Equity Finance 2024 Comparisons

In Hungary, venture capital is a crucial financing method for early-stage businesses with high growth potential, particularly those that carry a higher degree of risk. This form of financing is typically sought by companies that:

• have outgrown their initial funding sources;
• are not yet ready for public listing, owing to unmet requirements; and
• cannot secure traditional bank loans because of their early development stage and associated uncertainties.

Venture capital involves raising funds by selling shares to investors. However, this financing is more than just a capital injection ‒ investors often take an active role in the company, usually by joining the board of directors. They contribute to shaping the business strategy, overseeing management, driving sales and marketing initiatives, and selecting key management personnel.

The types of investors include individual investors and institutional investors, as follows.

• Individual investors provide capital and professional support to companies independent of them.
• Institutional investors are venture capital fund managers, which in Hungary are a type of investment management companies. Venture capital fund managers provide a link between investors and the companies that are seeking capital. A fund should invest in several companies, thereby diversifying the fund’s portfolio and spreading and balancing the risk of the resulting complex product. In such a scheme, the investor is completely passive and the transactions are carried out by the fund manager.

Among these, institutional investors are more prevalent in Hungary – both in terms of the number of deals and the volume of capital invested.

Mezzanine and convertible loans as hybrid forms of financing are an option under Hungarian law. However, their practical application has not been widespread so far.

In Hungary, private equity funds generally focus on acquiring a significant or controlling stake in medium- to large-sized companies. A key advantage of private equity funds is their ability to maintain the confidentiality of shareholders’ identities, as their units are not offered to the public.

Private equity funds, therefore, are the primary financing tool for businesses in growth stages. These funds are alternative investment vehicles that can be structured as separate legal entities.

The benefits for businesses are:

• the money received should not be repaid like a bank loan, so it does not burden the company’s cash flow; and
• it is clearly aimed at strengthening the firm, as the investor can “benefit” from the transaction only if it increases the profit-making capacity or the value of the business.

The benefits for investors are:

• the structure, members and beneficiaries of a private equity fund are fully adaptable to the needs of the investors;
• long-term investment horizon – the law requires a minimum operating period of six years, but there is no upper limit;
• private equity funds in Hungary are not part of the beneficial ownership register (ie, the beneficial owner does not have to be declared at the time of incorporation and operation), so one of the main advantages is the full discretion not to disclose the owners;
• payments into private equity funds are completely tax exempt, paying neither corporate tax nor local tax; and
• in the case of a natural person, the positive return of a private equity fund is treated as dividend, on which a globally low personal income tax of 15% (with no upper limit) and a social contribution tax of 18.5% (capped at 24 times the current minimum wage, which is currently EUR16,000) are payable.

Process of Equity Listing

Decision on listing

A company preparing for an IPO carries out a pros and cons analysis (eg, “revenue” from listing, information obligations, and costs). If the company considers that the advantages outweigh the disadvantages, the company decides to list.

Companies take into consideration the following factors when deciding whether to list or not.

• The pros, which are:
1. strengthening business trust;
2. better credit availability;
3. flexible future financing;
4. favourable “exit” option;
5. tax advantage;
6. liquidity;
7. continuous company valuation;
8. increased financial discipline, performance pressure; and
9. better “visibility” and marketing.
• The cons, which are:
1. information obligations (Market Abuse Directive (MAD)/Market Abuse Regulation (MAR); and
2. costs.

Selection of collaborators

The following collaborators are typically involved in the process of equity listing.

• Investment firms – their task is the preparation of the issuance process, advisory services, transaction organisation, and sale of securities.

• Auditors – alongside the regular audit, auditors prepare a more detailed financial report (long-form report) during the preparation of the issuance process and qualify management’s profit forecast (if any).

• Legal advisers – their task is to conduct due diligence on the company, its main contracts and legal relationships, and documentation affecting shareholders’ rights (articles of association, memorandum of understanding, syndicate agreements, etc).
• Marketing and public relations consultants – their focus is the sales promotion.

Preparation for stock exchange listing

The company must be prepared to be public; it must reorganise its structure and operations to be able to carry out the publicity obligations. An appropriate level of investor relations and co-ordination of internal processes between departments should be ensured.

In the case of an IPO, in particular – but also for a simple listing ‒ it is useful to develop an appropriate marketing campaign, which is also done at this stage.

Preparation of prospectus

The most important basic document of the listing – in line with the EU regulations - is the prospectus. This must contain all the information concerning the economic, market, financial and legal situation of the issuer (and its expected development), so that investors have the broadest possible information to make their informed decisions.

The requirements for the content of prospectuses at EU level are laid down in the Prospectus Regulation.

This prospectus should prominently state if the shares are intended to be listed on a stock exchange and, as a key risk factor, if no investment firm is involved in its preparation.

Preparation of listing documentation

Beyond the prospectus, the listing documentation basically consists of the application, the contract with the investment firm(s) (if any), and the declarations of the issuer.

Licence from supervisory authority

The prospectus drawn up for admission to trading on the Budapest Stock Exchange must normally be submitted to the National Bank of Hungary for approval, which will then decide within 20 working days and issue its authorisation to publish the prospectus. However, the supervisory authority may not only examine the form but also the substance of the prospectus, so the procedure may be delayed.

As a consequence of EU accession, the stock exchange will also accept prospectuses approved by any other EU supervisory authority on the basis of the “single passport” principle.

Submission

Given that the Budapest Stock Exchange is open to it, it is advisable to submit an unofficial draft of the application for preliminary review before the formal submission of the listing documentation, for a smoother processing. This could be followed by the formal submission of the agreed materials.

Publication by stock exchange of receipt of application

Upon receipt of the application, the stock exchange will inform market participants of the receipt of the application by means of a notice.

