In the introduction to our series on fiscal representation we mentioned that a foreign company can engage a fiscal representative in the interests of fulfilling its Hungarian tax liabilities.
Who has to have a fiscal representative?
Experts interested in the details will find references to legal regulations on fiscal representation in both the Act on VAT and the Act on Rules of Taxation. Generally speaking, a foreign company that is non-resident in Hungary from the perspective of VAT may engage a company with such VAT status. However, if the foreign company has its registered office or permanent establishment in a third country, i.e. outside the European Union, it is mandatory for it to engage a fiscal representative. Essentially the fiscal representative enables a special form of VAT registration in Hungary.
In practice, when a business organisation registered in Switzerland has a VAT liability in Hungary, it can only fulfil its tax liability payment through a fiscal representative. It is important to note that this does not necessarily mean an actual tax payment obligation: this can also apply even if registration in Hungary is required because of a tax exempt service provided in Hungary (e.g. passenger transportation) which ultimately does not result in a tax payment obligation. The administrative burden here is too significant compared to the fact that the company only has to include a single tax-free item in its tax returns.
So after all the scaremongering: who do we need?
For the purposes of VAT registration in Hungary, a company from a third country has to find a Hungarian limited liability company or a company limited by shares, whose registered capital is at least HUF 50 million (EUR 160,000), or which is able to obtain a bank guarantee of the same amount and does not have any tax debt at the tax authority. None of this is easy, since in practice most of the local business organisations do not have registered capital to such an extent (even maintaining the statutory minimum poses a problem for many of them) and obtaining such a high bank guarantee whilst bearing the cost of it would probably be a huge burden for them too.
The reason why most companies, including advisory firms, are reluctant to assume the role of fiscal representative is that the fiscal representative and the foreign (“VAT registered”) company have joint and several liability for the Hungarian tax liabilities of the foreign (represented) company. This means that the Hungarian tax authority may claim each tax debt from both the foreign company and the business organisation acting as the fiscal representative. Risks are often difficult to estimate beforehand at the company assuming the status of fiscal representative. Not to mention that the existence of the HUF 50 million (EUR 160,000) registered capital or bank guarantee is far from certain to cover all potential risks: understandably, engaging local companies requires a thorough and prudent preliminary review and risk analysis.
It is very common within an international group that under the pressure of the parent company, the Hungarian subsidiary “voluntarily assumes” this task, and it often does so without a detailed situation assessment or risk analysis.