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Mar 04, 2020

Luxembourg court rules on Hungary's taxes

The country’s sectoral tax was deemed lawful, while the sanctions regime in connection with Hungary’s advertising tax was found to be incompatible with EU law.

A Luxembourg court has ruled on Hungary’s taxes. The country’s sectoral tax was deemed lawful, while the sanctions regime in connection with Hungary’s advertising tax was found to be incompatible with EU law.

The European Court of Justice ruled that the Hungarian special taxes on the turnover of telecommunications and retail companies are compatible with EU law.

According to MTI, following the financial crisis of 2008, Hungary introduced the sectoral taxes to counteract imbalances in public finances. Tesco and Vodafone Hungary disputed the justification for the special taxes. The European Court of Justice ruled that there was no discrimination against the companies, since the special taxes that mainly impacted foreign-owned companies with the highest revenues on the Hungarian markets were progressive and reflected the real economic situation on the market.

The finance ministry said the court rulings would prevent large companies from raising complaints in the future against paying proportionally more tax than small companies with significantly lower economic potential. The EU court has acknowledged the Hungarian government’s position concerning the fair sharing of burdens.

Justice Minister Judit Varga said that progressive special taxes do not constitute discrimination if they are proportionate with the companies’ positions on the market.

Meanwhile, the court also found that the sanctions regime in connection with Hungary’s advertising tax is incompatible with EU law in a case concerning Google.

In January 2017, Hungary’s tax authority (NAV) fined Dublin-based Google Ireland for failing to register with the authorities regarding the advertising tax system. The law states that a first offence carries a fine of HUF 10 million (EUR 30,000) followed by a daily fine of three times the previous amount, capped at HUF 1 billion.

Google first took its case to the Metropolitan Court of Administration and Labor, claiming the law was discriminatory and breached the EU principle of freedom to provide services.

The EU Court of Justice agreed that a state can levy a tax on a company from another EU member state without breaching the principle of freedom to provide services under EU law, but it took issue with the daily imposition of successive fines, and the cumulative amount reaching millions of euros, without giving the company time to comply with their obligations.

Hungary’s system allows significantly higher fines for breaching the rule to register than other fines, the court said, adding a difference in treatment was disproportionate and therefore constituted a restriction on the freedom to provide services.

The finance ministry said the ruling made clear that Google should not have avoided paying tax in line with the Hungarian law on advertising, and the court only objected to cumulative sanctions imposed when the company failed to register for tax payment.

The ruling concerning Google upholds the principle that multinationals operating in Hungary can be drawn into the system of common burden-sharing even if they do not actually have facilities based in Hungary.