Final judgement: According to the European Court of Justice,
the Hungarian advertising tax does not infringe EU law

We wrote in last October that, in the opinion of the Advocate General, which was not final at that moment, the Hungarian advertising tax is not contrary to EU law, but the official judgment of the European Court of Justice was still pending at that time. However, this decision was made last week and, as expected, did not contradict the Advocate General’s opinion, i.e. it was officially confirmed that the Hungarian advertising tax did not infringe EU law on state aid.

Let us start by briefly reviving the background of the case. In August 2014, Hungary introduced the sales-based, progressive advertising tax, of which large companies became the main burden bearers (there were 6 different rates when this tax type was introduced). The obligors of this special tax were primarily media and advertising service providers and publishers, as well as publishers of Internet advertisements in predominantly Hungarian language. The customers of the advertisement (i.e. the companies that ordered the ad) had to comply with the relevant special documentation requirements, and if they failed to do so, the customers also became obliged to pay the advertising tax.

Following the formal investigation procedure initiated in connection with this measure, the European Commission (hereinafter “Commission”) ruled in November 2016 that the tax measure adopted by Hungary was incompatible with the EU due to both its progressive structure and the possibility to deduct accrued losses. Furthermore, according to the Commission, it constitutes as a state aid because it favoured the smaller companies over the largest taxpayers, thus the Commission ordered the immediate and effective recovery of the aid granted from the beneficiaries.

Hungary appealed against the Commission’s decision, as a result of which the European Court of Justice (hereinafter “Court”) annulled the Commission’s decision in June 2019, as it did not find evidence of an advantage for smaller companies.

However, the Commission appealed against the Court’s decision, which was unfavourable to the Commission, while Hungary decided on its own to temporarily suspend the advertising tax until its case was clarified, as a result of which the advertising tax rate became 0% for everyone from 1 July 2019 to 31 December 2022.

In the current judgment of March 2021, the Court argued that, in areas not covered by EU tax harmonization, Member States are free to determine the tax system they deem most appropriate. Consequently, the application of a progressive taxation based on sales falls within the discretion of each Member State, provided that such a measure does not contain a manifestly discriminatory element.

In its judgment, the Court assumed that a measure which could be regarded as state aid was selective under EU law (i.e. it disadvantaged certain entities) only if it was capable of favouring certain companies or the production of certain goods, which are in a comparable factual and legal situation (with regard to the purpose of that legislation) with other companies or goods and because of that the latter ones receive different (unfavourable) treatment.

The Court therefore said that the Commission had not shown that the rules on the Hungarian advertising tax were manifestly discriminatory.

As mentioned, the rate of the Hungarian advertising tax is currently 0%, which shows that the Hungarian legislator does not intend to abolish this type of tax – as it would have repealed the entire advertising tax law –, but rather waited for the relevant decision of the Court. Thus, in the future (according to the current situation, from 2023) this tax type is expected to be “reintroduced”. So it may be important to review who may be affected by the advertising tax in the future.

The rules of advertising tax may follow the previous regulation. The basis of the advertising tax is the adjusted net sales revenue from the taxable activity in the given tax year, the rate is 0% up to HUF 100 million (approx. EUR 278,000), but it is 7.5% for the above part. The tax (as a general rule) must be declared and paid annually by the publisher of the advertisement, by the last day of the fifth month following the tax year (31 May for calendar-year taxpayers). For taxpayers who are required to pay an advance, paying it twice a year is necessary furthermore, paying the remnant advance by the 20th day of the last month of their tax year is also compulsory (i.e. 20 December for taxpayers with a calendar year).

Based on the above, the position of the Hungarian legislator regarding the advertising tax has been confirmed at the EU level as well. It is therefore worthwhile for the previously obliged companies to follow the related changes and announcements, as these companies can expect to this obligation again (within 2 years). Of course, VGD Hungary will also follow the related news.

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Should you have any further questions regarding this newsletter, VGD Hungary’s tax advisors are gladly at your disposal.