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STRATEGY TO BRING HUNGARIAN LAND OWNERSHIP LEGISLATION INTO CONFORMITY
WITH EUROPEAN COMMUNITY LAW
INSTITUTE OF INTERNATIONAL STUDIES
This paper was researched and written to fulfill the M.A. project requirement for completing the Monterey Institute of International Studies’ Master of Arts in Commercial Diplomacy. It was not commissioned by any government or other organization. The views and analysis presented are those of the student alone.
For more information about the Commercial Diplomacy program and the M.A. project requirement, please visit www.commercialdiplomacy.org.
the context of the screening on the Free
Movement of Capital (which began on September 30, 1999), Hungary
requested a ten-year transition period for conforming to EU policy on
arable land acquisition—the country’s longest derogation request so
far. Hungary has argued that foreign acquisition of arable land should be
prohibited because the price of Hungarian land is extremely low compared
to European land prices—a circumstance that would allow foreigners to
easily buy up an undue portion of Hungarian land.
if Hungary wants to gain full European Union membership with all its
attendant benefits as soon as possible, it will need to limit its requests
for derogations to those that are truly unavoidable for financial or
infrastructure reasons. Moreover, it should be possible to craft arable
land ownership requirements that are nondiscriminatory yet ensure that
large portions of Hungarian farmland will not come under foreign
the goal of speeding
In the context of our EU accession negotiations, Hungary has requested a ten-year transition period for changing its restrictions on farmland acquisition. Added to the other derogations we have already requested, this request could delay our full accession beyond the current target date of January 1, 2002. In order to ensure accession by the target date, Hungary needs to rapidly bring its land acquisition policies into conformity with EU law and withdraw this derogation request. We need to fulfill the EU’s non-discrimination requirement between EU nationals and Hungarian persons, as well as between private and legal persons.
is preparing to enable the free movement of capital by the accession
target date, except in three areas for which we have requested temporary
derogations. One of these
areas is foreign ownership of farmland.
EU has not yet responded to this request. However it seems unlikely it
will be accepted. Such a derogation would undermine the EU’s
long-standing goal of curbing the ability of its member states to
constrain the EU’s four basic freedoms (movement of goods, services,
persons, and capital). Acceptance seems yet less likely because Poland has
asked for an 18-year transition period for changing its land acquisition
laws. If the EU were to allow one country a derogation on land acquisition
policy, it would be difficult to deny the other such requests.
Allowing foreign ownership of land in Hungary will not only help improve our relationship with the EU and improve our chances of acceding to the European Union by the accession target date, it will also help speed the development of our agriculture industries and improve our ability to fight organized crime and reduce the size of Hungary’s informal economy.
Land Act of 1994
Arable Land Act of 1994 provides that arable land may only be acquired by
domestic private persons.
Domestic and foreign legal entities (businesses), as well as foreign
private persons, are not permitted to legally acquire land in Hungary. In
reality, however, foreign persons often acquire land illegally through
pocket contracts while domestic companies are forced to resort to land
The current ownership provisions of the Hungarian Land Act violate European Community law, which requires non-discrimination, free movement of capital, and freedom of establishment. The European Court of Justice has upheld these provisions in several cases concerning property acquisition.
inadvertently preventing the development of a market for land, the Land
Act has, in effect, ensured that farmland cannot be used as a security for
credit. As a result, farmers have been unable to acquire capital needed to
purchase land and to invest in efficient, modern agricultural production
systems. Because of these obstacles, as well as the country’s decreasing
population size, the number of farmers in Hungary is expected to drop 38
percent by 2010. Changes in the ownership provisions of the Land Act will
help fuel the development of a vibrant, self-sustaining agriculture sector
Land ownership issues are highly political. While Hungary maintains a strong political commitment to join the European Union, it is popular domestically to advocate Hungarian ownership of land.
order to comply with Community law, Hungary should amend the Land Act to
allow land ownership by all persons and legal entities, regardless of
nationality. At the same time, to achieve domestic political goals and
stop land speculation, we should establish ownership requirements that
favor active farmers and farming businesses.
