On 12 September 2019, the advocate general of the European Court of Justice held that the Hungarian advertisement tax legislation based on which Google was fined HUF 1 billion (approx. EUR 3 million) constitutes an unjustifiable restriction of the freedom to provide services.

The advertisement tax was introduced in 2014 as a special tax on the turnover from the broadcasting or publication of advertisements. Individuals or entities that broadcast or publish advertisements may – irrespective of their residence – be subject to this tax. Initially several steeply progressive tax rates applied to taxpayers based on their advertisement turnover.

In 2016, the Commission found that the progressive tax rate scheme constituted state aid incompatible with the internal market because, inter alia, companies with a low advertisement turnover were liable to pay substantially less advertisement tax – even in proportion to their advertisement turnover – than companies with a higher advertisement turnover. As a consequence of the Commission's findings the progressive tax rate scheme was replaced with a flat rate of 7.5% as of 1 July 2017.

As of 1 January 2017, a special fine was introduced into the advertisement tax legislation to ensure that taxpayers comply with their tax liabilities, e.g. to register for advertisement tax purposes. The amount of this fine can reach a significant amount (up to HUF 1 billion, approx. EUR 3 million) in order to encourage registration. The initial amount of the fine is HUF 10 million (approx. EUR 30,000), followed by a daily fine tripling the amount of the earlier fine for failure to comply. The decisions relating to these fines become final and enforceable once notice of them is delivered to the taxpayer. Such decision cannot be contested in an administrative procedure, but only in court proceedings whereby only documentary evidence is admissible.

In its judgment dated 27 June 2019 (T-20/17), the ECJ annulled the Commission's decision which found the Hungarian advertisement tax incompatible with EU state aid rules. Hungary nevertheless amended the advertisement tax legislation; as a consequence of which the rate of the advertisement tax has been reduced to 0% between 1 July 2019 and 31 December 2022.

In the pending case before the ECJ, Google's Irish subsidiary carried out activities that were subject to the Hungarian advertisement tax, however, it disregarded its obligation to register. Therefore, the Hungarian tax authority issued fines to Google totalling HUF 1 billion (approx. EUR 3 million) in accordance with the abovementioned rules.

Google brought an action in front of the competent Hungarian court against the decisions of the tax authority, requesting that the decisions be annulled, primarily on the grounds of the amount of the fine. The Hungarian court decided to refer the case to the ECJ for a preliminary ruling on the questions whether (i) the registration obligation, (ii) the special fine imposed for failing to register and (iii) the fact that such a fine cannot be contested in an administrative procedure, but only in court proceedings whereby only documentary evidence is admissible, are compatible with EU law.

The advocate general took the view that the registration obligation is compatible with EU law (case C-482/18). However, the amount of the fine for failing to register was found to result in an unjustifiable indirect restriction of the freedom to provide services because it is not proportionate: (i) its amount could easily exceed that of the tax it seeks to enforce, (ii) it does not take into account reasons for non-registration and (iii) the exponential increase in the amount of the fine is unreasonable to ensure uniform taxation. Furthermore, the limited legal remedy against the fines imposed for failing to register was also held to constitute an unjustifiable indirect restriction on the freedom to provide services because the advocate general did not find any overriding reasons in the public interest underlying the limited legal redress.

What is fascinating about this opinion in connection with the recent discourse on taxing the digital economy is that, in addition to the referring court's questions, it scrutinizes the extraterritorial scope of the chosen object of taxation (online advertisements in Hungarian). In this respect, the advocate general conceded that "the idea behind the Hungarian tax on advertisements is that online Hungarian advertisements are directed primarily at Hungarian-speaking users who are for the large part located in Hungary. Google thus generates revenue with the 'help' of the Hungarian population which is not, however, taxed in Hungary. Without the internet, it is very likely that the major share of that revenue could only have been generated by becoming established in Hungary, in which case Hungary could have simply levied income tax as appropriate." Consequently, the advocate general came to the conclusion that "the connection to the use of the country’s own official language provides a sufficient reasonable territorial link in principle. No one can deny that language forms an important part of national identity and is thus strongly connected with a State and its territory. It is immaterial that this territorial link does not always exist in each specific case because the same language may be used in other States. It is also immaterial if the Hungarian user of the advertising service resides outside national territory. The 'genuine link' still exists in that case based on nationality."