Taxation of foreign webshops and EU law

The Hungarian retail tax has become one of the recurring points of conflict between EU law and Member State tax sovereignty in recent years. The debate has primarily focused on whether a revenue-based progressive special tax is compatible with EU law where, due to market structure, the actual burden is borne mainly by foreign-owned integrated retail chains. We have addressed this issue on several occasions, analysing the key lessons relating to progressive taxation, aggregation rules and the related infringement proceedings.

This article examines whether the rules governing the taxation of foreign webshops are compatible with the European Union’s fundamental freedoms, and whether they may result in discrimination against businesses engaged in cross-border e-commerce activities.

Road to an EU court case

In 2020, in the Tesco case, the Court of Justice of the European Union (CJEU) concluded that the progressive nature of the retail special tax does not in itself infringe the freedom of establishment. According to the Court, the fact that companies generating higher revenues are more likely to have owners from other Member States merely reflects the economic reality of the market and does not prove prohibited discrimination.

This legal dispute continued in the infringement procedure initiated against Hungary in relation to the Retail Tax Act introduced in 2020. As a result of the procedure, the repeal of the aggregation rule of the Hungarian Retail Tax Act has already taken effect as of 31 July 2026, including for the 2026 tax year. While the temporal scope of this amendment is understandable from a budgetary perspective, it does not provide a satisfactory answer regarding the EU compatibility of the rules applicable between 2020 and 2025, which remain unaffected. In our view, during that period the legislation infringed EU law, as it prevented foreign market participants from operating under the same business model used by Hungarian market players.

Beyond existing EU legal disputes

Interesting questions are also raised by the 2025 amendment to the Hungarian retail tax, which has not yet formed part of the EU compatibility disputes referred to above. This change affects not only the different tax treatment of integrated retail chains operating in Hungary and domestic franchise models, but also the taxation of foreign webshops and digital platform operators that are not established in Hungary for economic purposes.

Examples include:

• Amazon
• eBay
• AliExpress
• Alibaba
• Temu
• Shein
• Allegro
• Etsy
• Zalando
• About You

Until 2025, foreign sales of these businesses were simply exempt from Hungarian retail tax. Since 2025, however, Hungary has introduced a special progressive exemption rule, which has in practice led to a significant increase in tax liabilities for the affected businesses. Under the new rules, net sales revenues generated abroad also form part of the Hungarian tax base, while the corresponding tax amount may subsequently reduce the tax liability.

In the context of the taxation of foreign webshops, the question is therefore no longer simply whether a retail special tax may be progressive, but whether the regulatory approach whereby the legislator also takes into account the global revenue of these market participants when determining the Hungarian tax burden results in clear discriminatory treatment.

The 2025 legislative change: a departure from territorial logic

The original regulatory concept of the Hungarian retail tax was fundamentally territorial in nature. The connecting factor for Hungarian taxation was revenue from the sale of goods delivered within Hungary. This was consistent with the general tax principle that a state primarily taxes economic activities connected to its own territory.

However, the amendment effective from 1 January 2025 introduced a broader tax base definition for foreign retailers not established in Hungary. In these cases, the tax base includes not only turnover linked to Hungary but also the consideration received from the sale of goods delivered abroad.

Foreign revenue may push a taxpayer’s tax base into a higher tax bracket, after which the system provides a certain correction mechanism when calculating the tax. In practice, however, this more complex exemption mechanism has resulted in a significant increase in tax liabilities from one year to the next. This increase affects foreign retailers only, not domestic ones. As it applies exclusively to the taxation of foreign webshops, the progressive exemption mechanism has a discriminatory character, and the higher tax burden effectively results in a tax base exceeding domestic revenue becoming taxable in Hungary.

This issue also affects the retail tax obligations of platform operators.

Although the relevant provisions of the Hungarian Retail Tax Act do not expressly differentiate between domestic and foreign businesses, in practice they predominantly affect companies linked to other (EU Member) States.

A new dimension of non-compliance with EU law

The ongoing infringement procedure of the European Commission is primarily based on the argument that the Hungarian retail tax places foreign-controlled integrated retail chains and related entities at a disadvantage compared with businesses operating under domestic franchise systems. The discrimination arises because the aggregation rule introduced in 2020 for related entities prevents foreign businesses from restructuring their operations in a way that would enable them to achieve a similarly favourable tax position to Hungarian businesses.

