Hungary: New trends in state aid law in Hungary
Central and Eastern Europe, and especially Hungary, has for decades been an attractive investment location for large Western European and American enterprises, given the region’s favorable location and the availability of a qualified workforce.
State subsidies also play a key role in maintaining the attractive business environment. Currently, there are many subsidies available for investors aimed at accelerating and promoting investment projects in less developed parts of the region.
The trend in Hungary is that most EU co-financed tenders are only open to SMEs, or consortiums including at least one SME. Therefore, the burden of investment promotion has been shifted to subsidy sources financed exclusively from the national budget (development tax allowances, cash grants at the government’s discretion, often called “VIP cash grants”, training subsidies, etc.). Consequently, the aforementioned incentive package for large enterprises generally consists of a direct cash grant and a development tax allowance which together may reach the EU legal thresholds, or aid intensity rates, stipulated by European legislation. According to the current regional state aid map of Hungary, this intensity may be 50% in the case of an investment location in the eastern region of the country. This package may be further supplemented by non-regional subsidies with more specific aims, e.g. training subsidies, environmental subsidies, etc.
Until 2016, and especially during the years of the global financial crisis, the main aim of the regional investment subsidies was to reduce unemployment. Therefore, the eligibility criteria for these subsidies included a commitment to creating new jobs. Nevertheless, over the last few years the unemployment rate in Hungary (and throughout CEE) has fallen significantly, and large employers are finding it difficult to fill their vacancies.
The government of Hungary seems to have recognized this trend and, since January 2017, has directed the state subsidy system towards both job creation and establishing new and automated technologies requiring fewer or even no employees. In parallel, it has extended the applicability of R&D aid schemes.
These measures include a reduction in the minimum number of new jobs to be created in order to qualify for the development tax allowance (from 150 to 50 new jobs, and from 75 to 25 new jobs in less developed regions). In addition, the VIP cash grant system has been extended by establishing new eligibility criteria for investments which create no new jobs but have a volume of at least EUR 30 million (known as technology-intensive projects) and by setting up a new “VIP” R&D subsidy scheme.
In the case of technology-intensive projects, the new legislation offers a great advantage: Large enterprises may receive state aid even without committing themselves to creating new jobs. On the other hand, based on experience gained over the past four months, other criteria for this new type of aid could make it less attractive: The beneficiary of the aid must commit to increasing its sales revenue or its wages’ costs by 30%, and the aid intensity is limited to 25% of the maximum intensity specified for the given region.
In the case of the new R&D aid, the applicant’s R&D project, or even more projects implemented during a maximum period of three years, may be granted a non-refundable cash subsidy. Eligible costs are operational costs, e.g. personnel-related costs of employees involved in the R&D projects, depreciation of assets and rental fees calculated for the hours spent on the project(s), which must be at least EUR 3 million. Projects must be classified by the Hungarian authority as R&D projects. Accordingly, this type of aid may be especially attractive to large enterprises’ research centers which handle several R&D projects at the same time, involving a larger number of employees and thus reaching the cost eligibility threshold. Recent experience shows that applicants must not only be well-prepared for filling in the application form for subsidies, but also for the R&D qualification procedure, which may be an additional cost factor.