EU scrutinizing Hungary’s tobacco turnover tax

The European Commission has opened two separate ‘in-depth’ investigations to examine further whether two recent Hungarian tax measures with steeply progressive rate structures are in line with EU state aid rules. One measure concerns a tax on turnover from the production of and trade in tobacco products, while the other concerns a food chain inspection fee.

At this stage, the Commission has concerns in both cases that the progressivity of the rates based on turnover provides companies with a low turnover a selective advantage over their competitors, in breach of EU state aid rules,’ the Commission said in a press note.

‘The Commission has also issued injunctions, prohibiting Hungary from applying the progressive rates of the food chain inspection fee and the tobacco tax until the Commission has concluded its assessment.

‘The opening of in-depth investigations gives interested third parties the opportunity to comment on the measures under assessment. It does not prejudge the outcome of the investigations.’

This year, Hungary introduced a new tax on tobacco products, referred to as a ‘health contribution’, under which tax rates are steeply progressive; so companies with a low turnover are liable to pay a tax of 0.2 percent of their turnover from the production and sale of tobacco products, while companies with a higher turnover are subject to a rate of up to 4.5 percent of their turnover.

‘The Commission looked into the issue because it received a complaint,’ the press note said.

‘The Commission welcomes member state measures to reduce tobacco consumption. However, it has doubts that the effects of tobacco products on public health increase progressively with the turnover of companies selling them.

‘Because of the progressive rates, companies with a low turnover pay substantially lower taxes than companies with a high turnover. So far, Hungary has provided no objective reasons that would justify a differentiated treatment between companies with different turnovers.

‘The legislation also allows companies to reduce their liability under this tax if they make certain investments in tangible assets. The Commission is concerned that this may grant a selective advantage to such companies, and Hungary has not at this stage demonstrated that the reductions are compatible with the single market.’

Under EU law, member states are competent to decide on their taxation systems. However, member states have to ensure their tax systems respect EU rules on state aid (by not granting selective advantages to particular companies) and on the single market (e.g. by ensuring the freedom of establishment, free movement of goods, services and capital, and non-discrimination between domestic products and those from other member states).