State aid considerations in relation to progressive rates of taxation

In a judgment of the General Court (EGC)1, delivered on 27 June 2019, the General Court considered the application put forward by Hungary seeking to annul a Commission Decision (EU) 2017/329 of 4 November 2016 relating to the implementation by Hungary on a taxation imposed on advertisement relating to broadcasting or publication of advertisements specifically in relation to those persons who make advertisements public (newspapers, audiovisual media, billposters).

An advertisement tax which was introduced by Hungary, and applied on a progressive basis according to specific tax bands on turnover carried out in Hungary, was examined by the European Commission as part of its monitoring of State aid to determine whether such advertisement tax granted a selective advantage constituting State aid.

The advertisement tax was introduced by Hungary with the intention to promote the principle of public burden sharing.

Taxable persons to whom such advertisement tax was applicable and whose pre-tax profits were zero or negative were afforded the possibility of deducting from their taxable amount for the subsequent year, 50 per cent of the losses carried forward from the earlier financial year.

The European Commission initiated an investigation on the Hungarian authorities on the basis that the progressive nature of the tax rates and the provisions of the deduction from the taxable amount of losses carried forward gave rise to State aid.

One of the arguments put forward by the European Commission in justifying the characteristics of the advertisement tax at issue as State aid, was that it was possible for certain undertakings that were not profit making during a particular year to deduct from their taxable amount 50 per cent of the losses carried forward. According to the European Commission, this constituted an advantage since it reduced their tax burden compared to undertakings that could not benefit from that deduction. A subsequent argument put forward by the European Commission was that undertakings which were being taxed at a substantially lower tax rate mitigated the charges that undertakings with a low turnover must bear when compared to undertakings with a high turnover. This therefore provided an advantage to the benefit of smaller undertakings over larger undertakings.

The European Commission further stated that in order for the advertisement tax not to be characterised as State aid it had to satisfy two conditions, firstly the advertisement turnovers must be subject to the same single tax rate and secondly there must be no element that would provide a selective advantage to certain undertakings.

The Hungarian Authorities argued that the purpose of the advertisement tax was redistributive and that the turnover and size of an undertaking reflected its ability to pay. An undertaking with a higher advertisement turnover has a greater ability to pay than an undertaking with a lower advertisement turnover.

The Commission provided that an undertaking’s turnover is not a good proxy for its ability to pay nor is the pattern or progressivity of the tax rates. In addition the Commission also argued that the 50 per cent deductibility of the losses carried forward cannot be justified as a measure to prevent tax avoidance and the circumvention of tax obligations, as was being argued by the Hungarian Authorities. The Commission also considered that the measures introduced distorted or threatened to distort competition and affected trade between Member States.

Article 107(1) of the Treaty of the Functioning of the European Union (“TFEU”) provides that any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is, in so far as it affects trade between Member States, incompatible with the internal market. The State aid which is referred to in article 107(1) is not limited purely to subsidies but also includes State measures, in various forms which mitigate the charges which are normally included in the budget of an undertaking and which are similar in character and have the same effect as subsidies.

Consequently, when analysing tax matters, a measure by which the public authorities grants certain undertakings favourable tax treatment, even if this does not involve the transfer of State resources yet it places the recipient in a more favourable financial position than other taxpayers, this would amount to State aid within the meaning of Article 107(1) TFEU. In order to demonstrate whether there is a favourable tax treatment granted to certain undertakings, one will need to determine whether such measures favour one undertaking when compared to another, which comparison analysis must ensure that the undertakings are in a comparable legal and factual situation.

The Hungarian tax authorities argued that the scheme of the advertisement tax which was characterised by a progressive tax structure was consistent with the tax authorities’ objective, even though the tax at issue was a turnover tax.

The Court confirmed that there are taxes whose nature does not preclude them from being accompanied by variation mechanisms, without such mechanisms leading to selective advantages being granted. This is on the basis that there is no selectivity if the differences in taxation and the advantages which they create do not derogate from the normal tax system. Such mechanisms are justified even if only by the purpose governing the apportionment of tax between the taxpayers stemming from the application.

On the other hand if undertakings in a comparable situation, in light of the objective of the tax or the purpose justifying a variation, are not treated equally, that discrimination gives rise to a selective advantage which may constitute State aid to the extent that the conditions laid down under Article 107(1) TFEU are satisfied.

Accordingly, progressive tax structures which are not exceptional in the Member States’ tax systems do not in themselves imply the existence of State aid.

The Commission failed to prove that there was a selective advantage, and thus State aid on the basis of the progressive tax structure of the advertisement tax.

The Court concluded by stating that the Commission was not correct in identifying a discriminatory element contrary to the advertisements tax’s objective constituting a selective advantage characterising State aid and proceeded with annulling the contested decision.

The General Court (EGC) is a constituent court of the Court of Justice of the European Union.

Dr Christina Scicluna is an Advocate at GANADO Advocates