Common situations – when is VAT registration unavoidable?

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In an earlier article I summarised what we need to know about financial representation, we looked at the benefits of company representation at the NAV, and I analysed how a financial representative can be of help when taking care of tax matters. In this article we look at some, but not all, of the common situations when VAT registration seems unavoidable for a foreign company.

Importance of place of performance

If the business activity of a foreign company involves Hungary to some extent, it can happen that this involvement is of a nature or an extent that means a tax number must be requested to carry out the activity.

First of all, we always have to examine whether any of our international transactions have their place of performance in Hungary: tax payment obligations can only arise where legislation “establishes” a place of performance in Hungary. What helps is that the place of performance rules are identical throughout the European Union, but you still need to be aware of related local regulations as well.

Product supply

Things are easier with product movements: in these cases the place of performance is generally where the product is located when the transportation starts, or if there is no transportation of the product, then where it is when the sale is completed. In practice, if the product is physically located in Hungary and it is used (for example sold) in Hungary, then we can be quite sure that this is a transaction with a Hungarian place of performance, meaning that we need to request a tax number from the tax authority at the very least. It is important to note that purchasing a product from another EU Member State or from outside the European Union, or moving your own product, can result in a place of performance and a tax obligation in Hungary.

Special product transactions: chain transactions

The situation is different if the product is sold several times and the product is physically transferred from the first seller to the last purchaser. Judging chain transactions such as these requires complex expertise: actual transportation can only be linked to one sale in the chain, and only this sale can be tax free. All other transactions will be taxable in the country of dispatch or the country of destination.

If we notice that the physical movement of the product differs from its invoicing path, then based on knowledge of the parties involved and the actual movement of the product we have a good chance of determining correctly which country the place of performance will be in, and where the tax and possibly reporting obligations will fall.

Provision of service and reverse charge

If we provide a service to taxpayers as a foreign company, then in certain cases (for example, if the foreign company typically performs this work in Hungary for a lengthy period, at a specific place, using equipment and personnel, and therefore the foreign company has a VAT fixed establishment in Hungary) it can be important that the work is performed in Hungary. In this case, the foreign company is generally required to request a tax number in Hungary, and the VAT fixed establishment created as a result has to be registered.

In most cases, the place of performance rules result in a Hungarian place of performance when services are provided for a Hungarian taxpayer. However, generally speaking this does not mean the foreign company has to pay tax in Hungary and is subject to VAT registration in Hungary. According to reverse charge rules, in the majority of cases the Hungarian tax on these transactions is included by the Hungarian tax-paying customer in its tax return (generally both as payable and deductible tax simultaneously). This means that the foreign company does not have to register in Hungary provided the permanent establishment affected by the service is not in Hungary; the Hungarian tax-paying customer “takes care” of everything instead.

Finally, a brief example of how interesting VAT registration is: if a foreign company provides passenger transportation services to private individuals (organising bus trips to European cities from Hungary), then although there is a place of performance based on the route completed in Hungary, the foreign company does not have to pay tax because such services are exempt from tax by law; the registration obligation applies, however.

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