In a surprise initiative, the ruling party in Hungary has proposed legislation granting permanent residence and ultimately citizenship to investors who purchase government bonds valued at €250,000 or more.
The government hopes to attract billions of dollars of outside investment into Hungary from well-heeled investors worldwide. Press reports quote one lawmaker as saying that Chinese investors will be specifically targeted to take up residence in Hungary.
The proposal states, in part:
"The goal of the modification is to create the institution of 'investor residency' in Hungary … The proposal ties gaining citizenship to buying bonds because it intends to aid state financing this way … Other investments from those applying for such residency could boost the real estate, retail, and investment markets."
Should Hungary adopt this proposal, the attraction to Chinese investors—and wealthy residents of other countries—is obvious. Hungary is a member of the European Union. Citizens of an EU country can live or work in any other EU country, with few restrictions. A Hungarian passport also offers visa-free travel to more than 150 countries. By comparison, a passport from the People's Republic of China offers visa-free travel to only about 40 countries.
So, what's the catch? Actually, there are several.
1. Politics, politics, politics. The prospect of "citizenship for sale" is politically controversial wherever it's brought up. Inside Hungary, ultra-nationalist parties have expressed outrage over sale of their Hungarian birthright and especially the targeting of Asian investors. Comments from other EU countries are equally critical. Typical of those I've seen are this one from British Parliamentarian Priti Patel, who remarked: 'This is a shocking abuse of EU membership by the Hungarian Government and highlights one of many flaws in the EU and in the way it operates. This policy could pose significant challenges for the EU when it comes to immigration, social and economic policies."
2. Extended residence required for citizenship. Under current Hungarian nationality law, a non-Hungarian citizen may be naturalized only "if the person resided in Hungary continuously over a period of eight years preceding the submission of the application." Numerous additional requirements apply, including that the applicant "provides proof that he has passed the examination in basic constitutional studies in the Hungarian language, or that of being exempted by virtue of this Act." Exemptions exist only for: "a) persons who are legally incompetent or with diminished capacity; b) persons who graduated in the Hungarian language from a school or educational institution or institute of higher education; c) persons over 65 years of age at the time of filing the petition; d) persons who are able to verify not having the capacity to take the exam, due to their lasting and irreversibly deteriorated health."
Hungary may ultimately decide to waive the immigration and language requirements for individuals seeking citizenship under this proposal. However, the current initiative doesn't appear to be an example of "economic citizenship" involving the outright sale of Hungarian nationality. Rather, it is an expedited path to eventual citizenship.
3. Taxation on citizenship. Hungary is not an especially high-tax country. But unlike virtually all other countries (with the notable exception of the United States), Hungary also imposes taxes on its non-resident citizens. I recently wrote about these provisions here. The base rate for income tax begins at 16%. Hungary waives its claim to tax citizens on their worldwide income if they reside in a country with which Hungary has a tax treaty (69 in all). However, if you're a Hungarian citizen living in a zero-tax jurisdiction, expect to pay at least 16% of your income (less applicable deductions) to the Hungarian authorities.
4. Backlash from other EU countries. Should Hungary begin granting citizenship to large numbers of non-EU investors, it's possible that other EU countries will discriminate against Hungarian passport-holders. Other EU countries could even attempt to expel Hungary from the "Schengen agreement" which gives Hungarian passport-holders the right to travel visa-free to 25 EU countries. Greek passport-holders already face this possibility, as that country has been warned that it may face expulsion from Schengen if fails to clamp down on illegal immigration.
Despite the politics, not to mention the potential drawbacks, the Hungarian "investor residency" proposal is very interesting. I'm investigating it further, and will keep you posted as events develop.
Copyright © 2012 by Mark Nestmann
