EUROPEAN COMMISSION. State aid No SA (2015/NN) Hungary Hungarian health contribution of tobacco industry businesses

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1 EUROPEAN COMMISSION Brussels, C(2015) 4805 final PUBLIC VERSION This document is made available for information purposes only. Subject: State aid No SA (2015/NN) Hungary Hungarian health contribution of tobacco industry businesses Sir, The Commission wishes to inform Hungary that, having examined the information supplied by your authorities on the measure referred to above, it has decided to initiate the procedure laid down in Article 108(2) of the Treaty on the Functioning of the European Union (hereinafter "TFEU"). 1. PROCEDURE (1) On 6 March 2015 the Commission received a complaint with regard to a progressive turnover tax imposed on manufacturers and traders of tobacco in Hungary. By letter of 13 April 2015 the Commission forwarded that complaint for comments and sent an information request to the Hungarian authorities, to which they replied by letter of 12 May DESCRIPTION OF THE MEASURES 2.1. Introduction (2) On 16 December 2014 the Hungarian Parliament approved Act XCIV of 2014 on the health contribution of tobacco industry businesses ("the Act"). The Act imposes a tax, referred to as a "health contribution", which is levied on the annual turnover derived from the production and trade of tobacco products in Hungary and applies in addition to Őexcellenciája Péter SZIJJÁRTÓ Külügyminiszter Bem rakpart 47 H BUDAPEST Commission européenne, B-1049 Bruxelles Belgique Europese Commissie, B-1049 Brussel België Telefon: 32 (0)

2 existing business taxes in Hungary, in particular corporate tax. The purpose of the Act is to collect funds for the financing of the health system in order to increase the quality of health services. The Act entered into force on 1 February 2015 and, in its initial version, was supposed to cease to have effect on 31 December On 24 June 2015, an amendment to the Act was published in the Official Journal which makes the health contribution tax permanent Scope of the tax and tax base (3) (4) The health contribution tax is due on the annual turnover generated in the previous year (so the turnover generated in 2014 is taken as a base for the first instalments in 2015) [and derived from the production and trade of tobacco products in Hungary, on the condition that the turnover from these activities accounts for at least 50% of the total annual turnover generated by the undertaking. The tax is levied on authorised warehouse keepers, importers, or registered traders of tobacco products. The tax base to which that tax is applied is the turnover derived from the production and trade of tobacco products in Hungary without deduction of any costs, apart from the costs of certain investments in the tax year Progressive tax rate (5) The applicable health contribution tax is progressive in nature and depends on the annual turnover of the taxpayer as follows: For the part of the turnover below HUF 30 million, no tax is due. For the part of the turnover between HUF 30 million and below HUF 30 billion: 0.2% For the part of the turnover between HUF 30 billion and 60 billion: 2.5% For the part of the turnover exceeding HUF 60 billion: 4.5% 2.4. Reduction of the tax liability in the case of investment (6) Pursuant to Section 6(6) of the Act, the tax liability resulting from the health contribution tax can be reduced by up to 80% of the payable contribution if the company makes investments. The reduction is equal to the positive difference between 30% of the amount accounted for as an investment in the tax year and the amount of State or EU subsidy used for the implementation of the investment project. The value of all investments may be taken into consideration provided that they comply with the definition set out in Section 3(4)(7) of the Act C of 2000 on Accounting 1 1 In accordance with this Act, investment shall include the purchase or creation of tangible assets, the production of tangible assets by one s own enterprise, the activity carried out in order to install or use the tangible asset purchased for its intended purpose until its installation or first normal use (transportation, customs clearance, intermediary activity, laying the foundations, installation and any activity related to the purchase of the tangible asset, including design, preparation, arrangement, borrowing and insurance); 2

