New rules could drive supermarket chains out of Hungary, lobby says

* Government is planning hike in levy and new rule on profits

* Industry lobby warns of heavy losses among multi-nationals

* Foreigners dominate Hungary retail market

By Gergely Szakacs and Christian Lowe

BUDAPEST, Nov 19 (Reuters) - Multi-national supermarkets could be driven out of Hungary, a trade lobby said on Wednesday, after the government raised their inspection costs and threatened to shut them down if they fail to make a profit for two years.

The government of Prime Minister Viktor Orban has a record of adopting idiosyncratic laws untroubled by how they are viewed outside Hungary. Those have included special taxes that have cost foreign banks, telecoms and a TV station billions of euros.

Orban also favours a go-it-alone foreign policy: Hungarian Foreign Minister Peter Szijjarto was on a visit to Moscow on Wednesday, building on ties with the Kremlin that Brussels and Washington feel are too cosy.

Hungary's economy ministry this week submitted to parliament a draft bill that says from 2018 retail chains with annual turnover above 163 million euros must close if they go for two years without turning a profit in Hungary.

That could hit firms like Tesco (Xetra: 852647 - news) , Auchan, Lidl, Aldi and Metro Group, which have invested heavily in Hungary.

Gyorgy Vamos, Chairman of Hungarian trade group OKSZ, said the supermarkets now faced a double burden because the government is already planning to charge retailers a higher fee for food safety inspections.

He said the food safety fee would push the retailers' Hungarian operations into loss, and then the newest proposal would penalise them for that loss.

"This would mean that their operation could become impossible to sustain," Vamos told Reuters in an interview.

"If you go to another country, you invest and you employ people, then the rug should not be pulled out from under your feet from one moment to the next."

FOREIGN-DOMINATED MARKET

The government has said the measures are designed to protect Hungarian food producers and retailers from being pushed out of the market by foreign firms who use their financial muscle to sell food at a loss.

"Posting losses on a sustained basis indirectly represents an abuse of dominant market position, because competitors are forced out and the enterprise with the strong capital position 'buys up' the market," Economy Minister Mihaly Varga said in the reasoning attached to the draft bill.

The draft law does not give an exemption to Hungarian retailers, at least two of which have turnover higher than the threshold. But stores in the Hungarian chains, unlike in foreign ones, are often operated as separate franchises, which could allow the parent chain to escape the threshold. The government has not said how it would treat franchises under the law.

Even if Hungarian retailers are also subject to the rule on making profits, the burden will fall more heavily on foreign firms because they have a bigger share of the market.

According to a ranking by consultancy Planet Retail, 7 of the top 10 retailers in Hungary are foreign-owned.

Natalie Berg, Planet Retail's global research director, said it was commonplace for big multinationals to operate at a loss in growing foreign markets for a couple of years. The proposed law on profits "would definitely pose a problem," she said.

Tesco is Hungary's biggest supermarket chain. It says it operates over 200 stores and is the country's third-biggest employer. A Tesco spokesman said the company was still working through the detail of the draft law on profits.

On the increased fee for food safety, he said Tesco was disappointed. "The fee will significantly increase costs for many retailers in Hungary," the spokesman said.

Lidl's Hungary unit said in an emailed reply to Reuters questions that "it considers additional burdens acceptable if all market participants are required to take part equally."

Also this week, Hungary's parliament passed legislation that will further raise the top bracket of an advertising tax, to which only a single company is subject this year: the Hungarian unit of European broadcaster RTL Group.

The company's owner, German media giant Bertelsmann, has said the tax is aimed at driving it out of Hungary. (Additional reporting by James Davey in London, Sandor Petro in Budapest and Dominique Vidalon in Paris; Editing by Peter Graff)