Judgement of the Court of Justice of the European Union – unlawful NAV tax penalty

NAV tax penaltyNot so long ago we reported on a Hungarian case at the Court of Justice of the European Union based on the Advocate General’s opinion. The judgement was passed on 26 April, and we can easily say that it surpasses all expectations. Taxpayers can rejoice because the penalty-levying practice of the Hungarian tax authority (NAV) has once more been rebuked.

Why is the judgement regarding the NAV tax penalty case good for taxpayers? 

In this case, the NAV challenged the VAT deducted for the purchase of a mobile hangar, capitalising on the difficulties experienced in qualifying transactions between direct taxation and reverse charges. Additionally, it imposed a tax penalty totalling 50% of the VAT amount. To add insult to injury, the supplier was under liquidation, so it would not have been able to repay the tax to the taxpayer.

The judgement rectified the two major problems since it did not consider the maximum 50% penalty justified; what is more, in respect of the tax repayment it also added that the taxpayer should be able to reclaim the tax directly from the NAV. We believe this latter aspect represents a huge blow to the tax authority, and gives hope to taxpayers who unwillingly find themselves in unpleasant situations.

We rarely quote something to the letter, but in this case, it is worth getting to know the main points of the judgement (without the legal slang).

“The principle of proportionality must be interpreted to the effect that it precludes national tax authorities, in a situation such as that in the main proceedings, from imposing on a taxable person, who purchased an item of property the transfer of which comes under the reverse charge regime, a tax penalty of 50% of the amount of value added tax which he is required to pay to the tax authority, where those authorities suffered no loss of tax revenue and there is no evidence of tax evasion, this being a matter for the referring court to determine.”

… it cannot be contested that “in a situation such as that in the main proceedings, the relevant provisions may not preclude the purchaser of an item of property from being deprived of the right to deduct the VAT which he paid to the seller when that tax was not due, on the basis of an invoice drawn up in accordance with the rules of the ordinary VAT regime, where the relevant transaction came under the reverse charge mechanism, and the seller paid that tax to the Treasury. However, to the extent that reimbursement of the unduly invoiced value added tax by the seller to the purchaser becomes impossible or excessively difficult, in particular in the case of the insolvency of the seller, those principles require that the purchaser be able to address his application for reimbursement to the tax authority directly.

According to the reasoning of the judgement, Member States must provide for the instruments and the detailed procedural rules necessary to enable the purchaser to recover the unduly invoiced tax in order to respect the principle of effectiveness.

Consequently, the following facts cannot be ignored:

  • the seller was under liquidation, which may imply that reimbursement of the unduly invoiced value added tax by the seller to the purchaser was impossible or excessively difficult;
  • the VAT was previously paid to the seller (it could also be checked whether the seller actually paid the amount to the central budget or not, although this does not matter from the perspective of the taxpayer);
  • the suspicion of tax fraud did not arise, the taxpayer acted in good faith;
  • the central budget did not suffer any loss. 
What will the consequences of the judgement be? 

In terms of the NAV tax penalty, the tax authority itself could have decreased (or completely waived) the penalty during the proceedings since this is permitted by the Act on Rules of Taxation. Our practical experience shows that in similar cases the NAV usually does not start out with a 50% penalty, yet based on the VAT content of any given transaction, a 5 or 10% penalty can also be significant. We trust that tax inspectors and their supervisors also read the court judgements, and in similar cases they will not take the maximum penalty as the default situation.

The law does not allow direct reimbursement from the tax authority, though in specific cases, Hungarian courts do take the final conclusions of the judgements by the Court of Justice of the European Union on tax issues into consideration. Based on this specific case we think it is justified to incorporate a provision into Hungarian legislation where taxpayers in similar situations can turn to the Hungarian tax authority with a direct reimbursement request.

In light of the judgement it is even worth reviewing previous tax inspections where, in similar situations (insolvent seller company), VAT previously paid could not be reclaimed.


Reverse charge instead of normal VAT – another Hungarian case before the European Court of Justice

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