3 2.5. Payment of the tax (7) The Act provides that a tax declaration has to be submitted by 30 June 2015 and that the health contribution tax has to be paid in 30 days following this deadline. 3. POSITION OF THE HUNGARIAN AUTHORITIES (8) (9) The Hungarian authorities contest that the measures constitutes aid. In essence, they argue that the measures are not selective. Regarding the progressivity of the tax rates, the Hungarian authorities maintain that in the case of public burdens, the reference framework is specified by the tax base and the tax rate (including a system of progressive tax rates) jointly and that companies in the same factual situation are the ones whose turnover is the same. There is no difference in the base of the contribution, while under the progressive system of rates, applying tax brackets, the entities with the same projection base are subject to the same rate and the calculated amount of the tax is also identical. Therefore, the progressive system of tax rates does not create differentiation because companies in the same factual situation are subject to the same tax rate, and thus is not selective. Regarding the reduction of the tax liability in the case of investment, the Hungarian authorities argue that the Act does not distinguish according to the type or the value of the investment and no distinction is made between the operators carrying out an investment and the businesses implementing the same investment value are in the same factual situation. They stress in their reply that the reduction does not apply exclusively to investments that are carried out in Hungary and that the value of all investments may be taken into consideration for the calculation. The Hungarian authorities further note that the calculation of the investment value is subject to the definition of investment and the calculation of the value of investment under the Accounting Act which is beyond the scope of the Act on the health contribution of tobacco industry businesses. 4. ASSESSMENT 4.1. Existence of aid (10) (11) According to Article 107(1) of the TFEU, "save as otherwise provided in the Treaties, 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 shall, in so far as it affects trade between Member States, be incompatible with the internal market". The qualification of a measure as aid within the meaning of this provision therefore requires the following cumulative conditions to be met: (i) it must confer an advantage on its recipient; (ii) that advantage must be selective; (iii) the measure must be imputable to the State and financed through State resources; and (iv) the measure must distort or threaten to distort competition and affect trade between Member States. investments shall also include activities resulting in the upgrading of an existing tangible asset, the change its purpose, its conversion or directly increasing its useful life or capacity, together with the other activities listed above and related to such activity. 3

4 Advantage (12) (13) (14) According to the case law of the Union Courts, the notion of aid embraces not only positive benefits, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking. 2 Although a tax reduction measure does not involve a positive transfer of resources from the State, it gives rise to an advantage by virtue of the fact that it places the undertakings to which it applies in a more favourable financial position than other taxpayers and results in a loss of income to the State. 3 The Act lays down progressive rates of taxation which apply depending on whether the turnover of the undertakings falls within certain brackets. The progressive character of those rates and the manner in which those brackets have been established have the effect that the percentage of tax levied on an undertaking's turnover increases steeply depending on the number of brackets within which that turnover falls. This has the result that undertakings with low turnover are taxed at a substantially lower average rate than undertakings with high turnover. Being taxed at this substantially lower average tax rate mitigates the charges that undertakings with low turnover have to bear as compared to undertakings with high turnover and therefore constitutes an advantage to the benefit of the former for the purposes of Article 107(1) TFEU. Equally, the possibility under the Act, reduce the tax liability by up to 80% in the case of investment in the tax year constitutes an advantage for those undertakings that have made such investments, since it reduces their tax base and thus their tax burden as compared to undertakings that cannot benefit from that reduction Selectivity (15) A measure is selective if it favours certain undertakings or the production of certain goods within the meaning of Article 107(1) TFEU. For measures which mitigate the charges that undertakings would normally have to bear, such as a preferential tax treatment, the Court of Justice has established that the selectivity of the measures should be assessed by means of a three-step analysis. 4 First, the system of reference must be identified. Second, it should be determined whether a given measure constitutes a derogation from that system insofar as it differentiates between economic operators who, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation. If the measure in question does not constitute a derogation from the reference system, it is not selective. If it does (and therefore is prima facie selective), it must be established, in the third step of the test, whether the derogatory measure is justified by the nature or the general scheme of the (reference) tax system. If a prima facie selective measure is justified by the nature or the general scheme of the system, it will not be considered selective and it will thus fall outside the scope of Article 107(1) TFEU Case C-143/99 Adria-Wien Pipeline [2001] ECR I-8365, paragraph 38. Joined Cases C-393/04 and C-41/05 Air Liquide Industries Belgium [2006] ECR I-5293, paragraph 30 and Case C-387/92 Banco Exterior de Espana [1994] ECR I-877, paragraph 14. See, for example, Case C-279/08 P Commission v Netherlands (NOx) [2011] ECR I-7671; Case C-143/99 Adria-Wien Pipeline [2001] ECR I-8365; Joined Cases C-78/08 to C-80/08, Paint Graphos and others [2011] ECR I-7611; Case C-308/01 GIL Insurance [2004] ECR I

