Fate of advertising tax still unknown – Hungary files a legal challenge against the European Commission’s negative decision at the European Court of Justice

As we reported in detail in our previous summary, the European Commission published a negative decision on the compatibility of the advertisement tax introduced in Hungary in August 2014, with the EU state aid rules, upon the completion of a comprehensive investigation launched in 2015. As it is established by the Commission in its decision dated 4 November 2016, the provisions of the Advertisement Tax Act relating to the progressivity of the tax rate and the deduction of losses carried forward from the tax base, constitute an unlawful state aid, which situation was failed to be remedied by the law being amended in June 2015.

In line with the EU legislation, Hungary has to recover the unlawful and incompatible state aid from its beneficiaries. In terms of the progressivity of the tax rate, recovery of the state aid shall mean the following, in line with the Commission’s decision: “Hungary needs to treat all undertakings equally, as if they had been subject to a single fixed rate. By default, the Commission considers that the single fixed rate to be 5.3% as determined by Hungary in the amended version of the tax, unless Hungary decides, within two months from the date of adoption of the present decision, to set a different level for the single tax rate, that will apply retroactively to all undertakings over the whole period of application of the advertisement tax (original and amended versions), or to abolish the advertisement tax retroactively as of the date of its entry into force.” Further, in terms of aids granted to undertakings making a loss in 2013, and as a result of a deduction of the losses carried forward: “Hungary has to recover the difference between the tax due by application of the fixed tax rate to the entire advertisement turnover of the companies subject to the tax, without any deduction of losses, and the tax actually paid. This difference corresponds to the tax that has been avoided following the deduction.” – as stated in the Decision published on 20 December 2016.

The 2-month deadline expired in early 2017, without the Advertisement Tax Act being amended or abolished retroactively. Rather, on 16 January 2017, Hungary filed a lawsuit at the European Court of Justice, for the annulment of the Commission’s decision.

Therefore, the outcome of the lawsuit is yet unknown, and similarly, it is unclear what path Hungary will take if being unsuccessful with the lawsuit, i.e. (a) whether it will amend the Advertisement Tax Act by introducing a single fixed tax rate, in which case it is questionable how it is technically possible to retroactively settle the tax payments by taxpayers formerly being ranked in the various tax bands, or (b) decides to abolish the advertisement tax entirely and retroactively, as of the date of the law entering into force, in which case, the total tax collected, together with interest, would need to be repaid.

Until the European Court makes its decision, all taxpayers have to comply with their tax filing and tax payment obligations, in line with the provisions of the current Advertisement Tax Act in effect.