Investment incentives comparison: Hungary & Slovakia

Hungary and Slovakia are two advanced countries located in Central Europe, giving investors access to a single European market, attractive taxation policies, a skilled, low-cost workforce, and a modern infrastructure. Both countries have different investment incentives and focus industries, which would be of interest to a great variety of foreign businesses.

Investment in Hungary

Budapest, the capital

Following the breakdown of the USSR, Hungary has implemented a fast-growing market economy-oriented at foreign trade. In 2019, the country enjoyed a GDP worth $160.96 billion with an annual stable growth of 7.32%, according to Knoema. Despite the expected hit in 2020, the Hungarian economy is projected to swiftly recover and reach the pre-pandemic levels by the end of 2021. This is notable considering that most countries’ economies, including the United States, are not expected to return to the pre-COVID state until the end of 2022. Approximately 80% of the private sector’s Hungarian GDP contributions, with foreign ownership being the most significant benefactor.

Thanks to its geographical position, Hungary can offer access to Southeast and Central Europe through sophisticated infrastructure. The country remains at one of the EU’s lowest positions for the unemployment rate at a value of 4,9% as of 2020, significantly outperforming Austria, France, Finland, and Sweden. Furthermore, the percentage of the population below the poverty levels is also relatively small. Index Mundi lists Hungary below the United Kingdom with a value of 15%, again outperforming Germany (17%), Spain (21%), and Italy (30%). With one of the highest literacy rates in the EU (99,10%), Hungary can offer a skilled yet cheap workforce – many are exceptional specialists in engineering and finance. Apart from that, the government promises a high level of legal business protection for employers and employees. According to Rodl&Partner, Hungarian work regulations can be compared with the German ones.  

When it comes to economic incentives, Hungary has the lowest corporate tax rate in the European Union at only 9%. As of 2020, the government has made further steps to invite foreign businesses by reducing the employer’s social security contributions to 15,5%. Further support is provided for investors who make contributions exceeding 10 million EUR, invest in the tourism segment, or build logistics or manufacturing facilities.

Focus Industries in Hungary

Focus industries in Hungary

Automotive industry in Hungary

The automotive industry is one of the most significant Hungarian economic sectors, accounting for 21% of its exports. This type of manufacturing was recognized as the top priority segment. It is also one of the most invested in sectors in the country (21.1% of the overall investment is poured into this industry). Hungary already has many well-established players in the segment – both local and international. For example, Audi Hungaria, Mercedes-Benz, and Robert Bosch are all big industrial producers.

Electronics sector in Hungary

Hungary remains the biggest supplier of electronics in the Central-Eastern European region, accounting for as many as 26% of the overall production, according to Eugo. The 15th annual Future Horizons International Electronics Forum was held in Hungary’s capital, Budapest, and signaled the country’s important position in the sphere of electronics. According to EE Time, some of the key investors are Nokia, Ericsson, Solectron, IBM, and Samsung.

ICT in Hungary

The ICT segment picked up its pace in Hungary in the recent decade, currently accounting for 10%-12% of the county’s GDP. This sector withstood the financial crisis of 2012, when, unlike practically all other Hungarian industries, saw a growth of 4,5%. Today, it enjoys a net revenue of about 10 billion EUR. Some of the key foreign investors are Ericsson, Oracle, and Gameloft.

Criteria for Investment Eligibility in Hungary

Hungary incentive map

Eligibility and the amount of provided aid in Hungary varies by region (in some of them, no aid can be claimed) and may reach up to 50%. According to Eugo, the amount of aid decreases following the increase of the investment:

Investment between 50 – 100 million EUR = 50 % of the maximum regional aid intensity.

Investment above 100 million EUR – 34 % of the maximum regional aid intensity.

These calculations do not apply to Budapest, where the aid intensity cannot exceed 10%. In Central Hungary and Western Transdanubia regions, the maximum aid intensity is 30%, in Central Transdanubia – 40%,  according to the map presented by Eugo. The rest of the regions are eligible for 50% intensity.

The Hungarian government can also consider VIP Investment Subsidy if the following conditions are met:

1. The investment was made to manufacturing, shared service centers, research and development, or tourism industries (not a requirement, but these sectors are highly favored).
2. The investment between 10-25 million EUR, 50-100 new jobs created.
3. The investment above 50 million EUR, 100-200 new jobs created.
4. Establishment/Expansion of SSCs, 100 new jobs created or 200 in Central Hungary.
5. For R&D investments, 10 new jobs have to be created.

Investment in Slovakia

Bratislava, the capital

Slovakia’s political and economic stability, paired with the strategic geographical position in the middle of Europe, makes it an attractive country for foreign investment. Slovakia ranks high according to the Human Development Index –  0.860 in 2020, yearly improving its position in many dimensions. As of 2020, the country managed to reduce the unemployment rate to 5.1% from 8.13% in 2017.  Slovakia’s GDP is valued at 33, 521 US$ per capita as of 2019, and as much as 80% of it comes from the operation of private enterprises. In 2009, the country adopted the euro currency, allowing investors to avoid exchange rate costs. In 2020, Slovak Republic gained the maximum 100 points in the “Trading Across Borders” category, 90.2 for “Registering Property,” and 84.8 for “Starting a Business” by The Word Bank.

