Hungary’s special tax on the retail sector may contravene the European VAT Directive but does not discriminate against foreign businesses, in the Advocate General’s opinion.

The Advocate General (Juliane Kokott) delivered her opinion in the case between Hervis Ltd and Hungary’s National Tax Authority. Although it is not binding on the ECJ, the AG’s opinion tends to be followed in the majority of cases.

The special tax on certain retail activities was introduced retroactively in 2010 and was repealed at the end of 2012. The tax was based on the annual net turnover, while the tax rate was progressive.

Hervis claims that Hungarian retail businesses are typically franchises (and thus the turnover of each franchise company was taxed separately) whereas foreign retail businesses are not (and so were taxed on the net turnover of all their branches in Hungary, thus falling within a higher tax bracket). Thus, it argues, linking the net turnover calculation to the form of the operation is indirectly discriminatory against foreign businesses.

The AG rejected this argument in her opinion, stating that it was not obvious that foreign retail businesses had high turnover while domestic retail business had low turnover, nor could a valid comparison be made between businesses operating under a corporate group structure and those using a franchise model.

However (somewhat surprisingly as this was not a question asked by the Hungarian court when referring the case to the ECJ), she took the view that the tax may be contrary to the VAT Directive since it threatened the functioning of the common VAT system. She also criticised existing case law and suggested that the Hungarian court should now submit a new question to the ECJ on the tax’s compatibility with EU law.

Case-law: ECJ Case no. C-385/12.