The progressive exemption rule affecting the taxation of foreign webshops and platforms follows a different logic, but similarly places foreign market participants at a disadvantage compared with Hungarian businesses, potentially resulting also in an infringement of fundamental EU freedoms.

Could this open the door to tax refund procedures?

If the CJEU were to establish a breach of EU law, affected businesses could initiate special tax refund procedures. Under Hungarian tax procedural rules, taxpayers may request the refund of taxes paid on the grounds that the legislation establishing the tax obligation is contrary to EU law.

It is important to note that:

• it is not necessarily necessary to wait for the final CJEU judgment;
• procedures can already be initiated now;
• due to limitation rules, proper timing may be of critical importance.

This may be particularly relevant for businesses that have paid substantial amounts of Hungarian retail tax in recent years.

Our team of experts continuously monitors developments relating to the Hungarian retail tax, in particular the relevant communications and measures of the European Commission, the Court of Justice of the European Union, and the Hungarian government. Upon request, we are available to assist in clarifying strategic issues and potential procedural and enforcement options related to the Hungarian retail tax or the taxation of foreign webshops.

A Taxation of foreign webshops bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

The issue is particularly sensitive for market participants, as the Hungarian retail tax has imposed a significant additional burden on larger players in recent years. Therefore, the ongoing procedure carries not only legal but also substantial economic and financial implications.

How did we get here?

The special retail tax re-entered the Hungarian tax system in 2020. Its reintroduction was largely supported by the CJEU’s 2020 judgment in the Tesco case, in which the Court held that a progressive, turnover-based special tax – whose actual burden is primarily borne by large, typically foreign owned companies – is not, in itself, contrary to EU law.

The judgment emphasised that:

• Member States enjoy a broad margin of discretion in designing their tax systems;
• progressive taxation is not in itself discriminatory;
• differences in tax burdens may also stem from market structure.

However, the dispute did not end there. According to the European Commission, the current regulation differs in several respects from the system previously examined. Therefore, in 2024 it launched an infringement procedure against Hungary, which entered the judicial phase in 2026.

What is the Commission’s main objection to the Hungarian retail tax?

According to the Commission, the Hungarian rules may infringe the EU freedom of establishment, as the progressive tax burden primarily affects large, integrated companies – typically foreign-owned.

The most important new element is that the current regulation no longer allows businesses to restructure their operations in a way that could previously mitigate the tax burden. Under the applicable rules, even in franchise systems, tax bases must be aggregated where the structure resulted from a reorganisation (fragmentation) carried out after the entry into force of the Hungarian retail tax law.

This is a key difference compared to the Tesco case, where the CJEU still took into account that market participants could, to some extent, shape their operational structure.

Accordingly, the key questions in the current procedure may be:

• Does the current regulation actually restrict the freedom of establishment?
• Does indirect discrimination exist?

What decisions may be expected?

The current system remains in place

One possible scenario is that the CJEU, similarly to the Tesco judgment, again finds the Hungarian rules lawful. In this case:

• the Hungarian retail tax could remain unchanged;
• no retroactive tax refunds would be available.

Modification or phase-out of the regulation

It is also conceivable that the CJEU will object to the current system but limit the effects of its judgment to the future. In this case:

• the regulation may be amended or gradually phased out;
• however, reimbursement of previously paid tax would not be possible.

From a budgetary perspective, this solution would impose a significantly lower burden on Hungary. However, it remains a question to what extent such an outcome aligns with the government’s short- and long-term policy objectives.

Establishment of retroactive unlawfulness

The most far-reaching outcome would be if the CJEU were also to declare that the regulation had been incompatible with EU law in the past. In this case reimbursement of previously paid Hungarian retail tax could arise.

At the same time, it is important to note that, according to the CJEU’s practice, the temporal effects of a judgment may be limited in exceptional circumstances, particularly if repayment would seriously endanger a Member State’s budget. In this case, retroactive unlawfulness would not necessarily result in a tax refund.

Could the path to tax refund procedures open?

If the CJEU establishes a breach of EU law, affected businesses may have the opportunity to initiate specific tax refund procedures.