Examination of form and content of application

The Budapest Stock Exchange has ten trading days to examine the form and content of the application for listing and decides on the application within 30 days. If necessary, the stock exchange will request the issuer to submit a supplementary application, which will then complete the documentation accordingly within a maximum of ten trading days. In such case, the deadline for the stock exchange’s assessment will be extended by the time of submission of the supplementary application.

Publications on website

Documents relevant to market participants before they make their investment decision must be published at least two days before listing.

Decision by stock exchange on listing

If the documentation is complete and adequate, the Budapest Stock Exchange will issue a decision to list; otherwise, the stock exchange will issue a decision to reject.

First trading day

The issuer can decide on the first trading day, which must be no later than 90 days after the listing.

Relevance of Public Equity Markets

The capital market in Hungary is relatively underdeveloped in its current state. However, it is now on the road to progress.

Larger, more capital-intensive companies can be listed on the two categories of the stock exchange (standard and premium). Meanwhile, the Xtend market is available to investors for shares in SMEs that are ready to go public, planning significant growth in the coming years and would need external financing.

Methods

There are several main types of capital restructuring techniques available in the Hungarian capital market that companies can use to adjust for financial difficulties or to implement growth plans, as follows.

• Debt-to-equity swaps ‒ these are applicable in Hungary but are mostly seen either in larger companies or in private companies where a few shareholders finance the firm first by shareholder loan, which can be converted into equity.
• Down rounds ‒ these are also not uncommon in Hungary, especially in the start-up ecosystem, even though they create an uncomfortable situation for existing shareholders as their equity value decreases.
• Dilution – capital increase with dilution as a technique is relatively common in Hungary, especially when a company seeks to raise funds for new projects or to manage financial difficulties.

In addition to the above-mentioned examples, the following restructuring methods are known in Hungary.

• Equity extraction ‒ the company buys back a portion of its existing shares, reducing the number of shares available in the market. This can increase the value of the remaining shares but also reduces the company’s actual capital.
• Buyout – sometimes a financially troubled company is acquired by another company or an investment fund, which then gains determining ownership and restructures the company.

Capital restructuring may also be involved in procedures to preserve the solvency of companies and ensure their continued operation. These include restructuring procedures, bankruptcy proceedings where appropriate, or winding-up in the case of financial institutions.

Challenges

The main challenges involved in these common equity restructuring techniques are:

• protecting the interests of existing shareholders;
• balancing the needs of creditors and investors; and
• ensuring the long-term viability of the company.

These challenges often require significant negotiations and compromises. They must be carefully considered from a regulatory standpoint, as tax and legal environments can both influence decisions.

Legislative Background

In Hungary, corporate governance arrangements for private companies with more than one shareholder are governed primarily by the Civil Code, as follows.

• Supreme body – in Hungary, the shareholders exercise their rights in the supreme body (general assemble of the shareholders). The supreme body has the authority to decide on key matters such as the articles of association, the capital increase/decrease, issuance of securities, approval of annual reports, distribution of profits, fundamental business and personnel issues. Different types of shares may be issued according to the rights of the shareholder. This ensures that the rights so recorded are also transferred to the purchaser upon transfer of the security.
• Management – in most companies, day-to-day management is handled by executive officers or a board of directors. The management body is typically appointed by the supreme body.
• Supervisory board – the articles of association can establish a supervisory board as well and it can be entrusted with the power to take or approve certain decisions falling within the competence of the supreme body or the board of directors.

Contractual Arrangements

The specifics of governance, management decisions, and shareholder rights are often further elaborated in the company’s articles of association or even in a syndicate contract ‒ for example, specific rules or rights concerning:

• director appointments and removals;
• decision-making thresholds;
• information rights; and
• restrictions on share transfer.

The key features of such contracts are as follows.

• Information rights ‒ in a private company’s shareholders’ agreement, investors often secure information rights such as periodic reporting (eg, quarterly reports) or inspection rights, in addition to the general information rights granted by law.
• Shareholder decisions – in addition to setting voting percentages and granting veto rights, it is common for contracts to include drag-along and tag-along rights.
• Exit rights – one of the most essential elements of these contracts is the specification of exit scenarios. In addition to pre-emptive rights or put and call options, full exit strategies may be stipulated in these contracts, such as an IPO or a trade sale, including timelines and procedures.

In Hungary, it is uncommon for investors to simultaneously provide both equity and debt to a company. This practice is primarily undertaken by private equity and venture capital funds. There are a number of commercial and legal considerations behind this, as follows.

• Commercial considerations to be taken into account by investors are:
1. leverage and control – investors can influence company decisions through debt covenants without diluting equity;
2. return optimisation – debt offers predictable returns via interest payments, balancing the risk of equity investments; and
3. security – debt is often secured against company assets or the guarantee of the main shareholders, providing priority over other creditors in insolvency.
• Legal considerations to be taken into account by investors are:
1. requalification risk – debt provided by significant shareholders may be seen more or less as equity in insolvency if it resembles equity in substance, particularly if the company is in financial distress;
2. subordination – debt towards the main shareholders may be requalified and this way subordinated to other creditors, affecting repayment priority; and
3. conflict of interest – management must avoid conflicts between their duties to the company and the investor’s dual role as a creditor and a shareholder.

To complement the foregoing, the authors note that private bond issuance has picked up as a result of a steady and consistent decline in the central bank base rate.

The following techniques are commonly understood by the term equity finance in Hungary:

• direct equity investment;
• venture capital;
• private equity;
• growth equity; and
• IPOs.

The Hungarian equity finance market is relatively developed but still smaller compared to Western European markets. The market includes the following sub-segments.

• Venture capital and growth equity (emerging but active) – Hungary has a growing venture capital ecosystem, supported by both private and public funding, including EU-backed initiatives.

• Private equity (moderately developed) – the private equity market in Hungary is active but smaller in scale compared to major European markets. It focuses on SMEs.