5 a) System of reference (16) (17) (18) (19) The reference system constitutes the framework against which the selectivity of a measure is assessed. The reference system is composed of a consistent set of rules that generally apply on the basis of objective criteria to all undertakings falling within its scope as defined by its objective. In the present case, the reference system is the health contribution tax imposed on tobacco industry businesses on the turnover they derive from the production and trade of tobacco products in Hungary without deduction of any costs. The progressive character of the tax rate applied to the turnover cannot, however, form part of that reference system. As set out in the case law, it is not sufficient to confine the selectivity analysis to whether the measure derogates from the rules of any reference system as defined by a Member State. It is also necessary to evaluate whether the boundaries of the system of reference have been designed by the Member State in a consistent manner or, conversely, in a clearly arbitrary or biased way, so as to favour certain undertakings. 5 Otherwise, instead of laying down general rules applying to all undertakings from which a derogation is made for certain undertakings, the Member State could achieve the same result, side stepping the State aid rules, by adjusting and combining its tax rules in such a way that their very application results in a different tax burden for different undertakings 6. It is particularly important to recall in that respect that the Court of Justice has consistently held that Article 107(1) TFEU does not distinguish between measures of State intervention by reference to their causes or their aims but defines them in relation to their effects, and thus independently of the techniques used. 7 As demonstrated in the following sections, the Act, as a result of the progressive character of the tax rates and the manner in which the brackets to which those rates apply have been established, differentiates by its very nature between undertakings depending on the amount of the turnover derived from the production and trade of tobacco products they achieve without any justification. b) Derogation from the system of reference (20) As a second step, it is necessary to determine whether the measure is liable to favour certain undertakings or the production of certain goods as compared with other undertakings which are in a similar factual and legal situation, in light of the intrinsic objective of the system of reference. For this purpose, external policy objectives such as regional, health, environmental or industrial policy objectives cannot be relied upon by the Member States to justify the differentiated treatment of undertakings under a certain regime Joined Cases C-106/09 P and C-107/09 P Commission and Spain v Government of Gibraltar and United Kingdom [2011] ECR I Ibid, paragraph 92. Case C-487/06 P British Aggregates v Commission [2008] ECR I 10515, paragraphs 85 and 89 and the case-law cited, and Case C 279/08 P Commission v Netherlands (NOx) [2011] ECR I 7671, paragraph 51. 5

