On October 3, 2024 the European Commission announced that it decided to open an infringement procedure by sending a letter of formal notice to Hungary (INFR(2024)4022) for failing to bring its retail tax regime in line with the freedom of establishment as guaranteed by Articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU).
According to the Commission, due to the current design of the retail tax regime, foreign controlled retail companies operating in Hungary as integrated companies or linked undertakings, are subject to high and steeply progressive tax rates on their turnover. Whereas domestic retailers of a comparable size operating on the Hungarian market under their respective brands and logos via franchise systems are not subject to the same highest rates because their turnover is not consolidated for taxation purposes. Notably, the regime prevents the foreign controlled retail companies from restructuring their business operations like those of comparable domestic retail companies.
Therefore according to the European Commission, the retail tax regime constitutes a restriction to the freedom of establishment. According to the 2023 and 2024 Country Specific Recommendations (CSR) to Hungary, this tax disproportionally burdens larger foreign companies, similarly to other sector-specific taxes introduced in the recent years and affecting the internal market. Hungary, as part of its Recovery and Resilience Plan (RRP) committed to phase out the retail tax regime, which has initially been introduced to increase the contribution of the retail sector to public finances. Despite its unequivocal political commitment in its RRP, Hungary has so far failed to phase out the surtax on the retail sector. On the contrary, Hungary has consistently prolonged this tax measure without indicating a clear timeline for expiry so far, and has, over time, increased the highest tax rates applicable under the retail tax regime. Therefore the Commission is sending a letter of formal notice to Hungary, which now has 2 months to respond and address the issues raised by the Commission. In the absence of a satisfactory response, the European Commission may decide to issue a reasoned opinion.
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