Under Hungarian tax procedural rules, taxpayers may request the reimbursement of tax paid on the grounds that the underlying legislation is contrary to EU law.

It is also important to note that:

• it is not necessarily required to wait for the final CJEU judgment;
• procedures may already be initiated now;
• due to limitation periods, proper timing may be crucial.

This may be particularly relevant for businesses that have paid substantial amounts of Hungarian retail tax in recent years.

Why is it important to pay attention now?

The significance of the current procedure goes beyond a classical tax dispute. The case:

• may entail considerable budgetary risk;
• could set a precedent for the assessment of other special taxes;
• may materially influence future Hungarian special tax policy.

Therefore, it is advisable for market participants in the retail sector to:

• continuously monitor the proceedings before the CJEU;
• assess potential refund claims;
• and examine available legal options in a timely manner.

The current procedure may realistically open the door to further disputes related to the Hungarian retail tax, including refund claims.

Our team of experts continuously monitors developments relating to the Hungarian retail tax, in particular the relevant communications and measures of the European Commission, the Court of Justice of the European Union, and the Hungarian government. Upon request, we are available to assist in clarifying strategic issues and potential procedural and enforcement options related to the Hungarian retail tax.

A Hungarian retail tax: could the path to refunds open up? bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

A contradictory and intricate area

Recent CJEU case-law clearly illustrates the complexity of the VAT treatment of transfer pricing corrections:

• In C‑726/23 Arcomet-case, the Court concluded that, subject to certain conditions, even adjustments intended to ensure a guaranteed profit margin may fall within the scope of VAT.
• By contrast, the Advocate General’s Opinion in C‑603/24 Stellantis-case emphasises that profit sharing, in itself, cannot be regarded as consideration for a service.

The common message is that the VAT treatment of transfer pricing adjustments cannot be handled mechanically: the decisive factors are always the economic substance of the legal relationship and the contractual structure.

How to account for year-end transfer pricing adjustments

In Hungary, retrospective transfer price adjustments may be carried out in several ways:

• by amending invoices retroactively,
• by adjusting consideration through an accounting document, or
• by making a corporate income tax base adjustment only.

The chosen technique is not merely an administrative formality; it also affects the precise point within the arm’s length range to which the adjustment must be made.

A recent modification of the Hungarian legal framework introduced a more favourable interpretation: applying the median is no longer automatically required when the adjustment is made via an accounting document. At the same time, the timing of the adjustment has become more stringent: from 2025 onwards it must be performed no later than the balance sheet preparation date.

Applying the arm’s length principle is relevant not only for corporate income tax but also for other income-type taxes, which further increases the importance of appropriate documentation.

A new approach to transfer pricing adjustments and indirect taxes

The key difficulty in the VAT treatment of transfer pricing adjustments is that corporate income tax and VAT follow fundamentally different logic. While the former is designed to allocate profits, VAT taxes the consideration for specific economic supplies. Earlier professional approaches presumed that a VAT correction could arise primarily where a direct link existed between the adjustment and a specific transaction. However, Member State practices may differ, resulting in enhanced interpretative and compliance risks for companies.

The Arcomet-judgment: rethinking the concept of consideration

One of the core messages of the Arcomet-case is that profit‑based pricing mechanisms do not automatically exclude tax obligation. Where the contract specifies particular services and the pricing mechanism is clear and mandatory, the balancing payment may become part of the consideration for the service. At the same time, the Court reaffirmed that the existence of tax liability requires an objective and direct link between the supply and the payment, to be assessed in light of all relevant circumstances.

The judgment also highlights the practical conditions of exercising the right to deduct VAT. This right is not automatic: the tax authority may request further evidence proving that the service was actually supplied and served the taxable activity of the taxpayer. This makes the following documents indispensable, particularly for intra‑group services:

• detailed contractual background,
• performance confirmations,
• internal reports,
• cost allocation calculations.

The Stellantis-case: the need to move beyond a purely case-by-case approach

The Stellantis-case shows that the economic substance of the arrangement is decisive in determining the VAT treatment of transfer pricing adjustments. In the model examined, intra-group purchases were made at a predefined reference price, and at year‑end a retrospective adjustment was carried out based on actual costs and a target profit margin. The legal dispute centred on whether these balancing payments modified the taxable amount of previous supplies or should instead be viewed as financial settlements intended to ensure group‑level profitability.

