In its judgement of 2 March 2020, the Court of Justice of the European Union (CJEU) established that Member States are free to impose registration obligation for foreign suppliers and levy penalties on foreign entities for incompliance with the obligation, even if resident entities are exempt from that obligation. The judgement, however, also contains that the Hungarian legislation is disproportionate and as such, it is incompatible with the EU rules.
The background of the case is that in January 2017, the Hungarian tax authority found that Google Ireland (Google) had failed to comply with the then newly introduced registration obligation for tax on advertisement, and levied a total of HUF 1 billion (approximately EUR 3.1 million) within five days.
Google brought an action for the annulment of those decisions before the court, stating that the Hungarian legislation is discriminative and constituting a restriction on the freedom to provide services in the European Union. The court decided to stay the proceedings and to refer questions to the CJEU for a preliminary ruling.
According to the judgment of the CJEU, a Member State that imposes on advertisers established in another Member State an obligation to register in respect of their tax on advertisement liability is not contrary to the freedom to provide services under Article 56 Treaty on the Functioning of the European Union (TFEU). The CJEU secondly examined the penalty regime applied to foreign entities and found that a regulation that allows multiple, automatically increasing penalties imposed within a few days of time regardless of the nature or seriousness of the infringement without the competent authority giving the supplier the time necessary to comply with its obligations or the opportunity to submit its observations, is disproportionate and thus in breach of Article 56 of the TFEU.
It is clear from the decision that Member States are free to require registration from foreign entities even if resident entities are exempted from the obligation. The judgement also states that Article 56 precludes the application of the current penalty regime, however, one might imply also that penalties on foreign entities only contrary to EU rules unless disproportionate.
Finally, it is worth noting that in the meantime the Hungarian Parliament effectively suspended the application of tax on advertisement by temporarily reducing the tax rate to 0% from May 2019 by the end of 2022.
By Balint Zsoldos, Head of Tax, KCG Partners Law Firm