Gov’t scraps key provision of residency bond program

July 25, 2016

welcome

The Hungarian government has scrapped a key provision in its residency bond program, reports Hungarian daily Magyar Nemzet. Previously, foreigners who purchased a Hungarian residency bond were required to remain in Hungary for six months before receiving their permanent residency card. That provision has now been removed and anyone who purchases (or has purchased) a residency bond is now granted immediate permanent residency.

According to Magyar Nemzet, the government’s decision to modify rules of the residency bond program was announced in the government’s official bulletin, the Hungarian Gazette, on May 20. The new rules came into force on July 1 with retroactive effect, thus the rules apply to residency bondholders who made their purchase before the decision to change the rules was announced.

The previous rules required residency bondholders to remain in Hungary for six months on a temporary residency permit. Only after six months were the bondholders granted permanent residency status in Hungary, allowing free movement within the Schengen zone.

An interesting aspect of the Hungarian residency bond program is that the biggest winner of the transactions are the brokers. (How the brokers were selected is yet another story riddled with controversy. To read more about why, click here.) A handful of brokers are permitted to engage in the sale of Hungary’s residency bonds and they are pretty much guaranteed profits.

Magyar Nemzet reports that, according to Hungarian law, bonds sold through the program must have an interest rate of at least 2 percent. The interest is not collected by the bondholder, it goes straight to the brokerage, in addition to the fees collected for processing the bond purchase.

According to Magyar Nemzet, a five-year Hungarian bond denominated in Euros earns an interest rate of 0.5 percent, whereas the residency bond guarantees an interest payment of at least four times higher than that — and the interest does not even go to the bondholder. It is difficult to rationalize this because running the residency bond program is clearly more expensive for the state.

Magyar Nemzet estimates that the brokers responsible for selling these bonds are pocketing processing fees between EUR 45,000-60,000 (on top of the 2 percent interest payments) per permit. In short, this amounts to a brokerage making around EUR 74,000-89,000 on a single client.

This latest change to the residency bond program will certainly incentivize the program to foreign nationals.