The lesson of the case is that price corrections refining the consideration for the original transactions must be distinguished from adjustments serving a profit reallocation function. The former may trigger a VAT base modification, while the latter typically fall outside the scope of VAT.

For proper classification, the level of detail in the contractual pricing mechanism and the degree to which the adjustment is linked to specific supplies are determining. This requires companies to design their documentation and invoicing practices consciously.

Transfer pricing adjustments and customs valuation

Transfer pricing adjustments may also be relevant for customs valuation. According to the latest direction in EU case-law, profit‑driven adjustments may affect customs obligations even without modifying the price of specific transactions, creating additional compliance and administrative burdens for companies.

In light of recent CJEU decisions, a comprehensive review of corporate groups’ current transfer pricing and invoicing practices may be warranted. Coordinated management of corporate income tax and VAT requirements, clear contractual definition of pricing mechanisms, and detailed documentation of supplies have become essential to mitigate risks – especially given the increasing scrutiny of the authorities. Should you require professional support regarding the VAT treatment of transfer pricing adjustments, the transfer pricing advisers of WTS Klient Hungary are ready to assist.

A VAT treatment of transfer pricing adjustments bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

What was the case about?

A Croatian company sold timber to another EU Member State. The company acted as many businesses typically do in everyday operations: based on invoices, transport documents and customer confirmations, it applied the VAT exemption for intra‑Community supply.

However, the Croatian tax authority rejected the VAT exemption. According to its reasoning, the submitted documents did not fully comply with the proof requirements listed in Article 45a of Implementing Regulation 282/2011/EU (the so-called Quick Fixes) – even though the authority itself fully acknowledged that the goods had actually left Croatia.

The Croatian court initiated a preliminary ruling procedure to clarify whether the VAT exemption may be denied solely because the taxpayer does not rely on the documents explicitly listed in the regulation to prove the dispatch of goods to another Member State.

Essence of the Court’s decision

1. The evidence under Article 45a is not exclusive

The Court stated that Article 45a of the Implementing Regulation is not exhaustive. It creates a presumption regarding the dispatch of goods to another Member State, but it does not restrict the taxpayer from relying on other types of evidence to prove the reality of the EU cross‑border supply of goods.

2. The tax authority may not automatically deny the exemption

The Court emphasised that VAT exemption cannot be denied solely on formal grounds if the transaction was in fact an intra‑Community supply. The tax authority must assess all relevant evidence, even if such evidence is not listed in Article 45a.

3. Proportionality of the burden of proof and protection of taxpayers

The Court reaffirmed that the tax authority may only deny the exemption if objective circumstances show that the taxpayer abused the rules or if the transaction did not take place. The evidentiary requirements must remain proportionate and must not impose an unreasonable burden on the taxpayer.

Why is this CJEU decision important in practice?

• More flexible evidentiary framework: The decision ends the rigid, formalistic approach where authorities denied VAT exemption even when the goods had undeniably left the Member State.

• Obligations of tax authorities: National authorities must now examine a broader set of evidence, not only the prescribed list.

• Positive precedent for businesses: Particularly in commercial practice – where shipments cannot always be documented strictly according to the Regulation – taxpayers now have more flexible opportunities to prove the VAT exemption of an intra‑Community supply.

The conflict between the current practice of the Hungarian tax authority and the CJEU’s interpretation

The Hungarian tax authority often ties the application of VAT exemption for an intra‑Community supply strictly to the presence of the documents listed in Article 45a, even if the transaction has clearly taken place. In many cases the Hungarian tax authority does not accept alternative evidence at all and automatically assesses a VAT difference due to deficiencies in the Quick Fixes documentation.

The Flo Veneer judgment sends a clear message: the evidentiary system is flexible, and the actual fulfilment of the transaction prevails. The decision aligns with the CJEU’s consistent case law, according to which economic reality is paramount in the application of VAT exemptions, and formal requirements may not override actual transactions. This significantly enhances legal certainty in the field of intra‑Community supply, including for Hungarian businesses.

