mediated servicesIn Hungary, local business tax is levied based on net sales revenues which can be decreased by certain items, and thus by mediated services. You should be careful though because if the amount deducted on these grounds does not comply with the legal definition of mediated services, the tax authority of the local government may find a tax shortfall or set a tax penalty.

Definition of the value of mediated services 

Mediated services are defined by several laws in Hungary, so we find this term in the Act on VAT as well as in the Act on Accounting. Nevertheless, for local business tax Act C of 1990 on Local Taxes sets its own category. Accordingly, the value of mediated services means the value of a service purchased by the taxpayer in its own name, and resold (reinvoiced) under the terms and conditions in a written contract with a third party (customer), in part or in whole as agreed in the contract, but in an unaltered state. With mediated services the taxpayer is both the buyer and seller of the service; the taxpayer mediates the purchased service, in part or in whole, with the prospect of mediation clearly derived from the contract with the customer, and the actual mediation verified on the invoice, i.e. showing that the taxpayer – in addition to its own services – also provides services it has purchased, in an unaltered state but not necessarily at the same price.

What else should you look out for? 

Although the definition in Hungarian law represents a rather complicated and complex system of conditions, the issued legal interpretations and judicial practice include additional requirements on mediated services, which at first sight might not necessarily seem evident. For example, such requirements include that the incoming invoice issued to the taxpayer should not follow but rather precede the invoice issued (re-charged) by the taxpayer to its customer. The mediation is only evident from the invoice issued to the customer if own and mediated services are indicated in separate rows on the invoice.

As emphasised already, it is important for the taxpayer and its customer to conclude a written contract that clearly shows the possibility for mediation. The Hungarian regulation does not prescribe any specific form for the contract between the customer and the taxpayer, so theoretically even a contract for services or any other atypical contract can facilitate a tax base cut. Please note, however, that some argue consignment contracts comply with this legal condition the best (the consignee assumes an obligation to conclude a contract in its own name on behalf of the principal in connection with the service). Although the laws and regulations do not specify this either, it is also justified to set up an appropriate system of records for both outgoing and incoming invoices.

What can we do to mitigate the risk? 

Recently we have seen that mediated services have often been a focal point for the tax authorities of Hungarian local governments. So it makes sense to review and inspect the local business tax returns of previous years and their underlying documentation, and to ascertain whether reducing the tax base on the grounds of mediated services was in line with Hungarian laws and regulations. If an inspection is just about to start with you, or is already in progress, it is recommended that you contact an expert as soon as possible.

Should you have any questions regarding the inclusion of mediated services in your company’s local business tax returns, we would be happy to assist you. Over the past twenty years we have prepared or reviewed the local business tax returns of hundreds of companies. Our tax consulting team looks forward to hearing from you by email, or just give us a phone.