6 (21) (22) (23) (24) (25) (26) (27) The structure of certain special-purpose levies, such as health and environment taxes imposed to discourage certain activities or products that have an adverse effect on human health or the environment, will normally integrate the policy objectives pursued. In such cases, a differentiated treatment for activities or products whose situation is different from the intrinsic objective pursued does not give rise to a derogatory treatment. However, the health contribution tax imposed on tobacco industry businesses in Hungary applies to all operators involved in the production and trade of tobacco products which are in the same situation regarding the intrinsic objective pursued by that tax. The progressivity of the tax rates therefore creates a differentiation inside the category of activity of production and trade of tobacco products in Hungary. Indeed, due to the steeply progressive character of the tax rate, turnover falling in lower brackets is subject to substantially lower taxation than turnover falling in higher brackets. This has the result that undertakings with low turnover are subject to both substantially lower marginal tax rates and substantially lower average tax rates as compared to undertakings with higher turnover, and therefore to substantially lower taxation. At this stage, the Commission considers all undertakings which derive turnover from the production and trade of tobacco products in Hungary to be in a comparable legal and factual situation, in light of the objective of the health contribution tax on the tobacco industry businesses. The progressive tax rates and the manner in which the brackets to which those rates apply have been established differentiate between those undertakings having higher turnover and those having lower turnover. Since the amount of turnover achieved by an undertaking correlates to a certain extent with the size of the undertaking, the Act, as a result of the steeply progressive character of the tax rates and the manner in which the brackets to which those rates apply have been established, appears by its very design to differentiate between undertakings based on their size. The Commission notes, in particular, that the tax rates laid down by the Act and the brackets to which they apply result in a steep increase for undertakings subject to the health contribution depending on their turnover derived from the production and trade of tobacco products in Hungary and thus their size. The possibility to reduce the tax liability by up to 80% in the case of investment differentiates between undertakings that have made investments and undertakings that have not made investments. Therefore, the Commission considers, at this stage, that the provisions of the Act providing for the reduction of the tax liability in the case of investment differentiate between undertakings that are in a comparable legal and factual situation in light of the objective of the health contribution and thus creates a derogation from the system of reference. Therefore, at this stage, the Commission considers that the measures are prima facie selective. c) Justification (28) A measure which derogates from the reference system is not selective if it is justified by the nature or general scheme of that system. This is the case where it is the result of 6

7 inherent mechanisms necessary for the functioning and effectiveness of the system 8. It is for the Member State, i.e. for the Hungarian authorities, to provide such a justification. (29) (30) (31) The Hungarian authorities have argued that the health contribution is due on the manufacturing and trade of products causing health risk and is not linked to the profit of the economic operators, whereas the tax rate is adjusted to the load-bearing capacity of the taxable entities. Rather than the profitability of the undertakings, the ability to pay and the degree of the risk generated by them are reflected by their market share and market leadership and, consequently, their price-orienting role. Profit, as the basis of the contribution, is the least suitable factor for the expression of the damage to health generated by the subjects of the contribution through their activity. In comparison with undertakings with low turnover, undertakings with more significant turnover and market share are much more able to influence the market of a product than the difference between their levels of turnover. Considering the objective of the contribution, this will also entail that an economic operator obtaining a higher turnover on the market of tobacco products will also generate exponentially higher negative smoking related effects on health. In the present case, given the substantial relative increments of the progressive tax rate, the Commission has doubts whether ability to pay can serve as a guiding principle for turnover-based taxation. As opposed to taxes based on profit, 9 a turnover-based tax does not take into account costs incurred in the generation of that turnover. Therefore, in the absence of specific evidence to the contrary, it appears doubtful that the mere amount of turnover generated as such irrespective of the costs incurred reflects the ability to pay of the undertaking. Furthermore, the Commission is not convinced that, in comparison with undertakings with lower turnover, undertakings with more significant turnover are able to influence the product market and generate higher negative smoking related effects to such a degree that would justify the application of the highly progressive tax rates as adopted under the measure. In any event, the Commission considers that even if ability to pay and the negative effects on health might be considered to be inherent principles of the turnover-based health contribution, it would normally justify a linear tax rate, unless it is shown that ability to pay and the generation of negative effects on health increase progressively with an increase of the turnover. The Commission considers that progressive rates for taxes on turnover can only be justified exceptionally, that is, if the specific objective pursued by a tax indeed requires progressive rates. Progressive turnover taxes would, for example, be justified if it is shown that the externalities created by an activity that the tax is supposed to tackle also increase progressively. The Commission has doubts that the health damages caused by the manufacturing and trade of tobacco products would increase progressively with the turnover generated and according to the tax rate increments applicable under the measure. 8 9 See for example Joined Cases C-78/08 to C-80/08 Paint Graphos and others [2011] ECR I-7611, paragraph 69. See Commission notice on the application of the State aid rules to measures relating to direct business taxation, OJ C 384, , para. 24. The statement on the redistributive purpose that can justify a progressive tax rate is explicitly only made as regards taxes on profits or (net) income, not as regards taxes on turnover. 7

