Economy
EC sends letter of formal notice to Hungary over ban on loss-making in retail sector
A spokesperson of the EU executive confirmed to state newswire MTI on Friday that on 25 February the Commission sent a Letter of Formal Notice to Hungarian authorities, taking the next step in the infringement procedure over legislation approved in December 2014.
Discriminatory rules against foreign retailers
The profit rule is that commercial businesses that:
The above rule is not applicable in the first four business years after the establishment of the company. There is no exemption in the bill for Hungarian retailers. Yet, Hungarian chains operate as separate franchises, which could allow the parent chain to bypass the rule.
However, all multinational retail chains operating in Hungary have annual revenues above HUF 15 billion a year.
“The new legislation distorts business competition in the Single Market and can become a trade barrier and hinder investments," the EC said.
The Commission claims “the Hungarian government should withdraw the law in question, since it is disproportionate and compels companies to close that do not generate profit within two years."
Instead, the Hungarian government should “create legal certainty for all businesses and ensure fair competition within the retail market." According to a 20 January update of a EuroCommerce Overview of Single Market Barriers in the EU, the EC Commission should assess if the law is in line with EU law.
The first business year that may be taken into consideration is the business year started after 31 December 2014 and the ban may be put into practice after 1 January 2017.
The EC said the new legislation creates increased risks for retailers if they want to enter or expand on the Hungarian market.
"The law banning permanent losses may impede investments and thus could lead to worsened competitiveness and higher prices,"the EC said.
Hungarian authorities have two months to respond to the Commission’s objections. If no appropriate response is given to the letter of formal notice or the comments are found unacceptable, the EC may decide to send a Reasoned Opinion to Budapest and then, if necessary, take the case to the European Court of Justice.
According to the government’s explanation, the purpose of the amendment is to prevent well-financed hypermarket and supermarket chains from using predatory pricing practices against smaller, typically Hungarian-owned retail companies by consciously choosing to temporarily incur losses.
"The amendment provides an example of one case of predatory pricing, but it neglects to mention that Act LVII of 1996 on the Prohibition of Unfair Market Practices and the Restriction of Competition ("Competition Act") outlaws predatory pricing, which has so far proved to be an effective way of preventing infringements by companies with a dominant market position," commented CHSH Cerha Hempel Spiegelfeld Hlawati in a newsletter last year.
The law restricting investments in new stores over 300 square metres - with the possibility of exemptions granted by a special committee (Ministry of Economics, Ministry of Rural Development) -was in force from 1 January 2012 and effective till 31 December 2014. In effect, only Hungarian retailers could opt for smaller outlets. As a result, infringement proceedings started in 2014.
There is already a new “Plaza Stop" Act / Build Environment Act in place since 1 February 2015.
Based on the amendment to Act LXXVIII of 1997 on the Build Environment the Government becomes issued a decree setting out the technical, environmental, etc. conditions to constructing retail units with a surface greater than 400 sqm.
“In practice, this could
“The Hungarian government should make sure that the application of the law is justified and proportionate," according to the Commission, which should asses if the law is in line with EU law.
Discriminatory rules against foreign retailers
The profit rule is that commercial businesses that:
- a. generate more than half of its revenues from the sale of fast-moving consumer goods;
- b. have net sales revenues in two consecutive business years of at least HUF 15 billion ( EUR 50 million) per year;
- c. have zero or negative balance sheet profit in both years may not conduct any retail activity after the approval of the profit report of the second business year as defined in section b)
The above rule is not applicable in the first four business years after the establishment of the company. There is no exemption in the bill for Hungarian retailers. Yet, Hungarian chains operate as separate franchises, which could allow the parent chain to bypass the rule.
However, all multinational retail chains operating in Hungary have annual revenues above HUF 15 billion a year.
“The new legislation distorts business competition in the Single Market and can become a trade barrier and hinder investments," the EC said.
The Commission claims “the Hungarian government should withdraw the law in question, since it is disproportionate and compels companies to close that do not generate profit within two years."
Instead, the Hungarian government should “create legal certainty for all businesses and ensure fair competition within the retail market." According to a 20 January update of a EuroCommerce Overview of Single Market Barriers in the EU, the EC Commission should assess if the law is in line with EU law.
The first business year that may be taken into consideration is the business year started after 31 December 2014 and the ban may be put into practice after 1 January 2017.
The EC said the new legislation creates increased risks for retailers if they want to enter or expand on the Hungarian market.
"The law banning permanent losses may impede investments and thus could lead to worsened competitiveness and higher prices,"the EC said.
Hungarian authorities have two months to respond to the Commission’s objections. If no appropriate response is given to the letter of formal notice or the comments are found unacceptable, the EC may decide to send a Reasoned Opinion to Budapest and then, if necessary, take the case to the European Court of Justice.
According to the government’s explanation, the purpose of the amendment is to prevent well-financed hypermarket and supermarket chains from using predatory pricing practices against smaller, typically Hungarian-owned retail companies by consciously choosing to temporarily incur losses.
"The amendment provides an example of one case of predatory pricing, but it neglects to mention that Act LVII of 1996 on the Prohibition of Unfair Market Practices and the Restriction of Competition ("Competition Act") outlaws predatory pricing, which has so far proved to be an effective way of preventing infringements by companies with a dominant market position," commented CHSH Cerha Hempel Spiegelfeld Hlawati in a newsletter last year.
What about the Plaza Stop Act?
On Thursday, the Plaza Stop Act case was closed.The law restricting investments in new stores over 300 square metres - with the possibility of exemptions granted by a special committee (Ministry of Economics, Ministry of Rural Development) -was in force from 1 January 2012 and effective till 31 December 2014. In effect, only Hungarian retailers could opt for smaller outlets. As a result, infringement proceedings started in 2014.
There is already a new “Plaza Stop" Act / Build Environment Act in place since 1 February 2015.
Based on the amendment to Act LXXVIII of 1997 on the Build Environment the Government becomes issued a decree setting out the technical, environmental, etc. conditions to constructing retail units with a surface greater than 400 sqm.
“In practice, this could
- a. hinder retailers to construct new supermarkets or hypermarkets on lands already purchased;
- b. for the same reason, lower the market value of land already purchased;
- c. generally hinder retailers to construct further supermarkets or hypermarkets; and
- d. hinder retailers to extend/develop/refurbish already existing supermarkets or hypermarkets.
“The Hungarian government should make sure that the application of the law is justified and proportionate," according to the Commission, which should asses if the law is in line with EU law.
