Who needs fiscal representation services in Hungary?

Navigating the business world is not always an easy task, especially when engaging in cross-border activities. In this complex environment, the fiscal representative plays a key role.

As we have previously written in our series of articles on fiscal representation services, to mandate a fiscal representative is mandatory for companies established outside the European Union (e.g. China, United States of America, United Kingdom, Switzerland, etc.) that wish to perform business activity in Hungary, but do not have a fixed establishment in the country. More precisely, companies established outside the European Union, and which do not have a location in any Member State of the European Union should mandate a fiscal representative in Hungary. According to the Hungarian VAT Act, these companies must appoint a fiscal representative in order to be able to fulfill their tax obligations in Hungary. It is important that the fiscal representative should be reported to the Hungarian tax authority and the fiscal representative must be also indicated on the issued invoice.

Thus, fiscal representation services are is especially important:

• for third country companies that sell products or services in Hungary and
• in the case of businesses that remotely provide electronic services to Hungarian individuals or companies.

For companies within the European Union, using fiscal representation services is not mandatory, but they can choose this option.

Why should a company outside the EU mandate a fiscal representative?

Since the convention on legal assistance between Member States is not applicable outside the European Union, companies established outside the EU are required to use fiscal representation services, i. e. appoint a fiscal representative. The fiscal representative shares joint and several liability for the activities and tax obligations of the businesses they represent in Hungary and is also responsible for any potential consequences.

The company providing fiscal representation services acts as the client’s permanent representative when fulfilling all tax-related obligations. This means that as long as the fiscal representation services exist, only the fiscal representative can act on behalf of the foreign company. The foreign enterprise may not act either personally or through another representative.

Thus, the fiscal representation service is a relationship of trust and responsibility between the business and the service provider.

Requirements for the fiscal representative

Fiscal representation services can only be provided by companies that operate as a limited liability company (LLC) or a joint-stock company (JSC) in Hungary and are listed in the Hungarian tax authority’s database as free of public debt.

In addition, the spring-summer 2023 tax package introduced in Hungary a tightening in the area of fiscal representation services, according to which companies must have a registered capital of HUF 150 million instead of HUF 50 million, or an equivalent amount of bank guarantee in the name of the fiscal representative only, in order to qualify as a fiscal representative. The fiscal representative must prove the existence of these conditions to the Hungarian tax authority at the time of the declaration of acceptance of the representation and annually thereafter during the continuous exercise of the activity.

The new conditions had to be met by 1 January 2025 by taxpayers who were already registered as fiscal representatives at the Hungarian tax authority when the amendments entered into force.

What are the tasks of a fiscal representative?

• participating in the Hungarian tax registration process
• opening a bank account for the represented company (since the Hungarian tax authority transfers VAT refunds to foreign businesses exclusively to this account)
• reporting the represented foreign company to the Hungarian tax authority’s key taxpayers directorate (in Hungarian: NAV Kiemelt Adózók Adóigazgatósága)
• managing tax returns
• maintaining communication with the authorities
• providing advice on various aspects of taxation

The tax consulting team at WTS Klient Hungary has considerable expertise and many years of experience in the field of fiscal representation. We can also assist you with acting as a permanent representative before the Hungarian tax authority, preparing VAT returns, supporting compliance with special invoicing regulations in Hungary or performing VAT analysis and consulting on international and domestic transactions. Please contact our experts.

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Legislative environment and conditions

The term fixed establishment is most often used in international terminology, but Hungarian law uses this as another possible form of economic establishment alongside registered office. The question of what exactly this concept means tends to arise when a foreign entity carries out some assembly work or provides some service in Hungary, and fulfils the order to a certain extent by using its own employees and assets.

Based on the legal definitions and professional guidelines, we can say that a fixed establishment is a physically demarcated place for the pursuit of an economic activity over a lengthy period, where the conditions for the independent pursuit of that activity are available. In practical terms, this means the availability of human resources (labour) and technical resources (equipment and technical conditions). The term for a lengthy period is perhaps even more problematic than the other two factors. Professional guidelines issued by the tax authority suggest that work of six months or more has a good chance of creating a fixed establishment for the foreign entity, provided the other two conditions already mentioned are met.

Why is the concept of fixed establishment important?

This subject is important because legislation “attaches legal impacts” to the existence of a fixed establishment. The place of supply of a transaction, generally a service, and its tax liability are affected by the existence of a fixed establishment. If a foreign service provider has a fixed establishment, they cannot avoid charging VAT on an invoice issued to a Hungarian customer. Otherwise, however, the foreign company can use the tax number of its country of establishment, and does not need to apply for a Hungarian tax number and charge Hungarian VAT. In this case, the Hungarian taxperson using the service will pay the tax under the reverse charge rules.  

