On 3 March 2020 the European Court of Justice (ECJ) issued a decision in Vodafone Magyarország Mobil Távközlési Zrt. The company was a subsidiary of Vodafone Europe B.V operating in the telecommunications market and set up under Hungarian law. The company was assessed for telecommunication tax arrears and after an appeal the relevant issues were put to the ECJ.

The issues for the ECJ to decide were whether different levels of taxation arising from progressive rates of telecommunication tax amount to an indirect restriction of the EU principle of freedom of establishment under articles 49 and 54 of the Treaty on the Functioning of the European Union (TFEU); and whether the different levels of taxation give a selective advantage to enterprises with a lower turnover and therefore constitute State aid for the purposes of TFEU articles 107 and 108.

Another issue was whether the turnover-based telecommunication tax was a turnover tax for the purposes of article 401 of the VAT Directive (2006/12).

Advocate General’s Opinion

On 13 June 2019 the Advocate General (AG) ) issued an opinion.

The AG first examined whether or not the Hungarian telecommunication tax conformed to the essential characteristics of a value added tax (VAT) as established by the ECJ in the settled case-law, and concluded that the telecommunication tax cannot be characterized as a turnover tax.

It was not possible to conclude the telecommunication tax was incompatible with the freedom of establishment as features of indirect or covert discrimination could not be demonstrated.

The AG opined that the question relating to State Aid might be ruled inadmissible but if the ECJ accepted its admissibility the AG considered that the different levels of taxation resulting from progressive tax rates applied to turnover did not amount to a selective advantage for enterprises with a lower turnover and was not contrary to the general prohibition on State aid.

ECJ decision

The ECJ ruled on 3 March 2020 that Articles 49 and 54 TFEU did not preclude legislation in an EU Member State introducing a progressive tax on turnover, where the burden was mostly borne by enterprises controlled directly or indirectly by nationals of other EU Member States or by enterprises with a registered office in another EU Member State, because those enterprises had a higher turnover in the relevant market.

The ECJ also decided that Article 401 of the 2006 VAT Directive did not preclude legislation to introduce a tax based on the turnover of a taxable person that was levied periodically, and not at each stage of the production and distribution process, without the right to deduct the tax paid at an earlier stage in the process.