EUR;CoE;EU;CECC;JCCJ;WCCJa) Hungary / b) Constitutional Court / c) / d) 28-10-2010 / e) 184/2010 / f) / g) Magyar Közlöny (Official Gazette), 2010/165 / h) .
Keywords of the systematic thesaurus:
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General Principles - Rule of law.
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General Principles - Legality.
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Institutions - Public finances - Taxation.
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Institutions - Public finances - Taxation - Principles.
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Fundamental Rights - Civil and political rights - Non-retrospective effect of law - Taxation law.
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Headnotes:
An act providing for the introduction of a special retroactive 98% tax, if the income was given contrary to good morals by organisations managing state property or by state owned or governed organisations, was considered to be a “confiscatory” tax.
Summary:
I. On 22 July 2010 the parliamentary majority adopted a constitutional amendment on retroactive tax obligation, which permitted the legislature to tax retroactively incomes received from public funds (ranging from pensions to extra bonuses for former high-ranking government officials) if the income was given "contrary to good morals" by state organisations. Under Article 70/I.2 of the Constitution, in cases of income received from public funds serving as a contribution to public revenues, special taxes may be introduced by statute retroactively as of the beginning of the given tax year if the income was given contrary to good morals by organisations managing state property or by organisations owned mostly by the state or governed by the state.
Based on this constitutional provision, Act XC of 2010 (hereinafter, the "Act") was adopted concerning a 98% tax on public sector severance pay above HUF 2 million (approximately EUR 70.000). It was to be applied to the pay received by public sector employees who left their jobs after 1 January 2010. Several petitioners challenged the Act before the Constitutional Court.
II. The Constitutional Court justices unanimously declared the Act unconstitutional, and annulled it ex tunc. The Court did not examine explicitly the constitutionality of the new constitutional amendment, but took this for granted by applying it in the current case. According to the reasoning of the Court, the constitutional amendment makes an exception to the prohibition of retroactive legislation only in cases of incomes paid contra bono mores. Despite this, under the challenged Act the 98% tax was applied to severance pay received legally, in accordance with "good morals". The 98% tax was aimed not only at incomes that the new government considered to be against 'good morals', such as excessive public sector bonuses, but also at the wages and salaries of public sector workers, such as civil servants and public sector employees such as teachers and doctors which have been completely legitimate until now. In the Court's view, payments received according to former statutory regulations could not be seen as incomes contra bono mores and could not, therefore, be taxed retroactively to the beginning of the year 2010, even under the new constitutional amendment. Moreover, although the constitutional amendment paves the way for the legislator to introduce special taxes on certain incomes, 98% seemed to be a "confiscatory" tax and was therefore contrary to the newly enacted Article 70/I.2 of the Constitution.
Supplementary information:
Shortly after the Court decision, the parliamentary majority launched a new version of the constitutional amendment allowing any income from public funds to be taxed retroactively up to five years. The only constitutional hurdle from a taxation perspective is to ensure that the income is not revoked in its entirety. Article 70/I.2 of the Constitution currently in force reads as follows: 'In case of incomes received from public funds serving as a contribution to public revenues, statute may retroactively as of the beginning of the fifth tax year before the given tax year, introduce a special tax that shall not reach the amount of the income where this income was given by organisations managing state property or by organisations owned mostly by the state or governed by it.' Besides the constitutional provision, Parliament voted again for extra tax on certain income. Act CXXIV of 2010 states that with effect from 2005, public sector employees must pay extra taxes on severance payments which exceed the HUF 3,5 million (approximately EUR 12.500) threshold. There is a HUF 2 million cap for managers of state-owned enterprises, companies owned by local governments and senior officials in the public sector, including municipalities.
Another consequence of Decision no. 184/2010 was the reduction of the Constitutional Court's competences. More information can be found in the text of Act XXXII of 1989 on the Constitutional Court currently in force.
Hungarian.