• IPOs (limited activity) – larger, more capital-intensive companies can be listed on the two categories of the Budapest Stock Exchange (standard and premium), while the Xtend market as a multilateral trading facility (MTF) is available to investors for shares in SMEs. The Budapest Stock Exchange sees fewer IPOs compared to larger European markets. Although there have been successful IPOs, the market remains relatively small, with most companies preferring private financing options. The market is currently evolving.

• Hybrid financing (mezzanine capital) (uncommon) – mezzanine financing is available but is less common than traditional debt or equity. It is used in leveraged buyouts or by companies that require funding for growth but want to avoid full equity dilution.

In Hungary, equity financing is typically provided by the following entities:

• venture capital firms;
• private equity firms;
• institutional investors, including foreign investors;
• government-backed funds; and
• the public (IPOs).

Recent Changes

Increased venture capital and private equity activity

There has been a notable increase in venture capital and private equity activity in recent years, driven by a combination of EU funding and an improving business environment.

Boom in the bond market

The continued reduction in the central bank base rate has led to a surge in private bond issuance.

Government initiatives

The Hungarian government has been active in fostering innovation and entrepreneurship, leading to the establishment of several state-backed funds and programmes aimed at supporting star-ups and SMEs.

EU funds

EU structural funds have also played a significant role in boosting the availability of equity financing, particularly in the start-up ecosystem.

Restrictions on Shareholding and Equity Financing

Quantitative restrictions

In Hungary, there are generally no statutory limits on the percentage of shareholding that an individual or entity can hold in a company.

As for the minimum number of shareholders, limited liability companies and private limited companies can be established with a single shareholder.

To obtain significant influence (eg, 10%) over companies in certain regulated industries (eg, in the financial sector), a licence is required.

Qualitative restrictions

Foreign shareholding

Generally, there are no restrictions on foreign ownership in Hungary. However, companies in sectors critical to national interests (such as defence, energy, IT, health, and construction) are classified as strategic under EU rules. Any foreign acquisition of influence in a strategic company requires mandatory notification where it exceeds the following thresholds:

• the total value of the investment reaches EUR890,000;

• a foreign entity acquires a 10%, 20% or 50% ownership stake; and
• the combined foreign ownership exceeds 25%.

Such foreign acquisitions must be reported to the Minister of National Economy. This ministerial procedure is a prerequisite for registering changes in the company ownership.

Failure to comply with the notification requirement may result in a fine exceeding 1% of the strategic company’s net revenue from the previous financial year.

Shareholder qualifications

In most cases, there are no specific qualifications required for shareholders. However, shareholders in certain regulated industries (eg, capital markets, banking and insurance) may need to meet specific criteria (eg, good business reputation and no criminal record) set by the sector’s regulatory body.

Differences Between Equity Finance Seekers

In Hungary, there are significant differences among companies seeking capital based on the following factors.

Size

SMEs often have limited access to traditional bank loans owing to a lack of collateral or credit history, so they may turn to equity financing, particularly venture capital or private equity.

Large enterprises have more established credit histories and assets, so these companies can access a broader range of financing options, including syndicated loans, bond issuance, private equity, or even IPOs. Equity financing might be sought for large-scale expansions or acquisitions.

Age

Start-ups, particularly in technology or innovation sectors, require capital to scale quickly but often lack the revenue or assets for traditional debt financing. Venture capital is the most common equity financing method for them.

Established companies might seek financing for expansion, modernisation, or acquisitions. They might prefer debt financing to avoid diluting ownership, but equity financing is used for significant capital needs.

Shareholder composition

Family-owned or closely held businesses may prefer debt – often with personal guarantees from owners ‒ in order to avoid diluting ownership or losing control.

Public companies or those with diverse shareholder bases are more open to public offerings, secondary share issues, or hybrid instruments such as convertible bonds.

Industry

In the technology and innovation industry, there is a high growth potential but also high risk. Venture capital and private equity financing dominate in these sectors.

Manufacturing and real estate industries are capital-intensive industries. Bank loans, bonds, and mezzanine financing (if any) are typical.

The financial sector is always an attractive investment, especially for those planning for the long term. Currently, investment fund manager, portfolio manager and investment adviser companies are the main targets for investors (both foreign and domestic), owing to the growing demand for such services.

Most Active Segment

The venture capital and private equity sector focuses on technology, innovation and start-ups. This is driven by the potential for high returns, government support for innovation, and the availability of EU funds. Additionally, the tech ecosystem is growing rapidly, with a focus on fintech, healthtech, and digital services.

As previously mentioned, the equity finance market in Hungary is moderately developed. Detailed statistics on the exact number of equity financing deals in 2024 are scarce. However, it can be estimated based on trends from 2023.

In 2023, there were approximately 115 venture capital and private equity financing transactions, reflecting a significant decrease from previous years due to economic uncertainties. In 2024, a slight increase thereto is estimated. The average deal size in 2023 was around EUR1 million. For 2024, early data suggests deal sizes are stabilising.

Looking ahead to 2025, the equity finance market in Hungary is expected to grow modestly. The stabilisation of the economic environment, coupled with continued government support for innovation, will likely encourage more equity financing activities.

Drivers of Market Activity

The above-mentioned numbers are driven by the following factors.

• Economic environment – the economic environment, including inflation and interest rates, has a significant impact on the nature of the market activity. High inflation and interest rates in 2023 dampened investment, but as inflation rates potentially decrease in 2024, there might be a gradual recovery.
• Government support – government initiatives (including grants and incentives for innovation) play a crucial role in driving domestic venture capital activity, particularly in sectors such as technology and green energy.
• Sectoral focus – the technology sector remains the most active, driven by Hungary’s growing start-up ecosystem and the presence of venture capital firms focusing on early-stage investments.