As the entity ordering the service, we need to check whether we have a fixed establishment near our head office that is affected by use of the service. If so, the place of supply for our ordered service will typically be in that country, and it is here that we may be liable to declare and pay tax, rather than in the country of establishment.

Background to court case in question

This is the fifth case in the last five or six years that has questioned the criteria for a fixed establishment. And it is not the first in which the question concerns whether a company can be considered a fixed establishment of its parent company or of another group company. Since the Dong Yang judgment (C-547/18) in 2020, which held that a similar consequence cannot be ruled out, several tax authorities began looking for fixed establishments in group structures. In the Adient case (C-533/22), which is the focus of our article, the Romanian tax authority asked whether a Romanian company could be a fixed establishment of a corporate group in Germany that it had a contractual relationship with. Here, the place of supply of the service in question, and therefore the place of taxation, would not be Germany, but Romania.

Facts

Adient Ltd & Co. KG (Adient DE) is part of a group of companies supplying the automotive industry. In June 2016, Adient DE concluded a contract with a Romanian company in the group for a complex service producing and assembling upholstery components. The Romanian company has two sites in Romania, where the corresponding products are manufactured for Adient DE. Adient DE purchases the raw material for the transaction, which it sends to the Romanian group company for processing. In connection with this work in Romania, the German company uses the Romanian VAT number it previously requested, both for Romanian domestic and intra-Community purchases of goods and for the supply of goods manufactured by the Romanian company. The Romanian company argued that the place of supply for its services to Adient DE was the registered office of the recipient (Germany), and therefore it did not charge and pay Romanian tax.

Views of the parties

During a tax audit by the Romanian tax authority, it was established that Adient DE had two Romanian establishments in Romania through the Romanian group company, and thus had human and technical resources, so it fulfilled the criteria for a fixed establishment in Romania. Consequently, the services provided by the Romanian company to Adient DE are taxable in Romania. 

The German company, on the other hand, believes that the requirements for a fixed establishment in Romania are not met. Adient DE does not have human resources in Romania, since the Romanian company employs the staff and the Romanian company decides on the equipment needed for the processing activity too.

Conclusion of the European Court of Justice 

In its judgment, the ECJ underlined that an autonomous company belonging to the group but in another Member State cannot be considered a fixed establishment within the meaning of the VAT Directive solely because of its links under company law. Even a contractual relationship for the supply of a complex service cannot, as a general rule, result in the service provider supplying a taxable service to the recipient’s fixed establishment that is created as a result. The place of supply of the services is independent of the physical location of the manufacturing or assembly transaction, and of whether the recipient of the service supplies goods or services as its own “output” transaction.

The court ruled that a fixed establishment only exists if it replaces a head office in another Member State. On this basis, a contract with a service provider can only create a fixed establishment if it doesn’t relate exclusively to the supply of services for the purposes of the recipient’s activities. In other words, it must be typically aimed at providing the necessary human or technical resources to enable the recipient to provide services or make sales at the site (i.e. at the fixed establishment) that are similar to those from the head office.

If you need support regarding the tax treatment of complex cross-border service arrangements, assessing the risk of fixed establishments or, where appropriate, the entire administration related to that, you can rely on our colleagues. The tax advisory team at WTS Klient Hungary has significant expertise in the taxation of various international transactions. Feel free to contact us.

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Optional e-invoicing in Poland

A new type of invoicing has been in operation in Poland on a voluntary basis since 1 January 2022, namely electronic invoices issued using the National e-Invoice System (KSeF). E-invoices are generated in xml-format by the local financial and accounting software in accordance with the logical structure published by the Polish Ministry of Finance, and then are sent to KSeF where the purchaser may download them after a verification process in which a unique number is assigned to each e-invoice. When implementing voluntary e-invoicing in Poland, the authorities announced that, as a second step, e-invoicing will become obligatory.

The first draft law on mandatory e-invoicing in Poland

On 1 December 2022 saw the Government Legislation Centre publish a bill to amend the VAT Act and certain other legislation, according to which, as of the beginning of 2024, e-invoicing in Poland will be obligatory. As compared to the current legislation, the solution proposed in the bill is wider in terms of entities obliged to use it and the subject matter covered. The main assumption behind implementing mandatory e-invoicing is to provide tax authorities with insight into all issued invoices and thus facilitate the detection of invoice irregularities. The currently used forms of invoice (paper or electronic, e.g. PDF files) will have marginal importance after the introduction of obligatory e-invoices.

