Breakthrough for Scotch in Hungary
13 Jun 2014
The European Court has ruled that tax preferences for Hungarian
spirits made from fruit, known as palinka, are illegal. This
breakthrough is the culmination of a four year campaign to remove
discrimination against Scotch Whisky. Once whisky and palinka
are again taxed at the same rate, we hope Scotch Whisky can recover
sales lost in recent years to Hungarian producers who enjoyed
illegal tax advantages.
When Hungary joined the European Union in 2004, certain spirits
were granted tax preferences. These were designed to protect the
rural tradition of households being allowed to take their surplus
fruit to the local distillery and, upon payment of a nominal rate
of excise tax, receive the equivalent amount of palinka, Hungary's
national spirit. The Scotch Whisky Association and colleagues from
other Member States registered concerns that the quantities
involved were well above what was needed to help 'small'
distilleries. The Commission agreed to a review, but not until
The tax preference was poorly enforced. Although it was
meant to cover palinka for personal consumption only, there were
regular reports of the spirit being sold in retail channels, bars
and cafes. It is not unusual to be offered an after-dinner
drink in a restaurant in Hungary - this will be palinka.
In 2010 the government decided that palinka should receive
direct help. EU rules allowed a 50% tax reduction, but the
government decided rural-made palinka should instead be tax
free. This gave a huge boost to the palinka sector and Scotch
Whisky suffered, with exports worth £5.7 million in 2009 falling to
£3.7m in 2013.
In visits to Budapest, Scotch Whisky traders advised that the
tax breaks were part of a wider government effort to boost local
products. They cautioned that an SWA dialogue with local
officials was unlikely to help as the issues were driven by
politics rather than compliance with the EU's technical
rules. We complained and the Commission initiated legal
proceedings against Hungary.
In the meantime, Hungary caused more difficulties in 2011 by
increasing taxes on some spirits by 5% and others by 50%.
When we alerted the Commission to this problem, another complaints
procedure was initiated.
Our work with the Commission on the palinka complaint resulted
in a referral to the European Court of Justice. The Court
ruled unequivocally in spring 2014 that the zero-tax rate was
illegal. Indeed, the breach was so clear the Court
dispensed with the normal two-stage process for a verdict and
declared immediately that Hungary breached EU rules. This
sets a useful precedent that we will use during the Commission's
As yet it remains to be seen how Hungary will implement the
ruling. It is not happy and Cabinet Ministers have said the
ruling is 'outrageous'. Not long after the verdict, however,
Hungary received another signal that its tax policies were
unacceptable when the Commission sent the final warning letter on
the second complaint. Failure to harmonise tax rates as
required will see this also being referred to the European
While we aim is to ensure Scotch Whisky does not face tax or
other trade barriers within the EU Single Market, and can therefore
compete on even terms with other spirits, it seems likely that
Hungary will continue to present a challenging environment in which
to apply these principles.
Nick Soper, SWA director of European Affairs