A new era began on October 1, 2019 in the history of Hungarian investment promotion: there is no need for new job creation of VIP Cash Grant (regulated by Government Decree No. 210/2014) applicants anymore in case of classical manufacturing investments. The measure is a relief in the tight Hungarian labor market for both newcomers and those considering capacity expansion. In line with the above, the conditions of Development Tax Allowance (regulated by Government Decree No. 165/2014) were amended as of January 1, 2020; therefore, investors commit only to the maintenance of their current level of employees.
The above changes well reflect the requirements of the industrial revolution that, sooner or later, will transform the economies in a way where robots and algorithms take over a significant part of the manual and intellectual work, urging us to reimagine the way we do business today. Those countries and geographical areas that act first and create an economic environment that fosters the realization of Industry 4.0. investments will be the beneficiaries of this transition. Moreover, size does matter: progressive startups and innovative medium-sized enterprises play a key role in this shift, bearing the entrepreneurial spirit that overcomes the bureaucratic burdens and applies new, transformative approaches. Therefore, the investments of these companies are key to the fourth industrial revolution.
The above mentioned amendment of the incentive schemes also heads in the direction of supporting small investments and small investors. On the one hand, the CAPEX threshold of the Development Tax Allowance shall be gradually reduced from the current HUF 500 million to HUF 100 million and HUF 50 million by 2022 in the case of medium- and small-sized enterprises, respectively. On the other hand, the EUR 20 million CAPEX criterion of VIP Cash Grant falls to EUR 10 million in the most developed Western and Central counties of Hungary. Moreover, the list of preferred counties (Nógrád; Borsod-Abaúj-Zemplén; Szabolcs-Szatmár-Bereg; and Békés), where the minimum investment is only EUR 5 million, has been extended to also include Baranya, which indicates that the Government’s aim is to direct investments to the less-developed southern part of the country.
As a result of the changes, enterprises in manufacturing industry, who foresee minimum EUR 10 million total asset purchase in the next three-to-five years, may be eligible for both cash grant (VIP Cash Grant) and corporate tax exemption (Development Tax Allowance) almost anywhere in the country.
In conclusion, the abolishment of the job creation criterion triggers the realization of projects possibly being put on hold due to the fact that Industry 4.0 related technology intensive investments do not require extra labor force, while the reduction of CAPEX threshold puts in motion many investors who ‘think small’.
Nevertheless, investors should not forget that there is no free lunch. Instead of job creation, investors have to commit to an increase of wages and sales revenue. In the case of newly established enterprises, the required minimum wage and revenue increase is EUR 0.3 million and EUR 3 million respectively, whereas other companies should reach a minimum of 30% points combined growth. The aforementioned commitments may indicate the technology-intensive character of an investment: increased value creation and business output through enhanced efficiency.
Those companies that are willing and able to succeed in combatting upcoming challenges and make the most of the opportunities lying ahead can benefit from the industrial revolution. It is well said, “There are three types of companies: those who make things happen; those who watch things happen; and those who wonder what’s happened.” For those wishing to belong to the first category, stay tuned!
By Marcell Tatai-Szabo, Senior Associate, Noerr