The following recent trends have been observed in the privately allocated equity segment in Hungary. 

• Shift towards later-stage investments – there has been a noticeable shift in venture capital towards later-stage investments, as investors look for companies with proven business models and revenue streams.
• Increased focus on technology and innovation – technology continues to dominate venture capital investments in Hungary. Sectors such as fintech, AI, and healthtech are attracting significant attention.
• Growth in green and sustainable investments – there is a rising interest in investments related to sustainability and green technologies.

The public-raised equity segment in Hungary has seen the following recent trends.

• Limited IPO activity – the IPO market in Hungary remains relatively subdued, with only a few companies going public each year.
• Secondary offerings – companies that are already listed on the Budapest Stock Exchange or an MTF (Xtend) have been more inclined to use secondary offerings to raise additional capital.
• Increased interest in Xbond market – the Xbond market, a platform designed for SMEs to issue bonds, has seen growing interest.
• Foreign listings and dual listings – a few Hungarian companies have explored dual listings, particularly on more liquid and developed markets such as the Warsaw Stock Exchange or even further afield.

Dominance of Privately Allocated Equity

In terms of the number of the transactions, privately allocated equity is more important. Publicly raised capital, however, is more important in terms of the volume of capital raised and issued shares.

Overall, privately allocated equity seems to be more important in Hungary, owing to its greater market activity, investor preferences, and its critical role in supporting small and medium size companies (SMEs), startups, and innovation.

The public equity market in Hungary is relatively small; it sees limited IPO activity, with few companies choosing to go public each year. Most Hungarian companies have preferred to remain privately held so far, partly owing to the complexities and costs associated with public listings, and partly due to the relatively lower liquidity and investor interest in the public market.

In the Hungarian capital market, deals are typically sourced through advisory firms and intermediaries. Even though the market is smaller than in some Western European countries, there are specialised investment banks, investment service providers and corporate finance advisory firms in Hungary that play a significant role in deal sourcing. They often act as intermediaries, matching companies seeking capital with potential investors.

Advisor and Investor Scene in Hungary

In Hungary, investors can benefit from a well-established advisor and investor scene, as can companies seeking capital.

The benefits for investors are as follows.

• Access to local knowledge – investors benefit from working with local advisers who have deep knowledge of the Hungarian market, including regulatory issues, sector-specific dynamics, and potential risks.
• Deal flow – a well-established adviser network increases deal flow by providing access to a broader range of potential investments, including those that may not be publicly marketed.
• Due diligence support – local advisers can assist with due diligence, providing insights into the financial health, management, and growth potential of target companies.

The benefits for companies are as follows.

• Professional preparation – companies can benefit from advisers who help them prepare for fundraising by improving their operations, business plans, financial models, and pitch presentations.
• Enhanced credibility – engaging with reputable advisers can enhance a company’s credibility in the eyes of investors, making it easier to secure funding.
• Access to investors – advisers often have established relationships with investors, which can facilitate introductions.

In Hungary, the following exit scenarios are frequent –

• trade sale;
• secondary sale;
• IPO;
• management buyout;
• recapitalisation; and
• liquidation.

The typical exit path for an investor to realise the value that it might have is the secondary sale. In this case, the investor sells its stake to another – mostly financial – investor, such as another private equity firm or venture capital fund.

When considering a secondary sale, the following factors should be taken into account.

• Finding a buyer – identifying a buyer who recognises the value of the investment and is willing to assume the associated risks is crucial. This often requires a thorough understanding of the market and targeted outreach to potential buyers who are aligned with the investment’s profile.
• Exit timing – secondary buyers are generally interested in investments that offer a clear and realistic path to exit. This could be through a subsequent trade sale, an IPO, or another secondary sale. Timing is key, as buyers prefer investments with foreseeable opportunities for liquidity in the near-to-medium term.

In addition to the foregoing, there are a couple of further special considerations for exiting a private investment in Hungary.

• Foreign investor restrictions – for foreign investors, particularly in strategic sectors, there may be restrictions on the size of ownership and/or there may be requirements for government approval, as defined by laws.
• Market liquidity – given that the Hungarian market is relatively small, a larger sale can impact the liquidity and valuation of exits (particularly in public markets), so patience is needed.
• Taxation – capital gains tax and other tax implications of exits must be carefully managed.

In Hungary, debt finance is generally more important for companies than equity finance (especially for established businesses), owing to the following reasons.

• Banking sector strength – Hungary has a well-developed banking sector, with numerous domestic and international banks offering a wide range of credit products. This availability makes debt financing a more accessible and attractive option for many companies, particularly for working capital and expansion needs.
• Lower cost of capital – debt can be cheaper than equity in Hungary, especially with when the interest rates are expected to decrease. The tax deductibility of interest payments also makes debt financing more attractive from a cost perspective.
• Retaining ownership – Hungarian companies, particularly family-owned businesses and SMEs, tend to prefer debt over equity to retain ownership and control.
• Lower cost of capital – debt financing often comes with a lower cost compared to equity, as interest expenses are usually tax-deductible, thereby reducing the overall cost of capital for businesses.
• Maintaining ownership and control – debt allows companies to raise capital without diluting ownership stakes or losing control, which is a significant advantage for established businesses that wish to retain decision-making power.
• Predictable repayment terms – debt financing provides a clear and predictable repayment schedule, enabling companies to plan their cash flow and financial obligations more effectively compared to the uncertainties associated with equity financing, such as dividends and changes in stock value.
• Access to favourable lending conditions – established companies often have access to favourable lending conditions, such as lower interest rates and flexible repayment options, especially when they have a strong credit history and solid relationships with financial institutions.
• Leverage opportunities – debt financing allows companies to leverage their existing assets to fuel growth, enhancing returns on equity without immediately resorting to raising additional capital from investors.

Some recent changes have contributed to the current status of equity finance versus debt finance, as follows.

