European Court Upholds Hungarian Tax on Telecom Operators

LUXEMBOURG (CN) – The European Union’s highest court found Tuesday that a Hungarian tax on phone companies doesn’t violate EU law.

“Steeply progressive rates of the special tax do not, inherently, create any discrimination, based on where companies have their registered office,” the European Court of Justice wrote in its ruling.

A man walks by the European Court of Justice in Luxembourg in October 2015. (AP Photo/Geert Vanden Wijngaert, File)

The fact that foreign-owned companies paid the highest Hungarian tax rates only reflected the economic realities of the market, the Luxembourg-based court found.

Following the 2008 financial crisis, the central European country of Hungary introduced a series of taxes to balance the government’s budget. One of those was a progressive tax on telecommunications operators, which levied a tax ranging from 0.1% on companies with annual profits of between 500 million Hungarian forints ($1.6 billion) and 30 billion forints ($99 billion) to 2.5% on those with more than 100 billion forints ($330 billion.)  For telecom companies with annual profits of under 500 million forints, the tax rate is zero.

In 2012, British supermarket giant Tesco was given a tax bill of 1.4 billion forints ($4.5 million) on revenue earned between 2010 and 2013.

The local branches of Tesco and telecommunications giant Vodafone, which had also been taxed under the new laws, brought complaints against the Hungarian government in Hungarian court, arguing that the tax violated EU competition regulations.

Tesco argued that, with one exception, companies taxed at the highest rate were all foreign-owned while all of the companies with the zero tax rate were owned by Hungarians. Under EU law, countries in the political and economic union cannot discriminate on the basis of nationality.

However, the European Court of Justice sided with Hungary on Tuesday and found there was no discrimination in the tax system because the rates are not determined based on where the company was established.

“The basic band of tax charged at 0% does not exclusively affect taxable persons owned by Hungarian natural persons or legal persons, since, as in any system of progressive taxation, any undertaking operating on the market concerned has the benefit of the reduction for the proportion of its turnover that does not exceed the maximum amount of that band” the court wrote.

Vodafone and Tesco declined to comment on the ongoing litigation. Both cases will now return to the Administrative and Labour Court in Budapest, which referred the case to the EU’s top court, for a final ruling.

In a separate ruling Tuesday in a case brought by Google, the Court of Justice called Hungary’s system of taxation for advertising sales “disproportionate and therefore unjustified” and found that it was incompatible with EU law. Google’s European headquarters are in Ireland.

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