The European Commission has opened an in-depth investigation into whether Hungary's advertisement tax introduced in June 2014 complies with EU state aid rules. In particular, the Commission has concerns that the progressive tax rates, ranging from 0 to 50%, could selectively favour certain companies and give them an unfair competitive advantage. The Commission has therefore also taken a separate decision prohibiting Hungary from applying progressive rates until the Commission has finished its assessment (a so-called "suspension injunction"). The opening of an in-depth investigation gives interested third parties the opportunity to comment. It does not prejudge the outcome of the investigation.
Commissioner Margrethe Vestager, in charge of competition policy, said: "It is very important that we ensure a level playing field on media markets throughout Europe. Many media today rely on advertisement income to finance their operations. I welcome the signals from the Hungarian government that they intend to make changes to the advertisement tax. Our state aid investigation will look in detail both at how the advertisement tax applies currently as well as how it is amended, to make sure there is no unfair discrimination against certain media companies."
Under Hungary's Advertisement Tax Act, companies are taxed at a rate depending on their advertisement turnover and companies with a higher advertisement turnover are subject to a significantly higher tax rate. At this stage, the Commission considers that this progressivity of the tax rates, ranging from 0% to 50%, selectively favours certain media companies, in breach of EU state aid rules. Due to the progressive rates, companies with a low advertisement turnover are liable to pay substantially less advertisement tax, even in proportion to their advertisement turnover, than companies with a higher advertisement turnover. A progressive tax based on turnover places larger players at a disadvantage, unlike a progressive tax based on profits, which can be justified by the higher burden-bearing capacity of very profitable companies. At this stage, the Hungarian authorities have not presented any objective reason that would justify this.
The Commission also has doubts if the provisions in the Act, which allow the deduction of previous losses from the taxable advertisement turnover, are in line with state aid rules. These rules seem to be inconsistent with the overall objective of the tax and their narrow application only to companies that were not profit-making in 2013 appears to grant a selective advantage to these companies.
The Commission's investigation does not call into question Hungary's right to levy an advertisement tax or to determine the appropriate level of taxation. However, the Commission has to verify that such a tax does not selectively favour certain companies over their competitors. Hungary and interested third parties can now submit their comments to the Commission.
Following the investigation the Commission will decide whether or not the advertisement tax gives rise to state aid to certain companies and if there is aid, whether it complies with EU rules.
Hungary adopted the Advertisement Tax Act on 11 June 2014, with further amendments on 4 July and 18 November 2014. The Act creates a new special tax on advertisements published in the media in Hungary and applies to all media companies.
The tax for each company is based on the turnover derived from advertisement activities, without deduction of any costs. The tax is therefore not based on the profits generated from these activities. The tax base of affiliated companies is aggregated. The tax rate is progressive: companies with small or medium-sized advertisement turnover are either fully exempted or taxed at 1 %, whereas companies with high advertisement turnover are taxed at a progressive rate between 10% and 50%. For the tax year 2014, a transitional measure allows companies to deduct from the 2014 tax base 50% of the losses carried forward from previous years under corporate or personal income tax law. However, this possibility is limited to companies that were not profit-making in 2013.
In parallel, the Commission is also assessing the compatibility of the tax with other aspects of EU law, notably with the freedom of establishment as guaranteed by Article 49 TFEU in relation to whether the regime primarily affects Hungarian companies linked to companies with registered offices in other Member States. The Commission is currently in contact with the Hungarian authorities to establish all relevant facts.
The non-confidential version of the decision will be made available under the case number SA.39235 in the State Aid Register on the Commission's competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.