Hungary has unveiled proposed reforms to its national gambling laws that will allow EU- and EEA-based online sports betting companies to apply for authorization from the country’s tax authority to advertise and operate in the Hungarian market. However, the European Commission will have to scrutinize whether the strict tax requirements may constitute an effective barrier to market entry.

The Hungarian Government has notified proposed gambling law amendments to the European Commission in Brussels. Hungary hopes that its proposals to allow operators based elsewhere in the EU to apply for authorization to operate in Hungary will result in the Commission dropping the formal infringement investigations into Hungary’s sports betting market that began in 2006 and were escalated to the level of a Reasoned Opinion in March of last year.

Existing legislation in Hungary grants a monopoly over sports betting games to state-owned lottery and gaming company Sverencsejatek. The European Commission began its scrutiny of the Hungarian market after authorities attempted to apply local gambling laws to prosecute foreign online gambling providers including Sportingbet.

The amendments will allow online gambling providers based in EU and EEA member states to apply to be registered with the Hungarian tax authority to advertise and operate internet sports betting services in Hungary, subject to local regulatory and taxation requirements.

Under the proposed amendments, operators seeking local authorization must meet a ˆ4m minimum capital requirement, pass criminal background checks and ensure that betting opportunities they offer “do not contravene decency, public safety, public morals or violate child or youth policy interests”. Approved operators will also be required to comply with local data and player protection protocols.

More significantly, however, the proposed amendments establish that online sports betting operators will be subject to a set annual tax of HUF1bn (ˆ4m). The tax on cross-border betting differs from the country’s regime for land-based bookmaking operations who are obliged to pay a 20 percent tax on gross gaming revenues.

According to Clive Hawkswood, chief executive of the industry group the Remote Gambling Association, the ˆ4m annual fee could potentially be considered a barrier to market entry under EU law. The European Commission has previously established that member states cannot use local taxation as an artificial barrier to market entry, Hawkswood said, although he added that it is as yet unclear whether this will apply in Hungary’s case.

“On the one hand, it is clearly positive for private operators that we now have another EU member state saying that they will allow private companies to be licensed in their country. But, at the moment, it does appear that the barriers [to market entry in Hungary] would seem to be too high,” Hawkswood told GamblingCompliance.

“The Hungarian sports betting market is largely untested so we may be proved wrong and people may end up making money, but I doubt whether many operators would be able to support that level of tax.

“That said, we cannot look at this [annual betting] tax in isolation but rather as part of the local taxation regime in general. We do not know that there will not be tax breaks offered in other areas, for example.”

Alongside the formal registration system for European betting operators, the Hungarian proposals also contain provisions to ensure that unauthorized providers can be forcibly prohibited from accessing the Hungarian market. The proposals would subject local ISPs to fines of ˆ2,000-ˆ40,000 if they refuse to block access to websites deemed by the tax authority to be actively targeting Hungarian customers without prior authorization.

In its submissions to the Commission, the Hungarian Government maintains that “the registration system and the action taken against illegal service providers will facilitate the suppression of the illegal online gambling market”. Hungary notified the proposed amendments to the European Commission on October 1 and plans to formally enact the provisions as of January 1, 2009.

The trio of Denmark, Finland and Hungary became the first EU member states to receive a Reasoned Opinions from the Commission over their legislative regime for sports betting. A Reasoned Opinion is the final stage in formal EU infringement proceedings before the state in question is called to defend itself before the European Court of Justice.

Like Hungary, Finland has indicated its intention to reform its regulatory regime and should unveil formal plans before the end of the year following recent consultations between politicians, local operators and international experts.

By contrast, European Commission officials have previously stated that investigations into Denmark’s betting market have effectively been completed, suggesting that the country’s case is now ready to be referred on to the ECJ for a final ruling.