(Judgment of the Court of Justice of the EU in Case C‑385/12, Hervis Sport- és Divatkereskedelmi)

Viktoriya Petrikova [1]


The article examines the approach of the CJEU to de facto discrimination in the context of a request for a preliminary ruling concerning the interpretation of Articles 49 and 54 TFEU by a Hungarian court. It outlines the applicable national and EU legal framework, the factual background of the case and presents the conclusion of the Advocate General and the judgment of the Court. The conclusive chapter contains a brief commentary on the significance of the Hervis judgment and on certain practical aspects of the instruments available to individuals and companies under EU law for the protection of their rights and freedoms illustrated by the Hervis case.

The request for preliminary ruling has been submitted in proceedings between Hervis Sport-és Divatkereskedelmi (‘Hervis’) and the national tax authorities of Hungary concerning the payment of a special tax on the turnover of certain sectors of the store retail trade introduced by Hungary for the years 2010 to 2012.

According to Hungarian law introducing the special tax, taxable legal persons constituting linked undertakings must aggregate their turnover before applying a steeply progressive rate and dividing the resulting amount of tax among them in proportion to their actual turnover.

Hervis operates sports shops in Hungary and is part of a group of undertakings whose parent company, SPAR Österreichische Warenhandels AG, is established in another Member State. Under the applicable legislation in Hungary, Hervis is to be considered a linked undertaking for the purposes of the special taxation regime and therefore is liable to pay a share of the special tax payable by all the undertakings belonging to the SPAR group.

As a result of the application of the steeply progressive scale of the special tax rate to the overall turnover of the group, Hervis was subject to an average rate of tax considerably higher than that corresponding to the taxable amount consisting solely of the turnover of its own stores. Hervis maintains that the tax payable by the Hungarian retail store chains which are in competition with it is calculated on the basis of that taxable amount, since they are for the most part organised as sales outlets on the franchise model and do not belong to a group. Hervis claimed that such a system results in higher taxation of legal persons linked to non-resident companies and therefore infringes EU law.

In this context, the national court has asked the Court of Justice whether the Hungarian legislation on the special tax is compatible with the principles of freedom of establishment and equal treatment, where it has potentially discriminatory effects with regard to taxable legal persons ‘linked’, within a group, to companies established in another Member State.

After examining the facts put before it, the CJEU held that the national legislation at issue imposes, in particular, a criterion of differentiation between, on the one hand, taxable persons subject to the special tax which are linked, within the meaning of the applicable national legislation, to other companies within a group, and, on the other hand, taxable persons which are not part of a group of companies. Despite the fact that such criterion does not entail any direct discrimination, it has the effect of disadvantaging the legal persons linked to other companies within a group compared with legal persons which are not part of such a group. This is so due to two specific characteristics of the special tax:

  • the rate of that tax is steeply progressive in accordance with turnover, in particular in its upper band.
  • the scale applies to a tax base which covers, for taxable persons belonging to a group of companies, the consolidated turnover of all the ‘linked’ taxable persons of the group (before division of the total tax in proportion to the turnover of each taxable person), although it is limited to the turnover of the taxable person on an individual basis in the case of legal persons such as independent franchisees. According to the Court this means that taxable persons belonging to a group of companies are taxed on the basis of a fictitious turnover.

The CJEU therefore has noted that in such circumstances, if it is established that, on the store retail market in Hungary, the taxable persons belonging to a group of companies and covered by the highest band of the special tax are, in the majority of cases “linked” to companies having their registered office in another Member State, the tax regime in question is liable to disadvantage in particular the companies linked to mother companies from other Member States.

The conclusion of the CJEU is that Articles 49 TFEU and 54 TFEU preclude legislation of a Member State relating to tax on the turnover of store retail trade which obliges taxable legal persons linked to mother companies from other Member states, to aggregate their turnover for the purpose of the application of a steeply progressive rate, and then to divide the resulting amount of tax among them in proportion to their actual turnover. However, the Court stated that it is for the referring Hungarian court to verify and determine whether in reality it is the case that the taxable persons covered by the highest band of the special tax are ‘linked’, in the majority of cases, to companies which have their registered office in another Member State.

It is interesting to note that the Advocate General reached the opposite conclusion. In her opinion on the case, Advocate General Kokott presents a very detailed review of the case-law of the CJEU regarding the criteria to establish indirect discrimination, proposed to the CJEU to narrow the set of criteria in the future and applied said criteria to the facts in the Hervis case. According to the Advocate General however, neither the progressive scale of the tax, nor the criteria for “linked undertakings or the stage of the distribution chain at which the special tax is imposed entail direct or indirect discrimination. Therefore the Advocate General concludes that the national legislation introducing a special tax regime is compatible with Articles 49 and 54 TFEU. Surprisingly however the Advocate General raises the question concerning the compatibility of the special tax with Article 401 of the Value Added Tax Directive[2] which prohibits the introduction by Member State of taxes on turnover and recommends that the referring court examines said matter.

However, the CJEU has not followed the Advocate General’s opinion. In the Hervis case the CJEU clearly states that taxation which disadvantages undertakings linked, within a group, to companies established in another Member State constitutes indirect discrimination on the basis of the registered office of the companies.

Hervis is also a case which provides a good illustration of the simultaneous action of two instruments of protection provided to citizens and companies by the EU legal order, namely the infringement procedure under Article 258 TFEU and the preliminary ruling procedure under Article 267 TFEU. The conclusive chapter of the article briefly discusses the interaction of these two procedures and their implications from the point of view of the taxable persons.

Overall, Hervis is an important case which could have wider implications. It is likely that more and more taxpayers would invoke de facto discrimination analysis in the future. However, it must be noted that the burden of proof which the taxpayer would have to meet is substantial.




[1] Jurist, EU and Regulation at Arsov Natchev Ganeva – Attorneys and Counselors at Law, LL.M. in EU and International Law (PILC) from the VUB – Brussels, Specialization in EU and Comparative Law from the University of Ghent, Master Degree in Law from the University of Sofia.

[2] Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, OJ L 347 of 11.12.2006