The Hungarian tax authority will need to adapt its practice accordingly, which requires a substantial shift in mindset and audit methodology: instead of focusing on formal errors, economic reality must be examined. Once this happens, the Hungarian tax authority is expected to place greater emphasis on risk analysis and the verification of actual fulfilment, since it must accept a wider range of documents such as bank transfers, customer delivery confirmations, warehouse dispatch documents, and even GPS data. This could create a more predictable environment for businesses operating in Hungary.

What do we recommend?

• Documentation should continue to be organised and consistent.
• Companies involved in intra‑Community supply should retain all evidence supporting the dispatch of goods.
• Businesses should review their contracts with transporters and their internal procedures.

If you need expert support regarding the VAT processes of your intra‑Community supply, the VAT advisers of WTS Klient Hungary are ready to assist you with reviewing internal procedures, designing documentation systems or preparing for Hungarian tax authority audits. Feel free to contact us and request a proposal!

This article provides general information and does not constitute advice.

A Exemption of intra‑Community supply from VAT bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

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.

A EU legal case: VAT on advertising services bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Year 2021 was full of tax changes also in Poland, most of which are going to take effect at the start of 2022. For business, then, this year will be the one of implementing the changes and adjusting to the new reality.

However, the quality and pace of the reform have given rise to controversies resulting in a host of Polish cases dealt with by the Court of Justice of the European Union (CJEU) in 2021. The new publication of WTS&SAJA Sp. z o.o. gives an overview of the most important Polish cases and describes how these issues can impact business in Poland.

Decisions in Polish cases

CJEU resolved a number of long-time doubts surrounding the interpretation of extremely important VAT issues. The most important of these are:

• the applicability of reverse charge mechanism in a VAT-neutral manner where the three-month time limit for deduction of input tax has passed (case C-895/19, judgment of 18 March 2021);

• the availability of the right to invoice adjustment during a tax inspection if the taxable person acted in good faith to treat his transaction in accordance with the tax authorities’ approach applicable at the date of the transaction (case C-48/20, judgment of 18 March 2021);

• the ban on automatic imposition of additional VAT (so-called VAT penalty) due to its incompatibility with the principle of proportionality (case C-935/19, judgment of 15 April 2021);

• the availability of reduced 5% VAT on sale of meals if the consumer himself chooses whether to consume the meal away from the premises or on the premises at a restaurant or in a shopping centre using resources provided for the purpose (case C-703/19, judgment of 22 April 2021);

• that there is no need for taxable persons to pay VAT due on purchase of fuel via ICA if the tax has not yet become chargeable as appropriate for transactions of this kind (case C-855/19, judgment of 9 September 2021).

The details of those Polish cases and their impact on business in Poland can be read in the publication.

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In case of any questions or doubts regarding the content of the articles, please contact the experts of WTS&SAJA Sp. z o.o. directly, the exclusive representative of WTS Global in Poland.

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A Overview of CJEU’s Polish cases of importance in 2021 bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

VAT rules on management of special investment funds

According to Art. 6 (1) 8 (i) of the Austrian VAT law, the revenue from the “management of special investment funds”, the “management of holdings in the context of the business of providing capital … by undertakings holding a concession for this purpose”, as well as from the “management of special investment funds as defined by the other Member States” is exempt from VAT. This legal regulation corresponds to Art. 135 (1) (g) of the European VAT Directive with the aim of fiscal neutrality which does not allow economic operators who carry out similar transactions to be treated differently for tax purposes. According to the principle of fiscal neutrality, it has to be ensured that economic operators are able to choose the form of investment which best suits them – not facing the risk that their operations could be excluded from the tax exemption. Therefore, this regulation intends to protect small investors who would otherwise have a disadvantage compared to large investors who invest directly without being burdened with administration fees.

In the joined cases C-58/20 and C-59/20 the CJEU dealt with the question whether fund management services are covered by the tax exemption according to Art. 135 (1) of the European VAT Directive if the services are (partly) outsourced to a third party.

In the consistent case law, the CJEU has already dealt with the criteria for tax exemption as well as the tax treatment of such services which are outsourced to a third party. For example, in its decision of 2 July 2020, Blackrock Investment Management (UK), C-231/19 the CJEU stated that the services of an external service provider can also be exempt from VAT if they form a distinct whole which is intended to fulfil the specific and essential functions of managing special funds.

