At first glance, international chain transactions may appear straightforward: the goods leave the seller and arrive at the customer. But what happens if the transport route does not follow the logic of the sales chain?

In this article, we present a chain transaction where – due to the place of supply being in Hungary – a third‑country company becomes subject to VAT registration in Hungary, even though the goods do not physically remain in Hungary. As a result, the foreign sale could easily (but sometimes incorrectly) be considered VAT‑exempt export.

Our specific example helps explain when and why VAT registration in case of chain transactions becomes necessary, and how non‑compliance with Hungarian VAT regulations can be avoided.

Why may VAT registration be required in general?

Similarly to EU‑established companies, third‑country (i.e. non‑EU) businesses may also be required to register for VAT in Hungary in certain situations. The most common cases include when the company:

• moves its own goods to Hungary,
• sells goods to Hungarian customers, or
• ships goods from a warehouse rented in Hungary.

However, since the obligation to register for VAT depends on an economic presence in Hungary and the existence of taxable transactions , there are situations where the sale does not take place in Hungary and the goods immediately leave the country, yet Hungarian VAT registration and ongoing VAT compliance obligations still arise. An international chain transaction is one such scenario.

Not only an obligation, but also an opportunity

Although failure to comply may result in tax penalties, late payment interest and other legal consequences, VAT registration is not only essential from a compliance perspective. A VAT‑registered entity is also entitled to deduct input VAT on its purchases, while registration ensures transparency of economic activity at the Hungarian tax authority.

Let us now examine VAT registration in case of a chain transaction through a concrete example.

Chain transaction involving a Hungarian seller and two third‑country partners

A non‑EU (third‑country) company (“Party B”) has products manufactured by its Hungarian business partner (“Party A”). Upon completion of production, the goods are not delivered to the ordering party but are shipped directly to the United States to the final customer (“Party C”), which is a US company, also established in a third country. It is important to note that the transport is organised and ordered by the final customer (“Party C”).

Since the essence of chain transactions is that the goods are transported from the first seller to the final customer in a single shipment, while ownership is transferred multiple times, the above arrangement qualifies as a chain transaction. Three parties (A ➝ B ➝ C) participate in consecutive supplies, while the goods are physically transported only once, directly from A to C.

Which supply qualifies as VAT‑exempt export?

Under Hungarian VAT rules – particularly Sections 26 and 89 of Act CXXVII of 2007 on Value Added Tax – only one supply in a chain transaction can be linked to the transport. This is the so‑called “moving supply”, which may qualify as VAT‑exempt export. The remaining supplies qualify as “non‑moving supplies” and are taxable in the relevant country.

The party organising the transport determines which supply in the chain qualifies as the moving supply. In the present case, the transport is attributable to Party C and to the supply where Party C acts as the purchaser. Accordingly:

• The VAT‑exempt export supply is the B ➝ C transaction, where a third‑country company sells the goods to the UScustomer.

• The A ➝ B supply is performed in Hungary and qualifies as a domestic taxable transaction, since the goods are dispatched from Hungary directly to the United States, but the transport (i.e. the VAT‑exempt export) is not attributable to this supply.

Consequence: obligation to register for VAT in Hungary

In the A ➝ B transaction, Company A must issue a VAT invoice for the sale of goods, applying Hungarian VAT at the standard rate (generally 27%). In other words, reverse charge does not apply, and normal VAT taxation is required. As a result, third‑country Company B makes a domestic taxable acquisition of goods in Hungary. Based on this, VAT registration in Hungary in case of the chain transaction becomes mandatory for Party B. This also means that, in addition to applying for a Hungarian VAT number, the company must appoint a fiscal representative.

Why is a fiscal representative required?

If a non‑EU company is required to register for VAT in Hungary, Hungarian legislation allows this exclusively through fiscal representation. The company must appoint a fiscal representative established in Hungary and holding the appropriate authorisation, who:

• represents the company before the Hungarian tax authority,
• submits the required VAT returns,
• shares joint and several liability for the tax obligations in Hungary, and
• ensures compliance with applicable legislation.

The fiscal representative bears responsibility for the fulfilment of tax obligations and represents the third‑country company in all Hungarian tax matters at the Hungarian tax authority. This regulatory framework serves the security and transparency of the Hungarian tax system and provides safeguards for the tax authority regarding compliance.

The fiscal representative not only provides technical assistance but also legal and tax security for the foreign company. Choosing the right representative is therefore not merely a compliance obligation, but also a strategic business decision.

As demonstrated in this article, in a chain transaction the party organising the transport plays a decisive role in determining which supply qualifies as export and which constitutes a taxable domestic supply. Precise knowledge of logistical details, particularly in international transactions, is therefore critical for effective tax planning. With decades of experience, the tax advisers of WTS Klient Hungary not only assist in identifying the parties involved even in complex chain transactions, but also provide reliable fiscal representation for third‑country companies and support VAT registration in case of chain transactions. Feel free to contact us with confidence.

This article is for general information purposes only and should not be considered as advice.