8 (32) (33) As regards the reduction of the tax liability in the case of investment, it cannot be justified by the nature and general scheme of the tax system either. The Commission considers, at this stage, the possibility to reduce the tax liability by up to 80% in the case of investment to be inconsistent with the objective and the general system of the health contribution. On the one hand, the contribution is in principle based on the taxation of turnover, without costs being deductible. On the other hand, the objective of the health contribution is to create funds for the health system and increase the quality of health services given the fact that smoking plays an eminent role in the development of numerous diseases and significantly contributes to increased health expenses. Therefore, the Commission finds the possibility to reduce the tax liability in the case of investment, which aims at increasing the production and trading capacity of the undertaking, to be inconsistent with the objective of the health contribution. Therefore, at this stage, the Commission does not consider either measure to be justified by the nature and general scheme of the tax system State resources (34) (35) To constitute aid within the meaning of Article 107(1) TFEU, a measure must be financed through State resources and the transfer thereof must be imputable to the Member State. By applying different tax rates and possibility to tax liability reduction, the measures result in lower tax revenues for the Hungarian State, as far as the application of lower tax rates and the reduction of the tax liability for investments are concerned, in comparison to the situation without the measures. Waiving tax revenue which would otherwise have been paid to the State is equivalent to a positive transfer of State resources. 10 Since the measures results from legislative acts passed by the Hungarian Parliament, they are clearly imputable to the Hungarian State Potential distortion of competition and effect on intra-union trade (36) According to Article 107(1) TFEU, a measure must distort or threaten to distort competition and have an effect on intra-union trade. The measures apply to all undertakings deriving turnover from the production and trade of tobacco products in Hungary. The Hungarian tobacco industry is characterised by the presence of operators from other Member States as well as from international operators. The steeply progressive character of the turnover fee may severely disadvantage some operators, to their detriment, compared with others. Therefore, the measures have an influence on the competitive situation of the undertakings subject to the tax, distort or threaten to distort competition and have an effect on intra-union trade Conclusion (37) As all the requirements laid down in Article 107(1) TFEU seem to be met, the Commission, at this stage, considers that the measures constitute State aid within the meaning of that provision. 10 Case C-83/98 P France v Ladbroke Racing Ltd and Commission [2000] ECR I-3271, paragraphs 48 to 51. 8

9 4.2. Compatibility of the aid with the internal market (38) (39) (40) (41) State aid measures can be considered compatible on the basis of the exceptions laid down in the TFEU, in particular in Article 107(2) and 107(3) and in Article 106(2) TFEU. The Commission considers, at this stage, that none of the exceptions provided for in these provisions apply, as the measures are not aimed at any of the objectives listed in those provisions. The Commission also notes that the Hungarian authorities have not provided any arguments why the measures would be compatible with the internal market. Therefore, the Commission has strong doubts that the measures can be declared compatible with the internal market Recovery of the aid (42) (43) (44) The measures have not been notified to nor been declared compatible with the internal market by the Commission. Based on the preliminary assessment conducted in section 4.1, those measures constitute State aid within the meaning of Article 107(1) TFEU and new aid within the meaning of Article 1(c) of Regulation (EC) No 659/ Since those measures have been put into effect in violation of the standstill obligation laid down in Article 108(3) TFEU, they also constitute prima facie unlawful aid within the meaning of Article 1(f) of Regulation (EC) No 659/1999. If the formal investigation procedure confirms that the measures constitute unlawful and incompatible State aid, the consequence of this finding is that the aid must be recovered from its recipients pursuant to Article 14 of Regulation (EC) No 659/1999. As regards the State aid nature of the progressivity of the tax rate, recovery of the aid would mean that Hungary would need to treat all undertakings as if they had been subject to a fixed tax rate. It falls within the competence of the Hungarian authorities to decide upon the level of this fixed rate (which could also be zero). Hungary would then need to collect payments from those undertakings that have paid less than they would have had to pay with the fixed rate and to reimburse those undertakings that have paid more than they would have had to pay with the fixed rate. 5. SUSPENSION INJUNCTION (45) In the information request letter of 13 April 2015, the Hungarian authorities were informed that the Commission would consider issuing a suspension injunction decision in accordance with Article 11(1) of Regulation (EC) No 659/1999. The Commission notes that the Hungarian authorities did not provide any comments in this respect in their reply of 12 May Council Regulation No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, OJ L 83, , p. 1-9, as last amended by Council Regulation (EC) No 734/2013 of , OJ L 204, , p