Further specification of the criteria for VAT exemption

In the current case law, the CJEU specified further the respective criteria. According to the CJEU, the following criteria must be met to qualify for the VAT exemption:

• Distinct or autonomous character: First of all, it has to be determined whether the services provided by a third party are forming a distinct whole. However, as the CJEU states, it is not required that the services which are specific to and essential for the management of special investment funds must be completely outsourced to the service provider to be covered by the tax exemption which is a fundamental and trend-setting statement in the current legal case. If the application of the tax exemption required the entire outsourcing of the services, management companies which themselves supply those services and economic operators who invest directly, would be favoured from a tax point of view.

• Specific and essential character of the service: In a second step, it has to be assessed whether the services provided by a third party are specific to and essential for the management of special investment funds. It is crucial that the services provided are closely linked to the activities of the management company. Regarding services provided by a third party to a management company, it has to be examined “whether the service provided … is intrinsically connected to the activity characteristic of a management company, so that it has the effect of performing the specific and essential functions of management of a special investment fund.” Instead, services which arise regarding any type of investment are not specific and not covered by the term management of special investment funds.

If you would like to know the conclusion of the judgement and our detailed analysis, you can read the full article in the WTS Global Financial Services Newsletter #3/2021. Click here and scroll to page 4!

If you need more information about the aforementioned Austrian cases or the judgement concerning the VAT exemption for the management of special investment funds, please contact the experts of ICON Wirtschaftstreuhand GmbH, partner firm of WTS Global in Austria!

A Austrian cases on management of special investment funds before the CJEU bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

What do you need to certify regarding the irrecoverable nature of trade receivables?

In Hungary, tax refunds are always based on proof that trade receivables are definitely irrecoverable. In most cases, the starting point is the so-called certificate of irrecoverability issued in liquidation proceedings against the buyer, along with the fact that at least two years have passed since the start of the liquidation.

Exactly what is the procedure for claiming VAT refunds on irrecoverable debts in Hungary?

If a claim meets the conditions above, taxpayers can easily find themselves in a maze when seeking the answer to the question of exactly which procedure to use to enforce their VAT refund request.

The response can essentially be divided into two questions:

• Whether the limitation period for the underlying trade receivable has already expired, and
• If yes, how much time has passed since this status of definitive irrecoverability was reached?

If the underlying domestic supplies of goods and services subject to direct taxation were performed after 31 December 2015, the VAT refunds on irrecoverable debts can be initiated by means of a self-revision submitted for the original tax return period.

If the limitation period of the original transaction giving rise to the taxpayer’s receivable from the customer has already expired, according to a relatively new amendment of legal regulations it is still possible for the VAT amount unpaid by the customer to be refunded. In this case, the claim is not enforced via a self-revision of the original tax return, but by a written request submitted to the tax authority. VAT refunds on irrecoverable debts expired in this way have been made possible by a recent decision of the Court of Justice of the European Union in a Hungarian case.

It is important to emphasise that based on the legal regulation adopted as a result of the decision of the Court of Justice, VAT refunds on irrecoverable debts that have expired are only possible within certain limits. In light of the relatively long time it takes for the National Tax and Customs Administration to assess a VAT refund request, and the short filing deadlines (limitation period) for taxpayers, all taxpayers are advised to identify any expired trade receivables as soon as possible.  

What pitfalls can taxpayers expect during the procedure?

Although taxpayers have to follow a detailed system of conditions and procedures defined by law when enforcing their irrecoverable receivables entitling them to a tax refund, experiences of the past period show that full compliance with these does not necessarily result in a simple and quick approval of the request by the tax authority.

In adopting negative decisions regarding VAT refunds on irrecoverable debts, the tax authority regularly argues that the taxpayer did not do everything to ensure that the claim does not become irrecoverable. In this respect, during a detailed investigation of the facts underlying the request, the tax authority may reveal (real or perceived) deficiencies in the taxpayer’s claim enforcement procedure which, according to the tax authority’s interpretation, renders the taxpayer’s procedure incompliant. For example, in a given case, in relation to the non-paying customer the Hungarian tax authority would have expected the taxpayer to terminate the agreement with the customer even after the first unpaid invoice, which, obviously, cannot be a viable option for long-term cooperation between business partners.

