State Aid and Sports – The tax benefit scheme in the Hungarian sport sector

02 May 2019

Interesting decisions from the Hungarian government came out in January-February 2019 regarding the unique Hungarian tax benefit scheme operating in the sport sector since 2011. Namely, in January 2019, quite surprisingly, the government limited the total donation amount in 50 billion Hungarian forints (approx. EUR 150 million) for the donation period of 2019-2020. With another government decision issued 3 weeks later, this amount was suddenly increased to HUF 125 billion.

These decisions also show that during its 8-year-long existence the operation of the tax benefit system has raised several – mostly political – issues and questions, and has periodically been in the focus of attention. But what is this all about and how does the scheme function?

In 2011 Hungary notified the Commission of its plans to introduce a tax benefit scheme with the aim of developing the country’s sport sector. According to the notification the aim of the scheme was to “increase the participation of the general public in sport activities, by inter alia, promoting mass sport events, training of the young generations as well ensuring adequate sport infrastructure and equipment for the general public”.

Under the scheme, which, originally, was planned to run until 30 June 2017, corporations may choose to donate money to sport organizations, both amateur and professional. Sport organizations may use these resources to train the young generation, cover personnel expenses and to construct/renovate sport infrastructure. The donations could be deducted from the corporation’s taxable income and from their tax liability.

The aid scheme was focused on the so-called “spectacular sports”, the five most popular team sports in the country, i.e. football, basketball, ice hockey, water polo and handball. In connection with the donations used for the construction, renovation or maintenance of sport infrastructures, Hungary had introduced a monitoring system that was aimed to serve to avoid any misuse of the donations.

In its decision the Commission agreed with Hungary that the training of young generation falls outside the scope of EU State aid rules, donations used to cover personnel expenses may fall under the General Block Exemption Regulation or the de minimis aid Regulation. Thus, the tax benefit scheme decision of 9 November 2011 of the EC should only cover aid for the infrastructures used by the professional sport organizations.

The Commission declared that the scheme is compatible with EU law under Article 107(3)c) TFEU, as it was introduced in a sufficiently transparent and proportionate manner, and the Commission also acknowledged the special characteristics of sport and concluded that the purpose of the scheme is in line with the overall objectives of sport as stipulated in Article 165 TFEU.

In the decision the EC invited Hungary to submit an annual report covering information on the total aid amount allocated on the basis of this scheme, the sport infrastructure projects funded, their aid intensities, their beneficiaries, the parameters applied for benchmarking prices, the rents effectively paid by the professional sport organizations, as well as a description on the benefits provided to the general public and on the multifunctional usage of the infrastructures.

After the introduction of the tax scheme and the EC’s decision thereon, the practical operation of the system was publicly criticized at several forums, in particular by international civil organizations and NGOs.

As a known and detailed example of these critical voices, Transparency International published a report in October 2015, and questioned the efficiency of State aid enforcement in the sport sector. The report suggested that there is a discrepancy between Hungary’s intention to devise a tax benefit scheme benefitting to the entire sport sector, as notified to the Commission in 2011, and the actual operation of the scheme. Importantly, the report highlights that there is no obligation to disclose the identity of the donating corporations. Furthermore, found by the report, the operation of tax benefit scheme, in particular the figures on the amounts of donations spend, shows that a few (football) clubs are favoured.

As the scheme was originally planned to run until June 2017, on 14 October 2016 the Hungarian authorities notified the prolongation of the State aid scheme. According to the notification, the budget of the initial scheme was increased with about 9%, but the objective of the scheme remained the same.

In its decision of 23 March 2017 the EC found that the prolongation of the scheme and the 9 % increase in the budget do not affect the assessment done in the 2011 Decision with regard to the compatibility of the scheme with Article 107(3)(c), since no relevant characteristics have been changed. The Commission accordingly decided not to raise objections to the aid, but again requested Hungary to submit annual reports on the application of the system. Thus, despite of the critics regarding the real-life operation of the scheme, the system was again approved by the Commission – with a quite formal reasoning that there is no need to re-evaluate of the state aid compatibility of the system, as the essential characteristics had not been changed. The prolongation started on 1 July 2017 and will be valid until 30 June 2023.

Worthwhile to mention that a slight change was notified to the EC on 24 May 2017: the scheme was extended to volleyball as a newly introduced “spectacular sport” under the Hungarian legislation. The change was accepted by the Commission.

Thus, the state aid scheme in question was approved by the Commission several times. The question may arise what responsibilities has the EC in this situation. The legislation apparently requires that after declaring the Hungarian tax benefit scheme compatible with EU law, the EC needs to review the implementation and application thereof.

Pursuant to Article 108(1) TFEU and Article 21 of the Procedural Regulation, where the Commission considers that an existing aid scheme is no longer compatible with the internal market, the EC shall issue a recommendation to the Member State. Furthermore, we can also say that the EC’s task to constantly review aid is more necessary for aid schemes (like the Hungarian system), as compared to individually authorized aid measures. However, it is also true that only a few existing aid schemes are monitored in practice.

It is also a question whether a state aid complaint procedure can be initiated in this case. The tax benefit scheme was already approved by the Commission in 2011 and in 2017. However, this might not limit an interested party in submitting a complaint to inform the EC of any alleged unlawful state aid. What entities seem to fulfil the “interested party” criterion in this regard? The answer is not easy, and naturally requires a case by case analysis. In this case, particularly, where aid is granted to a professional sport club, an interested party could be another professional sport club, which for any reason does not benefit from system itself, and therefore may have real interest in challenging the scheme.

At the same time, the recent governmental decisions on the limitation of the donation amount seem to suggest that the tax scheme might not remain such important in the future. As mentioned, the system was prolonged until June 2023, we do not know yet whether an additional prolongation will be requested. In the meantime, it would be interesting to see how the EC would react on an individual complaint filed by an interested party – but, considering that such complaint has not been filed in the last 7 years, the chance of having an individual review of the scheme before the prolongation deadline seems to be low.

Dr. Borbás Máté