By maintaining a maximum plot acquisition size of 300 hectares, we
can ensure that land ownership does not become concentrated in the hands
of just a few wealthy business groups.
be able to achieve such legislative changes, the Ministry of Foreign
Affairs will need to build a coalition within the government (which will
require gaining the support of Hungary’s most powerful political
parties). Additionally, we should establish cooperative relationships with
relevant interest groups and research institutions. The Official
Communication Strategy of the Hungarian Government will provide the
primary means of building support from private citizens, including the
country’s 1.5 million landowners.
We will also need to convince the EU that our proposed modifications to the Land Act will bring our land acquisition policies into compliance with Community law, and that the proposed modifications are a far better option than the current derogation request. Our goal should be to have our proposal accepted as a permanent solution.
Direct Investment in Hungary
the past several years, Hungary has made great progress toward freeing
capital movements and ensuring the right of establishment.
· In 1995, the government established a privatization policy that encouraged the sale of state-owned enterprises to foreign-based strategic investors. The policy led to the country’s greatest influx of FDI to date.
· In 1998, Hungary began allowing foreign investment and made its currency (the forint) convertible. Since then, the government has played an active role in attracting investment; both the central government and local governments have offered special concessions and financial incentives.
· In February 1999, in accordance with our undertaking in the Europe Agreement, Hungary began allowing foreign nationals to take up and pursue economic activities as self-employed persons under conditions no less favorable than Hungarians.
capital invested in Hungary now exceeds USD 20 bn,
or 40 percent of all FDI invested in the CEEC region.
Companies with foreign stakeholders currently produce about 32 percent of
Hungary’s GDP and employ 25 percent of private-sector workers.
was first attracted to Hungary by the country’s cheap and highly skilled
labor force. Now, however, foreign companies in Hungary are gradually
moving away from labor-intensive production. Foreign-owned firms are
exporting more and more high-tech and high value-added products. Rather
than competing on price, firms are gradually focusing more on quality and
innovation. Hungary’s expected EU membership has also helped attract
investors, although there is some concern that accession will cause labor
costs to rise.
Derogation Request for Land Acquisition Policy
September 1999, the EU began examining Hungary’s laws on the free
movement of capital. Hungary indicated that, although further
liberalization of short-term and outward capital movements is still
needed, it expects to fulfil the requirements regarding the free movement
of capital by the time of accession with three exceptions. One of these is
a 10-year derogation concerning foreign ownership of farmland. Currently, only domestic
private persons are allowed to acquire arable land. Foreign private
persons, as well as domestic and foreign legal entities, are prohibited
from doing so.
Hungary has argued that, because
land prices are between five and 40 times more in the EU than in Hungary,
the country needs a transition period to ensure that a few speculators,
foreign or domestic, do not buy up an undue portion of the country’s
farmland. Although Hungary is on its way to becoming a market economy
based on private property, its land market has not yet had enough time to
evolve. The acquisition
restrictions are needed, Hungary has argued, to ensure that Hungarian
farmers have a reasonable opportunity to buy land.
has further argued that the prohibition on foreign acquisition is
reasonable during the transition period and does not conflict with the
Europe Agreement. In Hungary’s view, it should be sufficient to permit
foreigners the right to usufructuary lease. Hungary’s stated long-term
goal is to ensure unrestricted access to land ownership.
The Accession Implications of Hungary’s Derogation Request on Land Acquisition
farmland ownership is not specifically regulated by the EU, prohibiting
acquisition based on nationality goes against the principle of
non-discrimination and conflicts with Community law on the free movement
of capital and the right of establishment.
The EU has long tried to restrict Members’ ability to limit capital
applicant country derogations in this area would undermine these efforts.
