Those dealing with value added tax know very well how important the definition for permanent establishments or VAT fixed establishments is in the VAT treatment of international transactions. It can impact on the VAT rate of services provided, but in the case of VAT reclaims abroad, attention should also be paid to whether the company created an establishment in the given country. If a foreign company creates an establishment in Hungary, then VAT registration along with the extra administrative workload cannot be avoided. We will deal with these issues in our next article, but until then, let’s see what the greatest challenge is with regard to this definition.
VAT fixed establishments – Hungarian definition
Any geographically fixed place established or intended to be used for an economic activity over a lengthy period at a fixed location other than the registered office, where the other conditions necessary for conducting the economic activity independently from the registered office are in place, including the taxpayer’s commercial representation in specific cases, shall qualify as a fixed establishment as per the effective Hungarian VAT Act.
It is worth checking out how different the approach of the old VAT Act before 2008 was in respect to the definition of a fixed establishment:
Separate production or business facility with which the taxpayer conducts revenue-generating activity at a fixed location for a lengthy period, particularly:
a) the place of management;
b) a branch;
c) a factory site;
d) a workshop or warehouse;
e) a mine, quarry, oil field or any other site used for the exploitation of natural resources;
f) a place of construction, implementation, repair or supervisory activity.
Fortunately we were able to forget this definition after 2008 and the aforementioned definition now in force does not include any exhaustive lists in respect of a fixed establishment.
The biggest problem with the definition of VAT fixed establishments is perhaps that it was not precisely defined what period qualifies as a “lengthy” period. This is very important since it can define whether a foreign company has to register in Hungary for VAT purposes or not. Let’s see what the EU regulation requires: is the definition any clearer?
VAT fixed establishments according to the EU’s implementing regulation
Based on Council Implementing Regulation (EU) No 282/2011, primarily examining the party using the service, a “fixed establishment” shall be any establishment characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs. From the perspective of the party providing the service, a “fixed establishment” shall be any establishment characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable the provision of services.
There is nothing about periods here, indeed, there are differences between the Hungarian and the EU regulation. Please note that the definition of permanent establishment in the double taxation treaties is not the same as that of VAT fixed establishments. While the Model Tax Convention uses examples to help identify permanent establishments in the case of direct taxes, it is not easy to define how a fixed establishment is created from the perspective of indirect taxes. Sometimes EU case law provides the only point of reference (e.g. the ARO Lease, Berkholz or Welmory cases).
What is the practice of the Hungarian tax authority (NAV)?
Having reviewed the practice of the National Tax and Customs Authority (NAV) applying Hungarian law, it is clear that inspectors always decide whether Hungarian VAT fixed establishments are created by assessing the given transaction and all of its circumstances. The inspectors may examine the duration of the contractual and the actual activity performed in Hungary, alongside other conditions included in the definition. We can say that a period in excess of 12 months certainly creates a VAT fixed establishment and thus a registration obligation, while providing a service for a shorter period of 3 months or no more than 6 months would probably not create a VAT fixed establishment.
Naturally, there must be an in-depth review of the given transaction and the type of the transaction since the wrong assessment of an establishment could result in the NAV determining a tax shortfall along with a maximum tax penalty of 50% and default interest.
