Case law
12 March 2020

Court of Justice of the European Union decides in cases on special taxes levied in Hungary

The Court of Justice of the European Union decided that the EU freedom of establishment does not preclude Member States from levying a progressive tax on turnover, even though the actual burden is mainly borne by companies controlled from another Member State. The Court also ruled that Hungarian advertisement tax penalty regime disproportionately affected companies located in another EU Member State and was therefore contrary to the EU principle of freedom to provide services.

Marianna Dávidová


On March 3, 2020, the Court of Justice of the European Union (CJEU) rendered its decisions in three cases, C-482/18 Google Ireland, C-323/18 Tesco-Global Áruházak and C-75/18 Vodafone Magyarország, each of which concerned aspects of Hungarian law.

first case (C-482/18 Google Ireland) dealt with Hungarian tax on advertisements. Companies within the scope of the tax were required to fulfill the registration obligation while Hungarian registered businesses were in most cases considered to be registered based on existing registration for other taxes. Should the company fail to fulfill the registration obligation there was a penalty regime in place. The initial penalty was levied in the amount of approx. EUR 30,000 and this was increased on a daily basis and reached the maximum amount of approx. EUR 3,000,000.

CJEU was asked if obligation imposed on suppliers of advertising services to submit a declaration for the purposes of that tax represents a restriction on the freedom to provide services. The Court ruled that a reporting obligation, which is an administrative formality, should not constitute an obstacle to the freedom to provide services itself. The Court further noted that the exemption from the obligation to submit a tax declaration does not prevent the cross-border supply of advertising services, but rather prevents suppliers already registered with the tax authority from being required to complete an additional administrative formality.

In relation to the special penalties imposed for failing to register for the Hungarian tax on advertisements, the Court noted that sanction regimes in tax matters typically fall within the competence of individual EU Member States. While the sanctions in this case were, in the first instance, applicable to both domestic Hungarian and non-domestic companies, the Court determined that it was likely that domestic Hungarian companies would be penalized under the general provisions of Hungarian tax law and would result in significantly lower penalties.

The CJEU concluded that legislation based on which the penalty for non-compliance with the registration obligation is levied to the suppliers of services established in another Member State in a series of fines issued within several days, the amount of which is exponentially increased without giving those suppliers the time necessary to comply with their obligations or the opportunity to submit their observations, or having itself examined the seriousness of the violation is in the contrary to the freedom to provide services.

The second and the third case (C-323/18 Tesco-Global Áruházak and C-75/18 Vodafone Magyarország) dealt with the special turnover taxes applicable in Hungary using progressive rate structure and their compliance with the EU law.

Both a special tax on certain sectors and a special tax on telecommunications are calculated out of the turnover amount using the progressive rate structure. It was also argued that application of the special tax as well as tax on telecommunications in practice leads to a scenario in which foreign-owned subsidiaries are more likely to be subject to the higher rate of tax than domestic Hungarian businesses.

The CJEU in its judgments noted that the freedom of establishment prohibits direct or indirect discrimination based on the location of the seat of a company.

The Court therefore examined whether the use of a progressive tax rate to impose different levels of taxation on companies represents either direct or indirect discrimination. The Court noted that the disputed tax makes no distinction between taxpayers based on where they have their registered office and therefore does not establish direct discrimination. The Court further noted that the application of a system of progressive taxation is within the power of each Member State and that progressive taxation can be based on turnover on the basis that turnover represents a criterion of differentiation that is neutral and a relevant indicator of a taxable person’s ability to pay. The Court therefore found also no evidence of indirect discrimination and concluded that the EU freedom of establishment does not preclude Member States from levying a progressive tax on turnover, even though the actual burden is mainly borne by companies controlled from another Member State.

its judgment CJEU also confirmed that introduction of a tax which is based on the overall turnover of the taxable person, which is levied periodically, and not at each stage of the production and distribution process, and where there is no right to deduct tax paid at an earlier stage of that process in not prohibited by the EU VAT Directive.

The above judgments significantly reduce chances that the member state would challenge the specific turnover taxes as being in the contrary to EU law.


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