Presumed damage to the state budget is also a frequent argument. According to the tax authority’s interpretation here, if the taxpayer requests the refund of a tax where the taxpayer itself contributed to the amount being irrecoverable due to shortcomings in the claim enforcement procedure (e.g. missed checks when selecting the contractual partner, etc.), then they cannot transfer the resulting financial risk to the budget. We believe this is not necessarily a valid argument either, since the Hungarian taxpayer was obliged to pay both the relevant VAT amount and the corporate tax on sales as well as the local business tax to the budget, even if the customer did not pay the invoiced amount.

Although our experience shows that the arguments summarised in our article can be successfully defended or refuted in most cases, it is definitely worth involving a tax consultant in the early phase of the claim enforcement to develop a more efficient strategy in line with the individual trade receivable. If you wish to know when and how VAT refunds on irrecoverable debts are possible in connection with your receivables, please contact the VAT experts of WTS Klient Hungary.

A Current developments in Hungary regarding VAT refunds on irrecoverable debts bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

What creates the trap in the case of free of charge supplies?

With real estate developments, the municipality in question often sets extra requirements for the investor. Such demands include the construction of roads and pavements leading to the building complex to be constructed, as well as nearby bus stops. These investments, which among other things offer easier access or an improvement in existing public roads, must be handed over by the contractor to the municipality free of charge. In this context, the spotlight turns to the deductibility of VAT of public investment costs together with the potential risk of a VAT payment liability as a result of delivering the development completed to the municipality free of charge. The Hungarian legal practice so far was fundamentally disadvantageous for taxpayers (at least as regards the issue of the payable tax), i.e. the supply was considered subject to VAT.

Background to the current case

In the case at hand, a German company received a permit to redevelop and operate a limestone quarry on the condition that access to the quarry is ensured by extending the public road belonging to the municipality.

The company obtaining the permit engaged a general contractor for the construction work, then deducted VAT related to the invoice of the contractor. The VAT deduction was rejected by the competent German tax authority, which then assessed a tax shortfall. Since the investment was supplied free of charge to the municipality, according to the German tax authority, the investor is not entitled to deduct the related input VAT.

Findings on the right to deduct VAT

The case was transferred up to the Court of Justice of the European Union, which made several important and forward-looking comments in connection with the right to deduct VAT on free of charge supplies.

• As a general rule for the given purchase transaction, there must be a direct and immediate link with the sales transaction entitling to VAT deduction. This is because the right to deduct can be exercised with the proviso that the given costs form part of the price of the taxable activities entitling to the deduction of VAT. The direct and immediate link must be established on an objective basis.

• In the above case, the extension of the road leading to the quarry enabled the truck traffic to and from the quarry, and by extending the road, the authorised contractor met its obligation towards the municipality with regard to the operation of the quarry. An additional argument in the court’s decision for the direct link between investment costs and taxable activity was that the cost of the investment is incorporated in the cost of output transactions performed by the company.

• Furthermore, the court considered that in the current case the road leading to the quarry was not handed over for public use by the investor. In fact, the purpose of extending the road was primarily to provide access to the quarry for the company itself.

• Therefore, the court considered that if an investment made for “public” purposes (to be handed over to the municipality) does not exceed what was necessary to allow the company to carry out its economic activity and the costs of this work are included in the price of output transactions, then the investor is entitled to deduct input VAT.

Findings on the VAT obligation for free of charge supplies

The court established the following with regard to the VAT obligation for the investment supplied free of charge to the municipality:

• According to the VAT Directive (as well as the Hungarian legislation), the application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business (where the related VAT was wholly or partly deductible), qualifies as taxable supply of goods.

• In the current case, the road was handed over to the municipality in a manner that ruled out not only its use for meeting the company’s own or its staff’s needs, but its application for purposes other than those of the business too. This is because the construction work served the (own) needs of the company operating the quarry (which the court elaborated on with regard to the VAT deduction right).

• Consequently, the free of charge construction of a public road for the municipality does not result in a VAT payment obligation.

So what happens now? 

One of the most important conclusions to be drawn based on the decision of the court is probably the fact that input VAT is deductible on public purpose investments not exceeding what is necessary for a company to carry out its business activity. The other conclusion is that the free of charge supply of an investment meeting this latter requirement does not result in a VAT payment obligation.

