The Curia’s (Supreme Court of Hungary) Opinion No. 1/2025. KK elevates the approach to disputes relating to the right to deduct VAT to a new level, revising its previous judicial position. While the earlier Opinion No. 5/2016. KMK primarily focused on whether the economic transaction underlying the invoice actually took place or took place in the manner reflected in the documents, the new collegiate opinion clearly shifts the focus to the behaviour and “level of awareness” of the taxable person receiving the invoice.
In practice, this means that a formally compliant invoice and a genuinely performed transaction are no longer sufficient in themselves to guarantee the safety of the right to deduct VAT. Although the Hungarian tax authority and the courts had already examined in previous years to what extent the taxable person was aware of potential tax evasion connected to certain transactions, and whether such evasion could reasonably have been recognised, Opinion No. 1/2025. KK represents a declared shift in emphasis in both administrative and judicial approaches in Hungary.
A paradigm shift in the assessment of the right to deduct VAT?
One of the key messages of the new Curia opinion is that the refusal of the right to deduct VAT is not merely an “objective” issue but essentially depends on the qualification of the taxpayer’s conduct and state of awareness. This reflects the transposition of European Court of Justice case law from the past decade into Hungarian judicial practice, and a definitive departure from the tax authority’s earlier tendency to objectify the liability of invoice recipients, particularly in subcontractor chains. At the same time – alongside the direction and scope of the tax authority’s burden of proof – it places business partner due diligence and compliance processes of companies in Hungary into a new perspective.
Cases of refusal of the right to deduct VAT
The Curia identifies four clearly distinguishable categories, each requiring different evidentiary standards and tax authority approaches:
1. Intentional active conduct – non-existent economic transaction
The classical case remains where no actual performance underlies the invoice. If the tax authority proves that the economic event did not occur, this alone justifies the refusal of the right to deduct VAT, and further examination of the invoice recipient’s state of awareness is not relevant in this category.
2. Intentional active conduct – abuse of rights
A major element of the new opinion is the structured incorporation of the previously known but less systematised “Halifax test” into Hungarian judicial practice.
Accordingly, the right to deduct VAT may also be refused where:
- the transaction formally complies with applicable legislation,
- but results in a tax advantage contrary to the purpose of VAT rules,
- and objective circumstances indicate that the primary purpose of the transaction was to obtain that tax advantage.
The examination of this possibility is particularly important in the case of:
- complex structures,
- chain transactions,
- intermediary arrangements, or
- economically questionable transactions
In this category, the invoice recipient may face a tax penalty amounting to 200% of the tax difference, and in extreme cases even criminal proceedings.
In practice, however, the greatest risk for companies does not stem from overtly fraudulent schemes, but from the two categories of passive participation.
3. Knowing passive participation
Knowing passive participation refers to situations where the taxpayer does not itself commit tax evasion but is aware that another participant in the transaction or supply chain engages in abusive conduct and still takes part in the transaction.
In such cases, the Hungarian tax authority must prove:
- the existence of tax evasion, and
- that the taxpayer had knowledge of it.
4. Negligent passive participation: the new “key focus area”
A genuine novelty of Opinion No. 1/2025. KK is the recognition of negligent passive participation as a separate category.
In practice, this means that the right to deduct VAT may also be refused if the taxpayer did not actually know about the fraud but could have recognised it with the level of due care reasonably expected.
In cases of passive participation:
- criminal liability of the invoice recipient does not arise,
- however, a “standard” tax penalty (up to 50% of the tax difference) may apply.
Payment of VAT does not provide protection
It is important to emphasise that, according to the Curia in Hungary, the existence of tax evasion does not depend exclusively on a loss of tax revenue to the state budget. In other words, the mere fact that VAT relating to the transaction has been paid into the state treasury by someone does not automatically render the VAT deduction lawful on the recipient’s side.
This represents a significant shift in approach, as taxpayers previously often argued that “the VAT was ultimately paid,” and therefore no actual budgetary loss occurred. Under the new approach, however, the focus is no longer solely on the outcome, but on the legality of the transaction and the conduct of the parties involved.
What can the Hungarian tax authority expect from a “reasonably prudent” taxpayer?
With Opinion No. 1/2025. KK, the Curia has effectively confirmed in writing the Hungarian tax authority’s evolving audit practice, which increasingly focuses on:
- the circumstances of selecting business partners,
- the realism of pricing,
- the economic rationality of the transaction,the actual operation of business partners,
- the depth of partner due diligence performed by the taxpayer.
Currently, there is no detailed public guidance of the Hungarian tax authority specifying exactly which due diligence steps are sufficient. In practice, expectations typically emerge retrospectively during audits, in audit reports or resolutions. However, based on audit experience, the following can be expected:
- verification of the partner’s VAT number and company data,
- examination of representation rights,
- verification of actual business activity,review of references, online presence, registered seat and infrastructure,documented assessment of unusual pricing or structures,
- evidentiary documentation of the circumstances of performance.
Particularly in higher-risk industries or in high-value transactions, it may become a key issue whether the taxpayer can demonstrate that it has taken all reasonably expected steps, potentially exceeding standard due diligence measures.
Typical risk indicators
Enhanced partner due diligence is required in particular in the following circumstances:
- unusually low prices,
- relatively newly established or undercapitalised partners,
- difficult-to-reach management,unrealistic performance conditions,cash-based structures,
- lack of economic rationale.
What should companies do now?
Based on Opinion No. 1/2025. KK, it is clear that traditional “paper-based compliance” is no longer sufficient. The tax authority increasingly examines companies’ internal control systems, decision-making processes and partner due diligence mechanisms.
Therefore, it is particularly advisable for companies in Hungary to:
- review partner due diligence processes,
- establish internal checklists and documented procedures,
- conduct prior tax expert reviews of high-risk transactions,
- document business decisions and control steps,
- provide targeted training for finance and procurement staff.
The new Curia opinion confirms that the loss of the right to deduct VAT not only threatens businesses participating in intentional fraud, but also those unable to credibly demonstrate that they acted with due care. It is therefore clear that VAT risk is no longer merely an invoicing or documentation issue, but a complex compliance and risk management matter. If your company requires an experienced tax professional to assess VAT risks in Hungary, feel free to contact us with confidence.
This article is for general information purposes only and should not be considered as advice.
