination on national basis, therefore it has to amend ensuring that Hungarian bonds can be replaced by securities of other countries.
Temporary exemption – transition period
As the result of the negotiation between the EU and Hungary with respect to the terms of Hungary's accession to the EU, the rules concerning the acquisition of a real estate located in Hungary by a foreign person may differ from the EU rules for a certain period after Hungary's accession to the EU.
Hungary has a five-year transition period, during which Hungary is not obliged to apply the Community law regulations concerning the acquisition of a second residence. All real estates, where the owner is not resident, shall be considered as a second residence.
During this transition period, private individuals resident in one of the Member States and legal entities having their registered seat in an EU country have the right to purchase a real-estate located in Hungary as a second residence or other place of business with the prior approval of the competent authority. However, persons, who live in Hungary for at least a 4-year period are not subject to this limitation. By the end of this transition period it has to be ensured that there will be no difference between the citizens of the Member States and Hungary.
Hungary has a seven-year transition period with respect to the application of the rules of acquisition of arable lands by foreign citizens and/or legal entities. During this period acquisition of an arable land is not allowed by a foreign private individual and/or legal entities. Persons living in Hungary at least for a three-year period are exceptions from this limitation, if they are pursuing agricultural activities. Such persons have the same rights and obligations as the Hungarian citizens. A general supervision has to be held after 3 years, on the basis of which the length of this transition period can be shortened if it has no adverse impacts on the Hungarian land market or can be extended with an additional three-year period if the price of the Hungarian lands does not comply with the prices in the EU and it may impact adversely to the relevant market.
The above temporary protection gives time for the Hungarian agriculturalists to improve their operations and to avoid adverse affects on the market and it ensures that the foreign investors could not purchase the Hungarian lands at an unrealistically low price with speculative purposes.
EU Treaty allows possibility to keep some limitations with respect to the free movement of capital, if such limitations were in force on 31 December 1993. However, the above date cannot be applied with respect to Hungary as the legal rules relevant for the free movement of capital were entered into force following this date. Therefore, with respect to Hungary, 31 December 1999 should be considered as the reference date from this respect.
Hungary undertook to review all legal entities, in which the Hungarian State has a so called Golden Share, which ensures priority to the State in voting and a significant influence in all strategic questions of such companies. After Hungary' accession to the European Union it has to be ensured that such shares will be held only in accordance with EU rules. Golden shares can be held if it is important from public security, public health care and/or country protection point of view.
For further information concerning the free movement of capital and other principles of the EU, please visit the home page of the Hungarian Economic Ministry (www.gkm.hu), the official homepage of the European Union (www.europa.eu.int) or www.kum.hu.