Slovakia can offer low labor costs, a speedily developing sophisticated infrastructure, and many tax incentives to foreign investors. As such, forms of aid include income tax relief, cash grants, aid for new job listings, and foreign tax credit. When it comes to investors’ protection, Slovakia ranks 7.0 in the Index of Shareholders’ Power, higher than Eastern Europe & Central Asia (6.0) and Germany (5.0). Due to that, in 2019 alone, Slovak Republic’s foreign direct investment stock was valued at 60 billion$, according to Nordea.

Focus industries in Slovakia

Automotive industry in Slovakia

Slovakia’s key sector remains the automotive industry, accounting for 44% of the republic’s industrial production, according to VVA and Wik Consult report. The country is the biggest producer of cars per capita, with 1 250 000 cars produced in 2020, making it 229 cars per 1000 people. Slovak biggest players in the automotive industry are Volkswagen Slovakia, Kia Motors Slovakia, Psa Peugeot Citroën Slovakia, and Jaguar Land Rover.

Mechanical engineering in Slovakia

Another important sector that enjoys a stable economic position in Slovakia is mechanical engineering. Its year-on-year revenue growth in sales is estimated at 13%, and the number of newly employed workers grows by yearly 5%. Its close links with the automotive industry – the country’s most valuable segment – make it an attractive investment option. Some major manufacturers include DMD Group, Vaillant Industrial Slovakia, Tatravagónka, MicroStep, and others.

The chemical industry in Slovakia

The chemical industry is another large segment, which is also closely related to mechanical engineering and automotive sectors in Slovakia. The new investment in the segment is valued at €310 million, the revenue – at €9.63 billion, and the share of the manufacturing segment at 13.8%. The Slovak chemical industry includes a wide range of products, such as petrochemicals, organic and inorganic chemicals, and even vaccines. Some of the companies working in this sector are Slovnaft, Duslo, and Continental.

Criteria for investment eligibility in Slovakia

In Slovakia, all of the previously listed types of investment aid apply to different types of proposals. The amount one is required to invest to be eligible for a certain aid package will correspond to the number of new jobs created under the segment, the percentage of the new technology equipment, and the chosen area of investment. For example, Central and Eastern Slovakia have more underdeveloped districts or/and districts where the unemployment rate is higher than the country’s average (5.1%). Therefore, investors who choose those parts of Slovakia will be granted higher aid – 35% in cash grants, income tax relief, and transfer of property in comparison to 25% for those who decide to invest in Western Slovakia, where the unemployment rate is below average. For the same reason, those who are interested to choose Bratislava as their investment option will not be granted any aid. The unemployment rate is calculated based on the data from the year previous to requesting aid from the Slovak government.

Note: according to KPG, generally, the amount of granted aid does not exceed 30,000 EUR per one created job despite the set limits.

Covered types of investment:

Industrial production

• Red areas according to the unemployment rate:  minimum investment amount = EUR 200,000 (for the income tax relief) or EUR 1 mil (for a cash grant) AND if the percentage of new technology equipment is 30% AND if the number of new jobs created is at least 0,2 mil. €/20.
• Blue areas according to the unemployment rate: minimum investment amount = EUR 1,5 mil (for the income tax relief) or EUR 20 mil (for a cash grant) AND if the percentage of new technology equipment is 40% AND if the number of new jobs created is at least 1,5 mil. €/100.
• Yellow areas according to the unemployment rate: minimum investment amount = EUR 3 mil (for the income tax relief) or EUR 30 mil (for a cash grant) AND if the percentage of new technology equipment is 50% AND if the number of new jobs created is at least 3 mil. €/200
• Green areas according to the unemployment rate: minimum investment amount = EUR 6 mil (for the income tax relief) AND if the percentage of new technology equipment is 60%.

Technology Centers

• Priority areas:  minimum investment amount = EUR 100,000 (for the income tax relief) or EUR 200, 000 (for a cash grant) AND if the number of new jobs created is at least 10 AND if the minimum. fold the average salary in a district is 2,0.
• Other areas: minimum investment amount = EUR 200,000 (for the income tax relief) or EUR 400,000 (for a cash grant) AND if the number of new jobs created is at least 20 AND if the minimum. fold the average salary in a district is 1,7.

Business Service Centers

• Priority areas:  minimum investment amount = EUR 200,000 (for the income tax relief) AND if the number of new jobs created is at least 20 AND if the minimum. fold the average salary in a district is 1,8. Cash grants do not apply.
• Other areas: minimum investment amount =  if the number of new jobs created is at least 50 AND if the minimum. fold the average salary in a district is 1,5. Cash grants and income tax relief do not apply. 

Conclusion

Hungary and Slovakia can both offer economic stability, incentives for foreign investors, and access to a single European market. Due to their recent development and continuous projected growth, they remain key investment opportunities for those who wish to expand or start their business in the new country. If you wish to establish your company in Slovakia, YeYe Agency can support you in the following ways: 

• Establishing your company 
• Supporting you in the incentives procedures and application for funds
• Recruiting your local employees 
• Providing accounting and payroll services

Providing access to an online platform that enables you to manage your European company from anywhere.