EU legal case: VAT on advertising services

Fine levied by NAV for VAT deduction was unlawful

advertising services

A recent European Court of Justice ruling affecting Hungary has answered an important question regarding VAT on advertising services. The judgment in case C-334/20 was published on 28 November 2021. Essentially, the issue was whether the tax authority can refuse a deduction of VAT on advertising services if they deem that the services are overpriced or that no increase in sales revenues can be shown as a result of using the services.

What kind of advertising services were affected by the case?

Amper Metal Kft. concluded a contract with Sziget Reklám Kft. for the provision of advertising services in 2014. In line with the contract, Amper Metal advertised itself on stickers placed on racing cars. The consideration for the service was HUF 48 million (roughly EUR 120,000) for one year according to the contract concluded between otherwise independent parties. In its VAT returns filed for 2014, Amper Metal deducted total VAT of HUF 13 million (roughly EUR 33,000) which was indicated on the invoices issued to it. During the tax inspection, the Hungarian Tax and Customs Administration did not agree with the deductibility of the VAT in question, and therefore levied a penalty and late payment interest.

On what basis did the tax authority challenge the VAT deductibility? 

According to the judgment of the NAV, expenses arising in connection with advertising services did not qualify as costs related to the taxable revenue-generating activity of Amper Metal, so according to Section 120 of the VAT Act, Amper Metal was not allowed to deduct the VAT it paid. 

Additionally, the experts of the tax authority deemed that the advertising services are too expensive and the plaintiff did not benefit in any way from the advertisements because the profile of its clientele differs from car racing.

How did the case come before the Court of Justice of the European Union? 

The case of Amper Metal and the Hungarian Tax and Customs Administration affecting the VAT of advertising services came before the Veszprém County Court, which sought the assistance of the Court of Justice of the European Union in interpreting Article 168(a) of the VAT Directive (the EU’s Common VAT Directive). According to the aforementioned section, the right to deduct VAT cannot be refused on the grounds that the services provided by the supplier were not used in the taxable activities of the customer.

The Hungarian court quotes the NAV which explained the non-use by stating the cost of the service provided was disproportionately higher than the sales revenue or sales revenue increase generated by the service, which, according to the tax authority, was zero in this case. The NAV supported its arguments with the fact that the clients of Amper Metal typically comprise industrial players who presumably do not make commercial decisions based on stickers placed on racing cars.

According to the experts of the tax authority, the fee for advertising services paid by Amper Metal was also expensive and overpriced compared to the market price. 

What did the Court of Justice of the European Union decide? 

According to the judgment of the Court of Justice of the European Union in case C-334/20, the lack of an increase in the taxpayer’s sales revenues cannot affect the exercising of the right to deduct. According to their ruling, the common system of VAT ensures neutrality of the tax burden of all economic activities, whatever their purpose or results, provided that those activities are themselves subject, in principle, to VAT. Therefore, the right to deduct remains after its inception, even if the planned economic activity is not carried out, i.e. it has not led to taxable transactions. The right to deduct also remains even if the taxpayer has not used the products or services enabling the deduction in taxable transactions because of circumstances beyond its control (Sonaecom judgment of 12 November 2020, C-42/19, EU:C:2020:913, Sections 38 and 40, and the case-law cited therein).

That the price paid is higher than the market price or any potential reference value defined by the tax authority as the price for similar advertising services cannot justify the refusal to allow the taxpayer to exercise their right to deduct.

If you have any questions about the VAT system or the VAT deductibility of advertising services arising at your company, please get in touch with the VAT specialists of WTS Klient Hungary who will be happy to help you.

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