By Zsolt Balla, BBJ

A noteworthy initiative with a few blunders in its executive phase, or yet another hotbed of state-approved corruption? These are the two radically different opinions of the Hungarian scheme offering a permanent residence permit for €250,000. On one hand it garners funding for the state budget. On the other, companies registered in offshore tax havens including the Cayman Islands, Malta and Cyprus are granted a monopoly to handle state assets.

According to early ministry projections, some 1,500 people are expected to purchase state bonds in the foreseeable future in excess of €250,000 each in order to be granted a permanent residence permit, but more than three months after the new legislation took effect, only five actual deals have been closed. While the concept of the Hungarian offer might have the potential to draw in some serious cash to beef up the country’s economy, the pace of developments is modest, at best. This, topped with concerns raised by handing over exclusive rights to offshore companies allowing them to sell state bonds to foreigners with very little, if any, government control, changes the perception of the entire initiative completely.

“If all goes well, recent changes to the legislation, along with the relatively favorable tax environment, might have the ability to attract a significant amount of capital to the country, especially if Hungary manages to become the primary destination of investors who are currently fleeing Cyprus due to the local hardships,” says Attila Imecs, manager of tax services at PwC Hungary, who emphasizes that in spite of all the controversies, one should be focused on the potential and the positive impacts this might have on the state budget.

Replacing state debt with much more favorable state bonds with a rate of 2% is one thing, but drawing people wealthy enough to invest €250,000 into the country is likely to have other important benefits, too. “These people are likely to be entrepreneurs, who will bring businesses to Hungary, create jobs, and contribute to the tax and the healthcare systems,” Imecs says.

The next tax paradise?

Even more important than that, a relatively favorable tax environment paired with the scheme of a permanent residence permit in return for state bonds might have potential way beyond attracting rich third-world individuals to Hungary. “A detailed analysis shows that current tax rates are not all that different between Cyprus and Hungary, and in some respect, Hungary can be even more favorable than the prior,” the tax professional suggests. “That opens up a very realistic chance of more owners of complex holding structures deciding to move their headquarters to Hungary in the near future,” he says.

While this transition might be a slow and lasting process, a few financial and legal companies have already formed an alliance to back this. Three of the Big Four companies, PwC, KPMG and Deloitte, along with tax consultants RSM DTM and Mazars, and legal firms CMS Cameron McKenna, DLA Piper, Baker & McKenzie and Faludi Wolf Theiss are participating in a lobby group that aims to encourage investors leaving Cyprus to consider Hungary as a potential destination for their capital, and push Hungarian lawmakers to create an attractive and transparent environment that is capable of competing with other possible destinations.

While the potential and opportunities might be beyond doubt to professional eyes, dodgy details and controversies appear much more spectacular from an outsider’s point of view. The exclusive rights in trading the state bonds attached to residence permits have been placed in the hands of privately owned companies dedicated to specific markets on a one country per market base, granting a monopoly to these firms on those markets. Parliament’s Economic and IT Committee, headed by Fidesz’s Antal Rogán, specifically authorize such companies. The committee has thus far authorized three firms: the Hungary State Special Debt Fund, registered in Grand Cayman, targets the Chinese and Vietnamese markets; Innozone Holdings Limited, registered in Cyprus, targets India and Cyprus itself; and Discus Holdings Ltd, registered in Malta, targets South Africa, Indonesia, Kenya and Nigeria. It is difficult to ignore that all three of these companies are registered in traditional offshore locations, where the Hungarian state has very little if any control over their operations, and is likely to have absolutely zero revenue from their profits.

Remaining positive

Although the PwC tax expert also appears unsure about why the Hungarian state would entrust offshore companies with exclusive rights to handle its assets (a naïve approach would suggest that these countries are where the procedure to launch financial companies is easiest and fastest), Imecs still thinks that the positive aspects outnumber the potential pitfalls in this area. “I think it would be beneficial to move faster, and launch a number of companies that target all major and important potential markets for these state bonds,” he says. “Also, a state-backed marketing support seems inevitable, to ensure that the initial capacity to attract a significant amount of foreign capital to the country is not left unused,” he concludes.

For more on this story go to:

http://www.bbj.hu/economy/shoring-up-the-budget-_66295