It has officially been 10 years since Hungary first introduced the tax exemption for household distillers of palinka. In honor of the anniversary, we will take a look at the changes to the exemption over the years and its soon-to-be return.
The Initial Law
The law providing a tax exemption on distilling palinka for personal use went into effect in the fall of 2010. That initial law allowed households to legally distill up to 50 liters of palinka, which could be up to 86 percent alcohol, for personal use without paying a consumption tax. Given the popularity of the country’s national fruit brandy made from fermented fruit mash, this law was highly favored.
Given the high number of households with Hungarian residency or passports that consume palinka and distill it at home, this has a fiduciary effect, affecting people’s investments and income. Importantly, the law only applies to household distillers, not companies. Therefore, it does not affect trusts or shareholders.
Reflecting Back on the Law
To celebrate the 10th anniversary of the law, Hungarian officials held an event in late September. At the event, Prime Minister Viktor Orban referred to the law as an example of change in the long term. He referred to the time as the “revolution of 2010,” which is when his party, Fidesz, first held a two-thirds majority in the Hungarian parliament. This “revolution” gave the party and Hungary the opportunity to change things that were “ripe for change,” according to Orban. He also referred to the law as a guide for the future as well as “an example from the past.”
The Forced Change in 2014
Despite enacting the tax exemption in 2010, Hungary was forced to change it in 2014 due to international laws regarding tax planning. Specifically, the European Commission had already established that no country could eliminate the excise tax on spirits, even for personal consumption that does not involve a company.
The European Commission began fighting the Hungarian law right away, filing an infringement procedure in the European Court of Justice in 2010. After nearly four years of proceedings, the ECJ announced its judgment in April 2014.
The ruling was that the exemption Hungary brought into law was an infringement on the laws of the European Union. The ruling required Hungary to charge the EU’s minimum excise duty for “spirits … for personal use.” This allowed for a reduction of up to 50% of the normal excise rate.
According to Spirits Europe’s director general, Paul Skehan, this was an important judgment due to its supporting the idea that tax exemptions should not lead to discrimination or unfairness, a concept frequently seen in corporate tax and conversations about tax havens, private equity funds, real estate, and foundation assets. He went on to say that the other similar exemptions throughout Europe are also problematic and can lead to illegal alcohol or smuggling the drink.
The New Law
The tax exemption is ready to return just after its 10th anniversary, thanks to the new EU directive 2020/1151. This directive lets member states allow fruit distillate consumed within households to be tax-free, applying up to 50 liters per year. The new rule across the EU management goes into effect on Jan. 1, 2022.
Notably, this change to the directive requires states to create conditions that eliminate abuse, avoidance, or evasion of the exemption.
Hungary is strongly considering implementing the tax exemption for a household entity a year early, starting Jan. 1, 2021. Some sources report that the relevant managers, directors, and officials have already decided this will be the case.
Current Figures for Palinka Distillation
In 2019, the amount of palinka distilled in Hungary dropped, but there were still about 8.5 million liters produced with a 50 proof distillate. For perspective, that was about 1 million fewer liters than in 2018. Experts are still unsure how the pandemic has affected home distillation. However, commercial distillers say that there is no increase in demand.
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