Commissioner Margrethe Vestager, in charge of Competition policy, stated: “Hungary is in the full right to finance the cost of its food inspection activities and to levy a tax on tobacco products to finance its health system. However, Hungary should make sure that all companies are treated alike so that the contributions are levied on non-discriminatory terms.”
Following the Commission's opening of an in-depth investigation in July 2015, neither of these two Hungarian fiscal measures with progressive rates structure was collected by Hungary and, as a result, no State aid was effectively granted. Consequently, there is no need for recovery in these cases.
The first of these two Hungarian fiscal measures with progressive rates structure concerns a food chain inspection fee and the second a tax on turnover from the production and trade of tobacco products. While a fee or a tax based on turnover does not in itself raise State aid issues, the Commission considers that the progressive rate structure provides a selective advantage to companies subject to the lower rates (those with lower turnover).
However, Hungary was not able to demonstrate that a progressive structure was justified either by the objectives pursued by the food chain inspection fee to cover the cost of sanitary inspections, or by the health-related objectives of the tax on the tobacco businesses. The size of the retail operator controlled – or of the tobacco business – is already taken into account by linking the contribution to the turnover through a (single rate) proportional system.
The Commission does not question Hungary's right to decide on its taxation levels or the objective of different taxes and levies. However, the tax system should respect EU law, including State aid rules, and should not unduly favour a particular type of company, for example companies with lower turnover.
Food chain inspection fee
The Hungarian food chain inspection fee is meant to finance the food chain inspection agency in Hungary and until 2014 was set at a flat rate (0.1% of annual turnover) for all food chain operators. In 2015, a progressive rate structure was introduced for stores selling so-called “fast-moving consumer goods” with rates ranging from 0% and 0.1% for stores with small turnover (up to HUF 50 billion, about €158 million) to 6% for stores with high turnover (above HUF 300 billion, about €950 million). "Fast-moving consumer goods" are daily products such as food, cosmetics, drugstore or household cleaning products.
The food chain inspection fee also favours certain business models - franchisees are taxed on the basis of the individual turnover whereas integrated retailers are taxed on their aggregate turnover, which is higher since it covers several stores.
Hungary has not provided any evidence that the progressive rate structure corresponds to a similar progressive pattern in the costs incurred by the agency for the inspection of the relevant stores. Indeed, there is no evidence that the cost of controls for larger stores subject to the 6% rate is 60 times higher than the cost of control for smaller shops subject to the 0.1% rate. Hungary has therefore not demonstrated that the progressive rate structure is justified by the logic of the inspection fee.
In November 2015 the Hungarian Parliament abolished the progressive rates structure and re-introduced the 0.1% flat rate for all food chain operators. These provisions entered into force on 27 December 2015. They address the Commission's state aid concerns.
Tax on tobacco products
A Hungarian law 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 tax rates are progressive: companies with a low turnover (up to HUF 30 billion, about €95 million) are only liable to pay a tax of 0.2% of their turnover whereas companies with a higher turnover (above HUF 60 billion, about €190 million) are subject to a rate of 4.5% of their turnover.
Hungary has provided no evidence that the effect of tobacco products on public health increase proportionally with the turnover of the companies selling them or that the last pack of cigarettes sold by a producer would have less health-related effects than the first one sold by the same producer. Therefore, the Commission concluded that the progressive rates are not justified by the nature and general scheme of the tax system nor compatible with the internal market.
Also in the context of the tax on tobacco products, if a company makes certain eligible investments, it can reduce its liability resulting from the legislation by up to 80%. The Commission found that such a deduction, available to certain companies only, was inconsistent with the health-related objective pursued by Hungary with the contribution. Investments which by nature aim at increasing the production and trading capacity of tobacco businesses would indeed appear to increase the health damage that the health contribution is supposed to combat, rather than reduce it.
Under EU law, Member States are competent to decide on their taxation systems. However, Member States have to ensure their tax systems respect EU law, such as the State aid rules, by not granting selective advantages to particular companies, and Single Market rules (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).
The Commission opened in-depth investigations into the two measures in July 2015 and required Hungary to suspend the application of the progressive rates until the Commission could complete its State aid assessment. Hungary suspended the payment of both levies.Since the suspension took place before any operator had to pay the fee and the tax for the year 2015, no State aid was effectively granted under the measures and therefore there is no need for recovery.
The non-confidential version of the decisions will be made available under the case numbers SA.40018 (food chain inspection fee) and SA.41187 (health contribution on tobacco products) 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.