The European Commission has opened two separate in-depth investigations to further examine whether two recent Hungarian measures with steeply progressive rate structures are in line with EU state aid rules. The first measure concerns a food chain inspection fee and the second a tax on turnover from the production and trade of tobacco products. 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 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.
Amendment of the food chain inspection fee
The Hungarian Food Chain Act requires food chain operators to pay a so-called "food chain inspection fee". According to a 2014 amendment, shops selling "fast-moving consumer goods" are subject to the fee at steeply progressive rates. "Fast-moving consumer goods" under the Act include a number of products that consumers use on a daily basis and are typically consumed, depleted or replaced within one year (for example, foodstuffs, cosmetics, drugstore or household cleaning products).
According to an amendment in 2014 stores with a low turnover are now either fully exempted or liable to pay a substantially lower food chain inspection fee (0.1% of their turnover) than stores with a higher turnover (up to 6% of their turnover). While a fee based on turnover does not in itself raise state aid issues, the Commission considers at this stage that the progressivity of the fee rates selectively favours companies with a low turnover and gives them an unfair competitive advantage over others.
So far, Hungary has provided no objective reasons that would justify such differentiated treatment. As the new rules entered into force on 1 January 2015 and the first payments are due at the end of July, the Commission has also decided to require Hungary to suspend application of the progressive rates until the Commission has completed its state aid assessment.
New tax on sales of tobacco products
In 2015 Hungary introduced a new tax on tobacco products, referred to as a 'health contribution'. The tax rates are steeply progressive: Companies with a low turnover are only liable to pay a tax of 0.2% of their turnover from the production and sale of tobacco products. On the other hand, companies with a higher turnover are subject to a rate of up to 4.5% of their turnover.
The Commission looked into the issue because it received a complaint. 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).
Food chain inspection fee
The purpose of the food chain inspection fee is to contribute to the financing of the food chain safety strategy and the activities of the food chain authority, notably food chain inspections. Until 31 December 2014, all food chain operators (such as farmers, food processing factories, wholesalers and retailers), including suppliers from other Member States, had to pay a fee based on their turnover at a flat rate of 0.1%.
In 2014, Hungary modified its Food Chain Act introducing specific rules for the calculation of the inspection fee applicable to stores selling fast-moving consumer goods on the Hungarian market. It introduced a steeply progressive fee rate structure with 8 different rates ranging from 0% to 6%. Stores selling fast-moving consumer goods with small or medium-sized turnover are exempted from the tax (below HUF 500 million/ approx. €1.6 million) or subject to a 0.1 % rate (between HUF 500 million and HUF 50 billion/ approx. €1.6 - €161 million), whereas companies with higher turnovers are subject to the fee at a progressive ratesabove 1%, reaching 6% for turnovers exceeding HUF 300 billion(approx. €966 million). The amendment entered into force on 1 January 2015.
All other food chain operatorsremain subject to the fee calculated on the relevant turnover at a flat rate of 0.1%.
Furthermore, the Commission also has doubts, based on the information currently available, that the fee can be considered compatible with EU legislation on official controls along the agri-food chain. These rules allow, and in some cases require, Member States to collect fees to cover the costs of official controls by national authorities. In particular, the Commission has reservations as to whether the amended Hungarian fee levels correspond to, and do not exceed, the actual costs of such controls, as required under the above-mentioned EU legislation.
This measure is one of many retail restrictions introduced by Hungary recently, which can potentially have combined negative effects on competition and can violate the fundamental freedoms provided by the Treaty. For example, as a result of another legislative provision, retailers are prohibited to operate after two consecutive years of loss-making. Such losses can be the result of the high food chain inspection fee some retailers would need pay. The Commission has contacted the Hungarian authorities to find out whether this provision and other retail restrictions are compatible with Treaty rules on freedom of establishment.
Tax on tobacco products
On 16 December 2014 the Hungarian Parliament approved Act XCIV of 2014 on the health contribution of tobacco industry businesses. The Act, which entered into force on 1 February 2015, imposes a tax, referred to as the 'health contribution', on the annual turnover derived from the production and trade of tobacco products in Hungary. It applies to authorised warehouse keepers, importers, or registered traders of tobacco products.
The contribution has progressive rates of 0.2% (companies with a turnover between HUF 30 million and HUF 30 billion / approx. €96,500 - €96.5 million), 2.5% (companies with a turnover between HUF 30 billion and HUF 60 billion / approx. €96.5 - €193 million) and 4.5% (companies with a turnover above HUF 60 billion / approx. €193 million).
If the company makes certain eligible investments, it can reduce its liability resulting from the legislation by up to 80%.
The Commission is also examining whether the Hungarian laws on the distribution of tobacco products are compatible with EU law.
The Commission also has an ongoing 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 advertisement tax rates, ranging from 0 to 50%, could selectively favour certain companies and give them an unfair competitive advantage.
The non-confidential version of the decisions will be made available under the case numbers SA.40018 and SA.41187 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.
 Regulation (EC) No 882/2004 of the European Parliament and of the Council of 29 April 2004 on official controls performed to ensure the verification of compliance with feed and food law, animal health and animal welfare rules, OJ L 165, 30.4.2004, p. 1.