• Government support for debt financing – recent government initiatives (such as loan guarantee schemes and subsidised interest rates) have further boosted the attractiveness of debt financing, particularly for SMEs.
• Emergence of alternative debt products – there has been an increase in the availability of alternative debt products, such as corporate bonds, particularly through platforms such as the Xbond market of the Budapest Stock Exchange. These products provide more options for companies seeking debt financing without relying solely on traditional bank loans.
• Growing venture capital and private equity market – the venture capital and private equity markets in Hungary have grown, driven by both domestic and EU funding. This has led to an increase in equity investments, particularly in tech start-ups and innovative companies. However, this segment has remained smaller so far than the debt market.

Drivers of Financing Decisions

Companies decide whether to take on equity or debt based on the following drivers.

• Cost of capital – companies weigh the cost of debt versus equity. Given the hopefully relatively low-interest rates and the tax advantages of debt, many Hungarian companies opt for debt financing if they can afford the repayments.
• Ownership control – companies are concerned about ownership dilution and control, so they typically prefer debt. This is particularly true for family-owned businesses and SMEs in Hungary.
• Stage of business – start-ups and high-growth companies, which may not have the cash flow to support regular debt payments, often turn to equity financing. These companies may also seek the added value that equity investors bring in terms of strategic guidance and networking.
• Risk and collateral availability – companies with high-risk profiles or insufficient collateral to secure traditional bank loans may prefer equity financing. Equity investors are generally more willing to take on higher risk in exchange for ownership stakes.

Investors decide whether to take on equity or debt based on the following drivers.

• Risk tolerance – investors in Hungary typically prefer debt when they seek lower risk and more predictable returns.
• Return on investment – equity investors, including venture capitalists and private equity firms, seek higher returns that justify the increased risk of equity investments. They look for companies with significant growth potential where they can exit profitably in the future.
• Control and influence – equity investors often prefer to take on equity in companies where they can influence strategic decisions and drive growth.
• Market conditions – investors consider macroeconomic conditions, such as interest rates and economic stability. In a low-interest environment, debt may be more attractive owing to the lower cost of borrowing. Conversely, in a volatile market, equity may be preferred owing to its potential for higher returns.

The time required for a company in Hungary to raise equity finance can vary widely, based on factors such as the financing method used, the company’s stage of development, and market conditions.

Venture Capital Financing

Where venture capital financing is used, it usually takes between three and nine months to raise equity finance. The process involves preparation, fundraising, agreeing on the term sheet, conclusion of the investment contract and, closing.

Challenges that may affect how long the process takes are as follows.

• Complex due diligence – venture capital firms conduct thorough due diligence, assessing the company’s financials, market potential, management team, and technology or product, which can be time-consuming.
• Negotiations – negotiating the terms of the investment, including valuation, equity stake and control rights, can be complex and extend the timeline.
• Market conditions – the availability of venture capital can fluctuate with market conditions, affecting the time needed to secure funding.

Private Equity Financing

Where private equity financing is used, it usually takes between six and 12 months to raise equity finance. The process involvespreparation, fundraising, agreeing on the terms of the investment contract and the investors’ rights (especially through special types of shares), and closing.

Challenges that may affect how long the process takes are as follows.

• Complexity – private equity deals often involve larger sums of money and more complex deal structures, including leveraged buyouts, which can extend the timeline.
• Control issues – negotiating control and governance terms can be challenging, especially if the private equity firm seeks significant influence or changes in management.

IPOs

Where IPOs are used, it usually takes between nine and 12 months to raise equity finance. The process involves preparation, appointment of an adviser, rating, defining the desirable investors, pricing, preparing a prospectus, supervisory approval if necessary, marketing, closing, and issuing shares.

Challenges that may affect how long the process takes are as follows.

• Defining the suitable investors – in an IPO, finding the right investors takes time.
• Prospectus – it is time-consuming to prepare a prospectus in line with EU legal and stock exchange requirements.
• Rating costs ‒ rating can be expected by the investors. Credit rating fees are demanding for these companies.
• Pricing – in a public IPO, it is advisable to mandate a specialised firm to determine the most preferable price.

In Hungary, it is only advisable for a public company (ie, a company listed on the Budapest Stock Exchange or on the Xtend) to issue shares to the public.

Generally, there are no restrictions on investors ‒ not even foreign investors – investing in Hungarian companies. Foreign investors can even fully own Hungarian companies.

However, certain companies operating in sectors deemed critical from a national interest perspective (eg, defence, energy, IT, health, and construction) are classified as strategic companies. In line with EU rules, any foreign acquisition of influence in a strategic company is subject to a mandatory notification procedure where it exceeds the following thresholds:

• the total value of the investment reaches EUR890,000;
• a foreign entity acquires a 10%, 20% or 50% ownership stake; and
• the combined foreign ownership exceeds 25%.

Such foreign acquisitions must be reported to the Minister of National Economy. This ministerial procedure is a prerequisite for registering changes in company ownership. Failure to comply with the notification requirement may result in a fine exceeding 1% of the strategic company’s net revenue from the last financial year.

In such cases, the time required for company establishment, company change registration and investment procedures is increased. However, foreign influence becomes a significant obstacle only if it poses a demonstrable threat to national interests.

In Hungary, the legal framework for dividend payments and capital repatriation is generally open and investor-friendly. However there are a few key considerations and potential limitations that companies and investors should be aware of.

Payment of Dividends

Limitations on a company paying its investors dividends are as follows.

• Legal requirements – Hungarian companies can pay dividends to shareholders, provided they have sufficient profits and retained earnings.
• Profitability – dividends can only be paid out of after-tax profits and from retained earnings that have not been earmarked for other purposes.
• Supreme body approval – the payment of dividends requires approval by the company’s supreme body, based on the audited financial statements.
• Debt versus equity ratio – there may be restrictions prescribed by existing investors or financing banks if the company has a high level of debt, as the company needs to maintain a certain equity ratio.

