The provision of the Hungarian VAT Act that regulates the tax-exempt status of services directly related to exported products, such as export freight, changed as of 1 January 2019. Based on this change, the tax-exempt status is only applicable if the service is provided for the exporter of the product. So what was the previous rule, and what is the reason for this small yet all the more important change now? And how will the modified tax-exempt status of export freight affect businesses?
Former taxation practice for export freight
Based on Section 102 (1) b) of the VAT Act, exemption shall be granted for the supply of services if this is directly related to goods which leave the territory of the Community in an export procedure, and this exit from the territory of the Community is verified by the customs authority in the country of exit. In short, this means that a service (e.g. forwarding and ancillary services) related to exported products was tax-exempt.
Let’s take a Hungarian company for example (Company A) that exports products to Brazil, and engages a Hungarian forwarding company (Company B) to transport the product. Company B engages a Hungarian truck company (Company C) to deliver the products to Hamburg where they are loaded onto a ship. In this scenario, Company C issued an invoice without VAT for Company B, which in turn issued an invoice without VAT for Company A, given that the transportation and associated transportation organisation services are related to products exported from Hungary to Brazil.
The applicability of the rule on the tax-exempt status of the export freight was clear, entities in the industry followed this practice.
Case No. C-288/16
The judgment passed in an EU court case where the Court focused on the relevant provisions of the VAT directive (“Directive”) changed the above taxation practice of export freight along with the interpretation of the related rules.
In this case, the Court examined a situation in Latvia that was similar to the above scenario, only that the route ran between Latvia and Belarus, and that (continuing the above example) Company C rented out its means of transport to Company D, whose task was to drive, repair and fuel the transportation vehicle, complete and submit the customs documentation at the border, guard the cargo, transfer it to the recipient, and perform all the loading and unloading work. Since Company D believed the services it provided were related to a goods forwarding procedure, it applied a 0% tax rate to the services.
The related provision of the Directive states that Member States shall exempt the supply of services from tax where such is directly connected with the exportation or importation of goods.
However, based on the decision of the Court the tax-exempt status prescribed in this provision cannot be applied to a supply of services relating to a transaction consisting in the transport of goods to a third country, such as in this case, where those services are not provided directly to the consignor or consignee of those goods.
The judgment of the Court was promulgated on 29 June 2017.
What will change in the tax-exempt status of export freight from 2019?
From 1 January 2019, the prerequisite for the tax-exempt status of export freight and ancillary services is that the service should be provided directly to the exporter of the goods. So the amendment means you need to make sure that you do not accept an invoice including VAT if you are the company that carries out the export, and only this invoice can be tax-exempt in the subcontractor chain. For the previous invoices the VAT in Hungary of 27% has to be added. The question that arises in connection with the amendment is that while, based on the Court’s judgment, the tax-exempt status may be applied if the service is provided for the consignor or consignee of the goods, the Hungarian VAT Act only allows exemption if the user of the service is the one who carries out the export with the product; in our opinion, this is not necessarily the same thing.
Should we only pay attention to the export then?
It is not just with cases of export freight that we need to pay attention, i.e. when the products are subject to an export procedure and leave the territory of the Community, and all this is verified by the customs office in the country of exit – the exemption works in the case of other transactions too (though here the tax-exempt status only applies for invoices issued to the taxpayer performing special transactions). Such special transactions include, for example, when
- work is performed in Hungary on a product imported from a third country, and then the product is transported outside the territory of the Community,
- the product is subject to a temporary importation procedure involving full customs-free status,
- the product is subject to an external Community goods forwarding procedure, or
- the product is subject to temporary safekeeping while it is put through customs procedures,
- the product is entered into a bonded area or bonded warehouse,
- the product is processed under customs supervision.
There are several international groups among more than four hundred clients of WTS Klient Hungary for whom we provide tax consultancy services in respect of their export activities. Please do not hesitate to contact us if you need expert advice to comply with the changed legislation.