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More time for exporting goods for which a prepayment has been received

According to the Polish VAT regulation, if an exporter receives a prepayment then in order to apply the 0% VAT rate for the export transaction the goods should be transferred within two months. Under the proposal of the SLIM VAT package, the exporter will have six months to move the goods across the border applying the 0% VAT rate.

Possibility to choose currency translation for VAT purposes

The regulations on currency translations for VAT purposes will now allow the same translation rules as those applicable for income tax. As proposed in the SLIM VAT package, taxpayers will be able to select the option where currency invoices are translated in accordance with the same rules as those applicable for income for income tax purposes. If choosing this option, it should be used for at least 12 months from the first day of the month in which it is applied.

More time for input VAT deduction

Taxpayers in Poland presently have three months to deduct input VAT in current VAT returns. According to the SLIM VAT package they will be entitled to deduct input VAT within four months, i.e. in the month of receipt of an invoice and the three following periods.

Changes concerning correcting invoices

In respect of downwards adjustments correcting invoices, to reduce the output VAT suppliers are obliged to receive confirmation that the purchaser has received the correcting invoice. This obligation will be eliminated as the SLIM VAT draft allows the supplier to reduce output VAT based on the date the correcting invoice is issued, on the condition that the reduction in transaction value is agreed with the purchaser.

The Polish VAT Act will be also complemented by regulations concerning the recognition of upwards adjustments correcting invoices. This issue is currently only based on the business practice and approach of the tax authorities, so these regulations are more mandatory in nature.

Tax free documents in electronic form

The SLIM VAT proposal provides among other things for the electronic form of documents in the tax free system. It improves the procedure of VAT refunds for travellers. Within this solution, the whole process of VAT refunds would be simplified and automated, both for sellers and travellers. However, from the perspective of tax authorities it allows them to counter fraud and irregularities in this area.

Other changes in the SLIM VAT package

The SLIM VAT package also introduces changes in respect of:

• the limit for low-value gifts – this will be increased from a PLN 10 (roughly EUR 2) to PLN 20 (roughly EUR 4) per unit cost (low-value gifts do not need to be included in VAT records);
• the possibility to deduct input tax on accommodation services purchased for resale;
• clarifying the definition of value that determines the obligatory split payment mechanism, i.e. the value of an invoice equal to or higher than PLN 15,000 (roughly EUR 3,375).

Most of the changes are expected to enter into force on 1 January 2021.

The proposal is currently undergoing the intra-cabinet approval process. However, as there is not much time left until its introduction, it is expected that the final scope of changes will be established soon.

If you would like to know more about the introduction of the SLIM VAT measures in Poland, please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland.

A SLIM VAT as a package of new solutions in Polish law bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

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.

A Changes to tax-exempt status of export freight bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

From 1 March the financial administration in the Czech Republic has to apply stricter guideline on applying VAT to services directly related to the export or import of goods. The guideline was issued by the Czech General Financial Directorate in response to a judgment by the Court of Justice of the European Union.

The Czech General Financial Directorate has published Information on the application of VAT to services directly related to the export or import of goods exempt from VAT within the meaning of Sec. 69 of the VAT Act. The Information was issued in the context of the judgment of the Court of Justice of the European Union of 29 June 2017 in case C-288/16 ‘L. Č.’ The Court of Justice ruled on a situation where an exporter of goods commissioned a carrier to make the delivery of goods to a third country. As, however, the carrier did not have sufficient capacity, it assigned the effective performance of that freight transport to the third country to a subcontractor (another carrier).

Significant conditions

The Czech VAT Act has long provided for the VAT exemption of the transport of goods and services directly related to the export or import of goods, with the exception of VAT-exempt services with no right to deduct the tax.

Services directly related to the export or import of goods include those objectively caused by the import or export of goods and those contributing to their actual performance. The Information mentions the condition of the existence of a direct link, such as unloading or customs agent’s services.

However, the direct link between the services and the effectuation of the export or import alone is not sufficient to apply VAT exemption. Another significant condition is the direct provision of the relevant service, either to the importer, exporter, consigner or consignee. This is referred to as the condition of the form of a link.

What are the services directly related to the export or import of goods?

Directly related services shall mean services objectively caused by the effectuation of the import or export of goods and contributing to their actual performance (the condition of the existence of a link) and, at the same time, these services being provided directly to the exporter, importer, consigner or consignee (the condition of the form of a link). In the judgment in question, the subcontractor was not given the right to exemption in the context of transport related to the export of goods since the condition of the form of a link was breached. The subcontractor that carried out the transport ought to have charged VAT.

For the sake of completeness, please note that services related to the import of goods under Sec. 69 (2) of the VAT Act continue to be exempt from tax if the value of this service is included in the basis of the assessment of the tax on the import of goods, without the necessity for a direct link, i.e. contractual relationship between the provider and importer or consignee.

The Czech tax administration shall apply this stricter interpretation of services directly related to the export or import of goods from 1 March 2018. Thus it is recommended reviewing customer-supplier relationships related to the import or export of goods.

If you would like to know more about the VAT regulations in the Czech Republic, please visit the homepage of WTS Alfery, the exclusive representative for the Czech Republic of WTS Global.

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A VAT exemption of services directly related to the export or import of goods in the Czech Republic bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.