Repatriation of Capital

When it comes to repatriating capital outside Hungary, companies face the following limitations.

• Repatriation – in Hungary, investors are free to transfer capital, profits, dividends, and proceeds from the sale of shares abroad.
• Taxation – dividends paid to foreign shareholders are subject to personal income tax or corporate income tax, depending on whether the taxpayer is a natural person or a company. To determine the exact tax liability, double taxation treaties must be taken into account.
• Anti-avoidance rules – Hungary has implemented the EU Anti-Tax Avoidance Directive (ATAD), which includes measures such as the Controlled Foreign Company rules, interest limitation rules, and exit taxation. These could impact the repatriation of profits, particularly if the structures are deemed to be primarily tax-driven.

Mitigation

The above-mentioned limitations can be addressed/resolved as follows.

• Double taxation treaties – Hungary has an extensive network of these treaties that can mitigate withholding tax on dividends and ensure that repatriated profits are not taxed twice. Companies should ensure they are structured to benefit from these treaties.
• Tax planning – proper tax planning and structuring, potentially through holding companies, can minimise withholding taxes and optimise capital repatriation strategies.
• Compliance with ATAD – careful structuring is advisable to comply with anti-avoidance rules while optimising tax outcomes.

Hungary is subject to AML and KYC regulations, which apply to equity financings as well.

Legislation

The Act on the prevention and combating of money laundering and terrorist financing (the “AML Act”) contains the relevant provisions. This act implements the EU’s Anti-Money Laundering Directives (AMLD) into Hungarian law and sets out the requirements for customer due diligence (CDD).

Process

The CDD process in Hungary is broadly as follows.

• Identification – entities involved in equity financings, such as banks, financial institutions and law firms, must identify and verify the identity of their clients (ie, investors) before conducting transactions. This also includes collecting information on the beneficial owners of the equity.
• Verification – the information collected must be verified using government-issued IDs, business registries, or other official documents.
• Source of funds and wealth – entities must take reasonable measures to identify and verify the source of funds and, where applicable, the source of wealth of the client.
• Risk assessment – entities must assess the risk of money laundering and terrorist financing associated with each client and transaction. Higher-risk clients or transactions may require enhanced due diligence.
• Monitoring – after the initial CDD, entities must continuously monitor transactions and business relationships to detect and report suspicious activity.
• Reporting – if a transaction appears suspicious entities are obliged to report it to the Hungarian Financial Intelligence Unit (FIU).

Additional AML rules apply in certain sectors ‒ for example, the establishment of financial and capital market institutions and the authorisation to acquire controlling stakes in them also require proof of the legal origin of financial resources in accordance with strict requirements.

Impact on Equity Financing

The foregoing affects equity financing transactions in the following ways.

• Delays – the CDD process can introduce delays in equity financing transactions, particularly if investors are from jurisdictions considered high-risk or if they have complex ownership structures.
• Enhanced due diligence – unusually complex or large transactions or transactions involving politically exposed persons (PEPs) or high-risk third countries may trigger enhanced due diligence, adding further scrutiny. It can potentially cause delays in the closing of equity financing deals.

In Hungary, the choice of Hungarian law is typical in company law cases, thus also for equity investment cases – especially for the practical reason that Hungarian law must be applied to Hungarian companies as a background rule.

According to overall experience, the Hungarian courts judge domestic and foreign cases alike fairly.

Beyond the ordinary judicial channels, Hungary has a well-established arbitration system. One of the key advantages of arbitration is its confidential nature. Arbitration proceedings are typically private and the details of the case, including the final award, are not disclosed to the public unless both parties agree otherwise.

International arbitration and mediation are available options. However, they are not common in equity investment disputes, except for particularly large foreign investments.

Equity finance investors considering investing in a company in Hungary should be aware of several noteworthy regulatory trends that could impact their decision-making.

• Foreign Direct Investment (FDI) screening – as an EU member state, Hungary has implemented an FDI screening mechanism that allows the government to review and potentially block foreign investments in strategic sectors, such as energy, finance, and telecommunications.
• AML compliance – Hungary has tightened its AML regulations in line with EU directives, requiring more rigorous due diligence and reporting from companies and investors. These changes affect all EU member states.

There are a number of additional trends and developments that equity finance investors should take into account before committing to investing in a company in Hungary, as follows.

Economic Environment

Equity finance investors should consider the following economic factors when looking to invest in a company in Hungary.

• Economic growth and stability – Hungary has experienced moderate economic growth in recent years but, like many other countries, from time to time it faces challenges such as inflation, supply chain disruptions, and fluctuating energy prices (especially following the COVID-19 pandemic).
• EU funding – Hungary has been a significant recipient of EU funding, which supports infrastructure, innovation, and various development projects.

Taxation

Equity finance investors should take the following tax benefits into account when considering investing in a company in Hungary.

• Corporate tax rate – Hungary’s corporate tax rate is one of the lowest in the EU, at 9%. This favourable tax environment is a significant attraction for foreign investors.
• R&D and innovation incentives – Hungary offers various tax incentives for R&D activities, including tax credits and deductions.

Sector-Specific Trends

Developments in several sectors could influence equity finance investors looking to invest in companies in Hungary.

• Technology and start-ups – Hungary has a growing start-up ecosystem, particularly in technology and fintech. The government and the private sector have been investing in innovation hubs, accelerators, and venture capital funds.
• Real estate and infrastructure – real estate has been a popular sector for investment, driven by urban development and demand for commercial and residential properties.
• Renewable energy – Hungary is focusing on expanding its renewable energy capacity, particularly in solar and wind energy.

ESG Considerations

Equity finance investors should take the following ESG considerations into account before committing to investing in a company in Hungary.

