The European Commission announced that it decided to initiate an infringement procedure against Hungary on 3 October 2024, urging the country to eliminate its retail tax regime which is deemed non-compliant with the freedom of establishment.
The European Commission sent 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 guaranteed by Articles 49 and 54 of the Treaty on the Functioning of the European Union.
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.
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 foreign-controlled retail companies from restructuring their business operations like those of comparable domestic retail companies. Therefore, the retail tax regime constitutes a restriction to the freedom of the 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 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 to 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.
The Commission is therefore sending a letter of formal notice to Hungary, which now has two months to respond and address the issues raised by the Commission. In the absence of a satisfactory response, the Commission may decide to issue a reasoned opinion.