The Court of Justice of the European Union made its judgements regarding Hungarian taxation
The Court of Justice of the European Union (hereinafter: ‘CJEU’) has issued judgements in relation to three Hungarian cases. In our Tax Alert we highlight their key points.
Tesco-Global Áruházak Case (C-323/18)
Tesco stated that the retail trade sector surtax imposed on its 2010-2012 business years is not in line with European law. The Administrative and Labour Court of Budapest referred the case of Tesco to the CJEU for a preliminary ruling in order to examine whether the retail trade sector surtax:
- violates the principle of the freedom of establishment of companies;
- provides selective advantage to lower income businesses, imposing a higher tax rate upon higher income businesses;
- is in line with the principle of the prohibition of state aid.
In its judgement last Tuesday, the CJEU confirmed the Advocate General’s opinion published in July 2019, that the retail trade sector surtax is in line with the principle of the freedom of establishment and does not provide any selective advantage to lower income businesses.
Based on the Court’s judgement, the facts that the retail trade sector surtax is levied progressively on revenue, and that this tax is mainly borne by companies owned by persons of other member states, do not constitute discrimination against those companies.
In addition, according to the Court judgement, as the retail trade sector surtax cannot be considered to directly finance any state aid to certain taxpayers, there is no mandatory link between the surtax and tax exemption provided for certain taxpayers. Therefore, the provisions of the retail trade sector surtax does not affect the general legality of this surtax. Accordingly, the Court has concluded that Tesco cannot refer to illegality of surtax on the grounds of state aid provisions in order to avoid payment of this surtax.
Vodafone Magyarország Case (C-75/18)
As a result of the court appeal of Vodafone Magyarország, the Administrative and Labour Court of Budapest initiated a preliminary ruling procedure at the CJEU in order to establish:
- whether the Special Tax for Telecommunication Operators (hereinafter: ‘Telecommunication Tax’) violates the principle of freedom of establishment, or is discriminatory indirectly due to the fact that the tax burden is borne by non-resident taxpayers;
- whether the Telecommunication Tax is considered as a state aid from the perspective of a company owned by Hungarian residents;
- whether the Telecommunication Tax is in line with the VAT Directive, namely that it does not qualify as value added tax (given that only one value added tax can exist in a member state; in Hungary the value added tax is called ‘Általános Forgalmi Adó’).
The CJEU confirmed the opinion of the Advocate General (published earlier) in its judgement, according to which the Telecommunication Tax is in line with European law.
The judgement affirms that the progressive nature of the Telecommunication Tax does not constitute discrimination, and that the principle of freedom of establishment is not violated resulting from the that fact the tax burden is borne by companies directly or indirectly controlled by persons of other member states, as the latter reflects the economic reality of Hungarian markets.
Moreover, in accordance with the Tesco case, the CJEU also ruled in its judgement that the legality of the Telecommunication Tax cannot be disputed with reference to a possible breach of state aid rules.
Furthermore, the Court found that the Telecommunication Tax is in line with the VAT Directive, since only two of the four essential conditions are not met in this case: the Telecommunications Tax is not levied at each stage of the economic chain and the amounts paid during the preceding stages of the chain cannot be deducted from the tax payable by a taxable person.
Google Ireland Case (C-482/18)
Google has appealed at the Administrative and Labour Court of Budapest against decisions of the Hungarian Tax Authority, primarily on the basis of the amount of fines levied upon them, stating that the Hungarian legal provisions are discriminatory and violate the principle of freedom of services. The Hungarian court asked the CJEU whether the Hungarian tax legislation—imposing an advertising tax-related fine for a reporting failure of up to a thousand times more on companies not established in Hungary than the default penalty imposed on companies established in Hungary—is in line with EU law.
Tuesday's judgment reflects the findings of the Advocate General published in September 2020, according to which, the fine imposed on foreign companies concerning the Hungarian advertising tax liability is not in line with EU law.
The CJEU held that the principle of the freedom to provide services precludes Hungarian legislation which serially fines suppliers of services for non-compliance with the obligation to submit a tax declaration. The rules of penalties under the law on the taxation of advertisements enables significantly higher fines to be issued than the fines applicable to suppliers of advertising services established in Hungary.
Moreover, the CJEU concluded that the competent authority did not allow the suppliers of services enough time necessary to (i) fulfil their obligations, (ii) to submit observations, if any, and (iii) for the tax authorities to carry out an investigation on the materiality of the default.
Finally, the CJEU concluded that that the aforementioned differences in treatment are disproportionate and therefore unjustified, and so constitute a prohibited limitation on the freedom to provide services under Article 56 TFEU.