• ESG integration – there is a growing emphasis on ESG factors in Hungary, with more companies integrating ESG practices into their operations and reporting.
• Sustainability regulations – the Hungarian government is aligning its policies with EU sustainability goals, including the European Green Deal. This includes regulations on carbon emissions, energy efficiency, and sustainable finance.

Dividends and Distributions

Hungary does not impose withholding tax on dividends, distributions and other forms of payments. However, social security contribution tax is imposed on them, which is a limited tax for dividends. In 2024, the maximum social contribution tax payable will be 24 times the minimum wage (approximately EUR16,000). Calculated at 13% tax, this means a tax cap of EUR2,120. Only individuals are obliged to pay this tax.

Capital Gains

Investors’ capital gains are taxed at the following personal income tax rates.

• Resident individuals – for Hungarian resident individuals, capital gains are taxed at the flat personal income tax rate of 15%.
• Non-resident individuals – non-resident individuals are typically subject to capital gains tax on Hungarian-sourced gains at the same rate of 15%. However, the applicability and exact rate can be influenced by double taxation treaties (DTT).

Investors’ capital gains are taxed at the following corporate income tax rates.

• Resident corporations – Hungarian resident companies are generally subject to corporate income tax on capital gains at a flat rate of 9%, which is one of the lowest corporate tax rates in the EU.
• Non-resident corporations – non-resident companies may also be taxed on capital gains derived from Hungarian sources, but the rate and applicability depend on the provisions of the relevant DTT.

Payment obligations

Personal income tax on capital gains is assessed as follows.

• Resident individuals – for resident individuals it is typically self-assessed and paid through the individual’s annual tax return.
• Non-residents – non-resident investors may have the tax withheld by the broker or other intermediary handling the sale of the assets. If no intermediary is involved, they may need to file a Hungarian tax return to report and pay the capital gains tax.

In terms of Social security contributions, for individuals it is self-assessed. The corporations are not subject to this tax.

Corporate income tax on capital gains is assessed as follows.

• Resident corporations – resident corporate entities include capital gains as part of their regular corporate tax filing.
• Non-resident corporations – non-resident corporations might need to file in Hungary depending on the DTT and the nature of the gain.

Tax liabilities have an indirect effect on the amount of dividends and other capital gains, as they reduce the amount that can be distributed as profits.

The most relevant taxes are:

• local business tax (LBT) ‒ imposed by municipalities and is typically 1‒2% of the company’s net turnover, after allowing for certain deductions (eg, cost of goods sold, material costs);
• VAT – the standard VAT rate in Hungary is 27%, which is one of the highest in the EU (reduced rates of 5% and 18% apply to certain goods and services); and
• transfer tax ‒ applicable to the purchase of real estate in Hungary, typically at a rate of 4% on the purchase price, with certain exemptions and thresholds.

Public Grants and Tax Relief

Certain public grants and tax relief are available in Hungary, under the following conditions.

• EU and national grants – Hungary benefits from significant EU funding and offers various national grants to support business activities, particularly in R&D, innovation, infrastructure, and energy-efficient technologies or renewable energy sources.
• Development tax incentive – companies making significant investments in Hungary may qualify for development tax incentives, which can reduce their corporate income tax liability by up to 80% for a certain period.
• Tax relief for SMES – SMEs in Hungary can benefit from various forms of tax relief, including reduced corporate tax rates, accelerated depreciation, and other incentives designed to support business growth and competitiveness.

Hungary has a well-developed network of DTTs. It has concluded DDTs with more than 80 countries, covering most of its major trading partners, including EU member states, Canada, China, Japan, and many others. This extensive network helps to prevent the same income from being taxed both in Hungary and in the investor’s home country.

Hungary’s DTTs are generally based on the OECD Model Tax Convention, which is widely accepted and used as a standard framework for such treaties. This alignment ensures that Hungary’s tax treaties are consistent with international best practices.

Bankruptcy

In the event of bankruptcy, the debtor obtains a moratorium on payments in order to reach a composition and attempts to reach a composition. The supreme body (the owners) of the debtor company may exercise its/their powers only without infringing the rights granted to the administrator, which are ‒ inter alia ‒ to:

• approve and counter-sign the debtor’s commitments made after the bankruptcy proceedings start;
• challenge any legal declarations or contracts made by the debtor without the administrator’s approval or counter-signature;
• require the debtor to enforce its claims; and
• manage the company registration and payment accounts.

In its power to approve commitments, the administrator suspends any payment to the shareholders (especially dividend payments).

If the reorganisation is successful, the company might emerge from bankruptcy with a new structure, possibly including changes to equity that could dilute existing shareholders. If the reorganisation fails, it could result in liquidation, leading to greater losses for shareholders.

Liquidation

This procedure is designed to ensure that, in the event of the insolvent debtor’s dissolution without succession, creditors are satisfied in the manner provided for by the law on bankruptcy. On the date of the commencement of the liquidation by the court, the owner’s rights in relation to the entity under a special legislation cease. From that date, only the liquidator appointed by the court may make a declaration in respect of the assets of the entity.

In liquidation, the proceeds from the sale of assets are distributed according to a statutory order of priority. Creditors are paid first. Shareholders, being at the bottom of the priority list, only receive a distribution if there are remaining assets after all debts have been satisfied.

The liquidation process results in a total loss for shareholders.

Restructuring

Restructuring aims to reorganise the company’s debt and equity structure to restore financial stability and avoid liquidation. It may involve measures such as converting debt into equity, issuing new shares, or altering the company’s capital structure. These actions can dilute the ownership of the existing shareholders.

Depending on the restructuring plan, shareholders may have their voting rights reduced or reclassified.

Restructuring offers a potential path for recovery. If successful, the company might emerge stronger, and the value of the remaining equity could eventually increase.

