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EC: Hungary's Tobacco Tax Breaches State Aid Rules

by Ulrika Lomas, Tax-News.com, Brussels

06 July 2016


The European Commission has said that Hungary's progressive tax rates on turnover derived from the production and trade of tobacco products are not justified and are in breach of European Union (EU) state aid rules.

Since February 2015, Hungary has imposed a "health contribution" tax on the annual turnover derived by certain companies from the production and trade of tobacco products in the country. The tax applies to authorized warehouse keepers, importers, or registered traders of tobacco products.

The rates are progressive. Companies with a turnover of up to HUF30bn (USD105.4bn) are liable to pay a tax of 0.2 percent of their turnover, whereas companies with a turnover of more than HUF60bn are subject to a rate of 4.5 percent of their turnover.

The Commission said that while a fee or a tax based on turnover does not in itself raise state aid issues, it found that the progressive rate structure of the "health contribution" provides a selective advantage to the companies subject to the lower rates (i.e. those with lower turnover).

The Commission added that Hungary has provided no evidence that the effects of tobacco products on public health increase proportionally with the turnover of the companies selling them. The Commission therefore concluded that the progressive rates are not justified by the nature of the tax system, and are incompatible with the internal market.

Hungary also permits a company to reduce its "health contribution" liability by up to 80 percent, if it makes certain eligible investments. The Commission said that such a deduction is inconsistent with the health-related objective pursued by the Hungarian Government. It explained that investments that by nature aim at increasing the production and trading capacity of tobacco businesses would appear to increase the damage that the "health contribution" is intended to combat.

TAGS: tax | investment | business | European Commission | Hungary | public health | tax thresholds | Health tax | tax rates | tax reform | trade | European Union (EU) | Europe

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