Consequently, Hungary’s chances of gaining approval for this derogation
seem slim at best.
requests for laws that violate fundamental EU principles may also hurt
Hungary’s image in Europe. In
an interview given in early 1999 (before the receipt of our position paper
requesting the derogation on farmland ownership), Mr. Nikolaus van der
Pas, head of the European Commission’s Task Force for Accession
Negotiations, stated that Hungary had been more successful than any other
EU applicant in fulfilling EU requirements for membership.
Similarly, Eurobarometer, a Brussels-based, EU-funded pollster,
found that of the CEEC applicants for EU membership, EU public opinion is
most favorable toward Hungary.
We cannot afford to lose this trust.
The Domestic Implications of Hungary’s Derogation Request on Land Acquisition
addition to creating an obstacle to EU accession, Hungary’s current
restrictions on land ownership are 1) impeding the development of an
efficient agriculture industry in Hungary and 2) undermining our efforts
to fight organized crime and diminish the strength of the country’s
informal economy. Currently:
· Urban dwellers and retirees are unable to sell their land at a realistic price—which means that there is little incentive to sell land and therefore little hope of consolidating plots that became fragmented as a result of privatization.
· Certain domestic legal entities (especially transformed cooperatives) have no opportunity to purchase land. Accordingly, they continue to lease land and have no incentive to make long-term investments in the plots they farm.
· Land prices that had started to rise in the past two years have become stagnant again and can be expected to remain stagnant until the Land Act is changed. In turn, this is delaying the development of a credit system based on mortgage guarantees.
· Foreigners are buying farmland illegally through pocket contracts.
· Speculation prevails because the Land Act does not require proof of intent to cultivate the land.
Hungary’s Informal Economy
Hungary’s informal economy has flourished within communities that have been marginalized as a result of the political changes of 1989. Small and medium sized farms often fall into this category; they participate in a great variety of untaxed activities. The volume of the hidden economy has been estimated at 23-24 percent of GDP.
Recent Attempts to Fight Illegal
Land Ownership Practices
60 percent of Hungary’s cultivated land is leased land, no registration
requirement existed until, in April 2000, the Central Statistics Office
established a property registry and began implementing a land-use
The new registration system is now nearly finished.
Arable Land Act of 1994 covers all arable land in Hungary,
including protected natural land unless a nature preservation law provides
otherwise. The Act covers ownership rights, land use, formation of
property plots, and land protection.
following sections of the Act apply to ownership and acquisition:
II, Section 5 of the
Land Act, “Acquisition of
Ownership by Domestic Private Persons,” provides that a domestic
private person can obtain ownership of arable land that is “not more
than 300 hectares or worth more than 6,000 Gold Crowns.”
II, Section 6 of the
Act stipulates that no “domestic legal entity” can acquire arable land
except from the Hungarian state, local governments, forest-owners’ and
pasture-owners’ associations, or public foundations.
II, Section 7 of the
Land Act, “Acquisition of
Ownership by Foreigners,” stipulates
that “no foreign private person or legal entity may acquire arable land
or protected nature areas.” The
prohibition does not apply in the following cases:
If the land is
situated on the territory of a homestead
formed as an independent property with a surface area of no more than
6,000 square meters;
If a land owner
held his land on July 27, 1994 (when the Act came into force), he may
exchange his plot for a new plot if the area and Gold Crown (GC) value of
the new plot do not exceed the area and value of the original;
If, on July 27,
1994, the surface area and GC value of a plot of land, purchased from the
amount of indemnification received for expropriation, exceeded 300
hectares or the value of 6,000 GC;
If, on July 27,
1994, the surface area and GC value of a plot passing into ownership
through the termination of a co-ownership exceeded 300 hectares or the
value of 6,000 GC.
Act offers rights of pre-emption in certain cases. Leaseholders of a full
or partial plot, as well as those cultivating land by contract, have a
right of pre-emption if ownership by such person is not prohibited by law.