Priority List

In insolvency proceedings, there is a statutory priority ranking of the individual beneficiaries. The shareholders are listed on the priority lists as follows.

Bankruptcy

During this process, creditors have priority over shareholders when it comes to the payment of claims. The costs of the bankruptcy and secured creditors are paid first, followed by unsecured creditors. Shareholders only receive payment if there is a surplus after all creditor claims are satisfied. This is rare in a bankruptcy, as the goal is to keep the company operational rather than liquidate its assets.

Liquidation

As in bankruptcy proceedings, in liquidation proceedings costs of the bankruptcy and secured creditors are satisfied first, followed by unsecured creditors. Shareholders are paid last and only if there is anything left after all creditor claims have been fully satisfied.

Restructuring

Restructuring is a process whereby the company’s debts and obligations are reorganised to allow it to continue operations, possibly through new financing arrangements. The legislation on restructuring does not provide for a priority list for satisfaction. This should be provided for in the restructuring plan.

In some restructuring scenarios, new investors or creditors may be given priority in the event of future insolvency. To ensure these rights are enforceable, they should be clearly stated in the investment contract. In the order of satisfaction, the new investors are followed by the secured claimants, then the unsecured claimants, and finally the shareholders.

Uncalled Capital

If – at the commencement of liquidation proceedings – the company’s capital has not been paid up in full, the administrator is entitled to call immediately due and payable the outstanding amount of the capital and to require the owners of the company to pay it if this is necessary to discharge the company’s debts.

In bankruptcy proceedings and restructuring proceedings, the administrator (or the restructuring expert) is not entitled to call due and payable the outstanding amount of the capital. However, if the owner’s payment obligation is already due, the administrator (or the restructuring expert) shall call upon the debtor to enforce its claim against the owner of the company.

In addition to this, in the event of these proceedings, the parties may agree on the fulfilment of these obligations in the bankruptcy agreement or the restructuring plan.

Bankruptcy

The typical duration of bankruptcy proceedings in Hungary ranges from several months to a couple of years. The bankruptcy procedure itself is quite rare and recoveries for shareholders in bankruptcy proceedings are generally low.

Liquidation

In Hungary, liquidation usually takes five years or more, depending on the complexity and the asset value.

Restructuring

Restructuring may vary widely in duration, from several months to a few years. Recovery in restructuring is uncertain and depends on the specific terms of the restructuring plan.

It should be noted that the rules of restructuring only apply in Hungary from July 2022.

Measures to Rescue a Company

In bankruptcy proceedings in Hungary, the following measures are undertaken to rescue a company in financial distress.

• Moratorium – upon filing for bankruptcy, the court grants a moratorium, which typically lasts 180 days but may be extended for 240 days or up to 365 days.
• Administrator – the court appoints an administrator who oversees the reorganisation process, working closely with the company’s management and creditors to develop a feasible plan for restructuring debts and operations.
• Agreement – ideally, the debtor company reaches an agreement with its creditors on the way and process of repayment of its debts, thereby avoiding liquidation and allowing it to regain its strength and operate normally again.

In restructuring proceedings in Hungary, the following measures are undertaken to rescue a company in financial distress.

• Debt renegotiation – the company may negotiate with its creditors to reschedule debt payments, reduce the amount owed, or agree to a partial debt forgiveness.
• Equity restructuring – this involves issuing new shares, converting debt into equity, or bringing in new investors.
• Operational changes – the company may also implement operational changes to improve its financial health, such as cost-cutting or restructuring its management team.

Key Features of Bankruptcy and Restructuring

Bankruptcy proceedings in Hungary typically entail the following roles, risks and benefits:

• driver’s seat – primarily the administrator and creditors;
• shareholder role – limited, with potential loss of control;
• risks – high risk of dilution, loss of control, and potential total loss if reorganisation fails; and
• benefits – possibility of retaining some value if the company successfully reorganises.

Restructuring proceedings in Hungary typically entail the following roles, risks and benefits:

• driver’s seat – company management, with significant influence from creditors;
• shareholder role – potentially more active than in bankruptcy proceedings, but still limited compared to creditors;
• risks – dilution, potential loss of voting rights, and uncertainty of outcome; and
• benefits – potential recovery value, opportunity to avoid bankruptcy or liquidation, and some control is retained.

If their company becomes insolvent, one risk faced by equity finance providers is loss of investment, in the following ways.

• Equity subordination – in insolvency proceedings, equity holders are subordinated to creditors, meaning they are paid last after all debts have been satisfied. In many insolvency cases, especially in liquidation, this may result in a total loss of the investment.
• Dilution – during restructuring or bankruptcy reorganisation, equity finance providers might face dilution of their shares if new equity is issued to creditors or new investors.

Equity finance providers are also at risk of legal liabilities if their company becomes insolvent, as follows.

• If a member of a company has abused its limited liability and, as a result, there are unsatisfied creditor claims remaining upon the dissolution of the company without a legal successor, the member is liable without limitation for these debts.
• If the company is dissolved without a legal successor, the member who held a qualified majority is liable for the unsatisfied claims based on the creditors’ lawsuit, provided that the dissolution without a legal successor was due to the disadvantageous business policy of the member who held the qualified majority.
• If a member of a company intentionally causes harm in connection with its membership rights, it is also liable with its personal assets, jointly and severally with the company.

Litigation by Insolvency Administrators

In Hungary, it is not common for investors to be sued by insolvency administrators ‒ although it can happen under specific circumstances, typically on the following grounds.

• Recovery of dividends – insolvency administrators may sue to recover dividends paid to shareholders if those payments are deemed to have been made at a time when the company was insolvent or close to insolvency.
• Breach of fiduciary duty – equity finance providers who also serve as directors or have significant control over the company may be sued for breach of fiduciary duties if their actions are deemed to have harmed the company or its creditors.