Hungary’s ad tax breaches EU rules

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The European Commission has found that the progressive nature of Hungary’s advertisement tax rates grant a selective advantage to certain companies, and is therefore in breach of European Union’s state aid rules, according to a press release issued by the EC today. The commission said it believes the system provides undue favor to companies that did not make a profit in 2013 by allowing them to pay less tax.

Hungaryʼs 2014 Advertisement Tax Act saw companies taxed depending on their ad turnover; companies with a higher turnover were subject to significantly higher, progressive tax rates, ranging from 0% to 50%. After an in-depth investigation, the EC found that “the progressivity of the tax rates favored certain companies”.

The EC added that under the act, “companies with a low advertisement turnover were liable to pay substantially less advertisement tax, even in proportion to their advertisement turnover, than companies with a higher advertisement turnover. This gave companies with a low turnover an unfair economic advantage over competitors.”

The also commission added that “Hungary has not demonstrated that the progressive tax rates were justified by the objective pursued by the advertisement tax.”

The commission noted that, at the time it opened its investigation,Hungary suspended the application of the tax as it had been asked to do by the EC. However, Hungary then implemented an amended version of the tax, failing to notify or consult with the commission, its press statement says.

“The commissionʼs investigation showed that the amended advertisement tax, in force since July 2015, took steps in the right direction but did not fully address the commissionʼs concerns,” the press statement adds. “The amended scheme allows companies to decide themselves whether to opt for a retroactive application of the amended scheme. It maintains progressive rates based on turnover over a smaller range (0% and 5.3%). However, there is still no objective justification for this differential treatment. Moreover, the limitations on deduction of past losses remained unchanged,” the statement said.

The commission’s decision, published today, requires Hungary to lift the “unjustified discrimination between companies under the 2014 Advertisement Tax Act and/or the amended version and restore equal treatment in the market,” while the precise amounts of tax that should be recovered from each company, if any, must now be determined by the Hungarian authorities on the basis of the methodology established by the EC.

“The commission does not question Hungaryʼs right to decide on its taxation systems or on the objective of different taxes and levies. However, the tax system must comply with EU law, including state aid rules, and cannot unduly favor certain companies over others,” the EC concluded.