In cases of protected nature areas, the Hungarian State has a right of
pre-emption that trumps the persons listed above.
Means for Foreigners to Buy Arable Land in Hungary
foreign person may legally become an owner of an infinite amount of arable
land or protected natural land on Hungarian territory as a result of legal
inheritance, usucaption, building,
or through auctions held for the purpose of indemnification for past
expropriations of arable land.
can also acquire arable land legally by joining or gaining ownership of
organizations that may acquire or have acquired land. Three forms of
organizations make indirect ownership possible:
Businesses such as
limited liability companies and joint stock companies.
and pasture-owners’ associations. Joining
these types of organizations requires prior possession of land. As a
result of joining, however, co-ownership of an unlimited amount of forest
and grazing land is possible.
of an ecclesiastic legal entity, which requires 100 persons.
Such organizations may receive title to an infinite amount of land
by testamentary disposition, deed gifts, and contracts for maintenance.
Means of Circumventing
Regulations on Land Acquisition
have used various strategies to circumvent Hungary’s land acquisition
laws. They have acquired land by:
arable land registration of a plot they wish to purchase.
authorization to change the status of the plot they wish to purchase (land
that is deemed to be part of the “inner area” is not considered to be
contracts—signed sales contracts that are not recorded in the land
register so that, although the official record shows that a Hungarian
citizen owns the land, in practice, a foreign person owns the property.
(Pocket contracts are the most common method foreigners use to acquire
· Signing leasing contracts, under which foreigners and Hungarian citizens have the same rights. Since lessees have a right of pre-emption, land can become the property of foreign lessees. However, as of May 28, 1999, rights of pre-emption or purchase cannot be established for persons prohibited from land ownership—not even contingent upon changes in the prohibition.
 The law also limits ownership to 300 hectares per person.
 EU Requests More Information on Land Ownership Question, www.gm.hu/econews/e10/eco189.html.
 On a per capita basis, Hungary’s FDI rate is the highest of the CEECs.
Hungary Stands out in the Region, www.itd.hu/InvestmentRecords/p3.html.
 The other two derogation requests concerned foreign acquisitions of real estate and the insurance industry’s ability to make foreign investments.
 Some EU countries do, however, maintain land acquisition restrictions. In Denmark, for example, farmers are required to have lived permanently (at least six months per year) for eight years on a farm, and they must have an agricultural background.
is the Most Welcome New Member (Hungary Took the Lead, p.2), www.gm.hu/hunec/v27n2/infocus.html.
 Source: The Significance of the Informal Economy Viewed from the Human Resources Angle, UNDP National Human Development Report, Hungary, 1996. www.ksh.hu/undp.
 For more information on the Computerization of Land Offices Programme, see Appendix J.
 Passed by Parliament on April 6, 1994.
 Arable land is defined in the Land Act as a plot of land that is registered in the outskirts of a settlement as plough-land, vineyard, orchard, meadow, reeds, forest or fish pond.
 Gold Crowns are used to express the quality of arable land. The higher the Gold Crown value, the better the quality of the land.
 Agricultural cooperatives took the case to the Constitutional Court questioning whether the Land Act discriminated among natural and legal persons as well as between various legal persons. The Constitutional Court, in its decision of 35/1994 (VI.24.), ruled that the Land Act was not contrary to the constitutional right of equality before the law because the acquisition of property is not the only way for agricultural cooperatives to access land necessary for operation. (Agricultural cooperatives are allowed to lease up to 2,500 hectares of land.)
 A complex of dwellings and economic buildings built on the outskirts of a settlement for the purpose of agricultural production and with land belonging to that under an identical topographical lot number.
 Under the title of building, the purchase of a plot of significant size is not feasible due to restrictions placed on buildings on outskirts area lands. The size of the land accompanying a building can not exceed that of a homestead-type property. Based on the Land Act, foreigners are allowed to acquire ownership of a homestead.