The European Commission has initiated an infringement procedure against Hungary due to its special retail tax. As the first step, the Commission has sent Hungary a formal notice regarding the issue.

According to the statement, the procedure was launched because Hungary failed to align its retail tax system with the principle of freedom of establishment, as guaranteed by the Treaty on the Functioning of the EU.

The Commission argues that foreign-controlled retail companies operating as integrated or affiliated enterprises in Hungary are subject to high and highly progressive tax rates based on revenue. However, similarly-sized domestic retailers operating under franchise systems, using their brand names and logos, are not subject to these higher tax rates, as their revenues are not consolidated for tax purposes.

The Dutch-based retailer filed a complaint with the EU earlier in March claiming that the special retail tax imposed on large retail chains in Hungary in May 2022 was discriminatory and violated several EU regulations and asked for interventions.

To plug the gaping hole in the budget after a pre-election spending spree, the government slapped windfall taxes on half a dozen sectors. The windfall for retailers was set at a 2.5% rate on companies with net sales over HUF100bn (€250mn), which was later raised to 2.7% and 4.1% in 2023. The levy for companies with net revenue of HUF30bn and HUF100bn was raised from 0.4% to 1%.

Spar said the tax hike increased costs by €90mn, resulting in a €50mn loss. The tax also cut into the profits of the top foreign retailers - Tesco, Aldi, Lidl, Auchan Penny Market - also subject to the highest tax rate.

The Court of Justice of the European Union (CJEU) ruled earlier that price caps on food staples and setting mandatory stocking levels were incompatible with the EU rules and undermined fair competition. Spar filed the complaint after being fined for not keeping mandatory levels of stock.

Hungary's sectoral tax on retailers had come under attack again, in spite of the Court of Justice of the European Union's position, in a ruling in 2020, that it was in line with EU norms, the National Economy Ministry responded in a statement. Spar has launched "another political attack against Hungary" with Brussels taking the side of the "price-gouging retailer, it added.

Spar has angered the Hungarian government further when the company’s Austrian CEO openly spoke about the Orban government’s harassment and extortion in the Western press.

Hans Reisch said they received calls from government circles that the windfall tax could be lowered if one of Prime Minister Viktor Orban’s relatives is granted some form of ownership in the company.

This has been since confirmed in the press. According to an April report by investigative news site Vsquare, Kremlin-connected oligarch Megdet Rahimkulov and Viktor Orban’s son-in-law had approached Spar separately with bids backed by the government to buy stakes in the retailer in 2023.

The Orban government, which has used similar tactics to squeeze out foreign companies in sectors, threatened to sue the company over these allegations, but Gergely Gulyas, the head of the Prime Minister's Office acknowledged that no lawsuit had been initiated yet.

In addition to this infringement procedure, the government faces another legal challenge from the European Commission, which has decided to take Hungary to the European Court of Justice over its sovereignty protection law after Budapest failed to address its concerns over the legislation.  It argued that the legislation violates several fundamental rights enshrined in the EU Charter of Fundamental Rights and breached a number of fundamental freedoms of the internal market.

Critics argued that the law, which makes it a criminal offence to receive foreign funding for political purposes, was drafted to intimidate and silence critics of the government.

The Commission is also taking legal steps against Hungary over a law adopted last year that penalises convicted human traffickers very lightly.  The ECJ has also ordered Budapest to pay €200mn and daily €1mn fines for failing to comply with a judgment on the protection of asylum seekers.