Of course, all cases must be individually reviewed to decide what elements and what business background of an investment may comply with the system of conditions set by the Court of Justice of the European Union. Feel free to contact the tax advisers of WTS Klient Hungary if you need help from an expert.

A VAT obligation for free of charge supplies bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

Essence and purpose of new rule

According to the special tax reimbursement rule, taxpayers will have the opportunity to claim reimbursement of input VAT – that they cannot otherwise recover – no later than six months prior to the expiry of the limitation period.

Taxpayers lose this right after the deadline expires, and the request must be filed in writing. In the request, taxpayers will have to provide evidence that they cannot reclaim the input VAT in any other way due to reasons beyond their control. The Hungarian tax authority will approve the reimbursement if the VAT has been paid into the budget.

The aim of introducing this special tax reimbursement is to ensure that in line with the principle of fiscal neutrality, taxpayers can be completely relieved of the burden of input VAT charged in relation to the supply of goods and services entitling the deduction of taxes. Tax deduction rules are intended to ensure this principle is enforced. Yet in some cases, certain companies may still be unable to recover the VAT amount despite doing everything in their power.

When can the special tax reimbursement rule be applied?

The rule on special tax reimbursement may be applied, for instance, if the supplier of a company incorrectly charges VAT, instead of issuing a reverse VAT invoice, and the VAT is paid by the company to the supplier. The issuer of the invoice pays the VAT to the Hungarian tax authority, and the company receiving the invoice deducts this amount. At a subsequent tax inspection, the tax authority finds that no VAT should have been charged for the given service in the first place, so the company was not entitled to deduct said VAT. By default, the receiver of the invoice may claim the reimbursement of the unlawfully charged VAT from the supplier in such cases. If, however, the supplier has since been terminated or become insolvent, reclaiming the charged VAT becomes impossible.

Decision of the Court of Justice of the European Union

The new rule presented above is based on a decision of the Court of Justice of the European Union in a case involving a Hungarian party.

The Hungarian tax authority conducted an inspection at PORR Építési Kft. (PORR Building Ltd.), during which it found a VAT shortfall. The company accepted several invoices for construction activities, on which the service providers charged VAT. PORR Kft. paid the invoices to the service providers and deducted the amounts of VAT charged thereon, before reclaiming the VAT. However, the tax authority found that the business transactions on the invoices were related to construction activities, so the invoices should have been issued with a reverse charge. Consequently, a tax shortfall was established and a tax penalty with late payment interest was levied on the taxpayer.

PORR Kft. should have reclaimed the VAT unlawfully charged to it by the issuer of the invoices, who could have reclaimed the unduly paid VAT from the tax authority. However, in the meantime the suppliers had become insolvent and were under bankruptcy proceedings, so the company could not recover the unlawfully charged VAT. In PORR Kft.’s opinion, if we accept that the tax authority can deny the right of the invoice receiver to deduct the VAT without ordering the invoice issuer to apply a reverse charge procedure and correct the invoices at the same time, the receiver would have to pay the same tax twice.

The solution: special tax reimbursement

According to the Hungarian court involved in the case, before denying the company’s right to deduct taxes related to VAT paid erroneously to the invoice issuers, the tax authority must examine whether the issuers are able to correct the relevant invoices and repay the VAT included therein to the taxpayer.

Based on the decision by the Court of Justice of the European Union, the principle of fiscal neutrality and that of effectiveness is not violated if the tax authority denies reimbursement of unduly paid VAT without reviewing in advance whether the issuer of the invoices is able to repay the unlawfully charged VAT to the user of the services.

However, if the reimbursement of the unduly invoiced value added tax by the supplier to the recipient of the services becomes impossible or excessively difficult, in particular if the supplier is insolvent, those principles dictate that the recipient of the services may address their application for reimbursement to the tax authority directly.

When providing preliminary consulting on value added tax, WTS Klient Hungary helps its clients determine VAT burdens as part of even very complex transactions and situations. Please do not hesitate to contact us if you have any questions on the application of the special tax reimbursement rule, or on any other issues related to changes in VAT.

A Special tax reimbursement in Hungary bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.