10 (46) (47) (48) For the reasons set out in section 4.1, the Commission considers, at this stage, that the measures confer a selective advantage on certain undertakings, derived from State resources and imputable to the Hungarian State, with a potential distortive effect on competition and an effect on intra-union trade. The Commission thus considers, at this stage, the measures to constitute State aid within the meaning of Article 107(1) TFEU. Moreover, for the reasons set out in recital (42), the Commission considers that aid to be unlawful, since it has not been notified to the Commission prior to its implementation by Hungary as required by Article 108(3) TFEU. A suspension injunction constitutes an interim measure that the Commission may adopt, on the basis of Article 11(1) of Regulation (EC) No 659/1999, requiring a Member State to suspend any unlawful aid pending a final decision by the Commission. A suspension injunction is an appropriate instrument in particular when a Member State is still granting the unlawful aid in a manner that prevents the immediate restoration of undistorted competition, as in the present case. In that context, the Commission underlines that the steeply progressive character of the turnover fee is capable of having a significant impact on the competitive situation in the market. As the health contribution of tobacco industry businesses, including its progressive rate, is still being applied by the Hungarian authorities at the date of this decision, the Commission therefore considers in light of the above observations that it is crucial to now suspend the application of the progressive rate of the contribution tax. The Commission therefore considers it is necessary to issue a suspension injunction in accordance with Article 11(1) of Regulation (EC) No 659/ CONCLUSION (49) (50) (51) (52) In the light of the above considerations, the Commission has decided to initiate the formal investigation procedure provided for in Article 108(2) TFEU to the measures in question. The Hungarian authorities and interested third parties are therefore invited to provide in their comments to the opening decision all information necessary to carry out a full assessment and to submit to the Commission the appropriate information. In light of the foregoing considerations, the Commission, acting under the procedure laid down in Article 108(2) of the TFEU, requests Hungary to submit its comments and to provide all such information as may help to assess the aforementioned measure, within one month of the date of receipt of this letter. The Commission invites the Hungarian authorities to transmit immediately a copy of the present decision to all (potential) beneficiaries of the aid, or at least to proceed to inform them with appropriate means. The Commission wishes to remind Hungary that Article 108(3) of the TFEU has suspensive effect (i.e. no undertaking should benefit from State aid under this scheme as long as the Commission has not closed the formal investigation), and would draw the attention of the Hungarian authorities to Article 14 of Regulation (EC) No 659/1999, which provides that "where negative decisions are taken in cases of unlawful aid, the Commission shall decide that the Member State concerned shall take all necessary measure to recover the aid from the beneficiary". 10

11 (53) (54) (55) The Commission requires Hungary, in accordance with Article 11(1) of Regulation (EC) No 659/1999, to suspend the application of progressive rates to its health contribution tax and deductions in case of investment until the Commission has taken a decision on the compatibility of the measures with the internal market (suspension injunction). The State aid investigation does not prejudice investigations on the compliance of the measures with the fundamental freedoms laid down in the TFEU. The Commission warns Hungary that it will inform interested parties by publishing this letter and a meaningful summary of it in the Official Journal of the European Union. It will also inform interested parties in the EFTA countries which are signatories to the EEA Agreement, by publication of a notice in the EEA Supplement to the Official Journal of the European Union and will inform the EFTA Surveillance Authority by sending a copy of this letter. All such interested parties will be invited to submit their comments within one month of the date of such publication. If this letter contains confidential information which should not be published, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to publication of the full text of this letter. Your request specifying the relevant information should be sent by registered letter or fax to: European Commission Directorate-General for Competition State Aid Registry B-1049 Brussels Fax No: Yours faithfully, For the Commission Margrethe VESTAGER Member of the Commission 11