LUXEMBOURG (CN) – Backing Google in a tax dispute Tuesday, Europe’s highest court chucked a $3.5 million fine related to advertising sales in Hungary.
The Court of Justice called Hungary’s system of taxation “disproportionate and therefore unjustified” and found that it was incompatible with European Union law.
Hungary first fined Google 31,000 euros ($33,000) in 2015, after it introduced a progressive advertising tax system based on total advertising turnover the year before. The rates ranged from zero to 50%, depending on how much advertising revenue a company had made. Because resident and nonresident companies also faced different registration systems to pay the tax, the Irish-based Google alleged discrimination in proceedings before the central European nation’s tax authority.
Meantime, the European Commission, the EU’s cabinet body, opened an investigation into the tax system. “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,” competition commissioner Margrethe Vestager said when announcing the investigation in 2015.
The Hungarian government made some adjustments to the regulations, most notably reducing the top rate from 50% to 5.3%, but the commission still found that the tax violated EU competition regulations. “Today’s decision requires Hungary to remove the unjustified discrimination between companies under the 2014 Advertisement Tax Act and/or the amended version and restore equal treatment in the market,” the European Commission said in a 2016 statement.
Under EU law, member states of the political and economic union cannot discriminate on the basis of nationality or residency.
Despite the admonishment from the commission, Hungary continued to pursue the case against Google, which the Budapest Administrative and Labour Court referred to the Court of Justice in 2018.
“The system of penalties under the law on the taxation of advertisements enables significantly higher fines to be issued than the system of fines provided for in the event of infringement by a supplier of advertising services established in Hungary of its obligation to register,” the Grand Chamber of the Luxembourg-based court wrote Tuesday.
Siding with Hungary in one respect, the Court of Justice upheld the country’s requirement for foreign companies to file a tax declaration there.
Tuesday’s opinion is final and cannot be appealed.
Hungary’s government passed another tax regulation on advertising in 2017, assessing a flat 7.5% tax on all advertising sales exceeding $330,000. The legislation was called the “Google tax.”
In another dispute over taxes, the Court of Justice sided Tuesday with Hungary in a case involving British retailer Tesco. Together with another British-based company, Vodafone, Tesco had filed a complaint in Hungarian court over a tax levied on telecommunications sales. The two companies claimed the tax discriminated against them based on nationality, but the court found it was compatible with EU law.