Importantly, in accordance with the bill, electronic invoices will have to be obligatorily used by taxable persons based in Poland or having a fixed establishment in Poland. Entities not covered by the obligatory electronic invoicing system will be able to use e-invoices optionally or to continue issuing invoices based on the current Polish VAT Act (outside KSeF). These entities will also receive invoices from suppliers as agreed with them (including outside the KSeF system).

The e-invoicing requirement will cover the activities that currently require an invoice in accordance with the VAT Act. Therefore, as a rule, entities subject to the e-invoicing requirement will only issue invoices via KSeF. Any invoice issued by such entities outside KSeF will not be considered an invoice according to Polish VAT regulations. Only in the case of KSeF malfunction (after the failure is removed, there are seven days for sending invoices to KSeF) or a crisis (emergency related to geopolitical situation) can invoices be issued outside KSeF. A failure to comply with e-invoicing regulations will trigger severe penalties.

Latest updates and postponement of deadlines

After an intensive public consultation, on 22 February 2023 the Government Legislation Centre published a new draft of the bill. It provides a framework for implementation of the mandatory e-invoicing in Poland. The most important provisions that have changed over the previous version of the proposal:

• Commencement date of mandatory e-invoicing in Poland has been deferred from 1 January 2024 to 1 July 2024.

• New deadline for entities with VAT exemptions to use obligatory e-invoices will be 1 January 2025.

• New deadline until invoices issued via cash registers and of cash receipts will be treated as invoices will also be 1 January 2025.

• Commencement of penalties for issuance of e-invoices outside KSeF in breach of obligation, for issuance of e-invoices not in accordance with required template, and for failure to timely submit invoices issued during KSeF malfunction or in off-line mode will also be postponed to 1 January 2025.

• KSeF e-invoices will not be obligatory in the case of business-to-consumer transactions and motorway toll, bus, train etc. tickets.

• As of 1 July 2024 any invoice changes can only be made by issuing correcting invoices.

• The use of off-line mode in invoice issuance has been extended to include also unavailability of KSeF for reasons on the part of the taxable person – e-invoices to be issued offline according to required template and submitted to KSeF on next business day.

• More precise regulations on the use of exchange rates to translate the taxable amount and VAT on e-invoices – you can use the published midrate applicable on the last business day prior to the issuance date on the invoice. This rate can be used on condition the e-invoice is issued via KSeF not later than next day after it is issued through the accounting software.

• No changes to regulations on invoice issuance before chargeability of tax – e-invoices can still be issued even 60 days prior to the chargeable date. 

Fixed establishments 

Applying the mandatory e-invoicing in Poland also to persons having fixed establishments in the country for VAT purposes exceeds the range of entities first specified in the Council Implementing Decision, which allowed Poland to impose the e-invoicing obligation only on entities based in Poland. But according to unofficial information from the Polish Ministry of Finance, this obligation was later confirmed with the European Commission after the issue was raised during public consultations. It will be introduced together with measures supporting taxable persons in correctly determining if they have fixed establishments in Poland (plans are to publish official tax guidance or a public tax ruling).

If you would like to know more about e-invoicing in Poland, or need any tax advice regarding the country please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland and contact their experts.

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• In which country do you need to pay taxes on the revenue generated from using real estate located abroad?
• What tax obligations arise?
• Is a permanent establishment created for the lessor company in the country where the real estate is located?

We will answer these questions in our article, and highlight what a foreign company should pay attention to if it plans on renting out real estate located in Hungary.

VAT fixed establishment when renting out real estate

Renting out real estate in a country other than where the company carries out business activities, or using such property, does not necessarily create a VAT fixed establishment for the lessor.

In one of our earlier articles we explained the definition of a fixed establishment in detail based on the Hungarian Act on VAT and the implementing regulation of the VAT Directive. Pursuant to the directive, a fixed establishment is created for a company using real estate in the state the property is located if it has a geographically defined place at a fixed location where it carries out the business activity for a prolonged period, and where all the material and personnel conditions required to conduct the business activity independently are actually available on site. According to the implementing regulation of the VAT Directive, a fixed establishment is created if the service provider possesses a suitable organisation with a sufficient degree of permanence in terms of human and material resources to enable the provision of the services in the state where the real estate is located.

Based on the two rules, it is clear that in addition to the fact the rented out property is located in Hungary, the presence of the human resources and material conditions required for supplying services in the country of the real estate must be investigated further.

One important aspect is to what extent is renting out real estate a determining part of the lessor’s business activity, and does it in fact have the organisational framework enabling the supply of services connected to use of the real estate. If a detailed investigation finds that the above conditions are not met, no fixed establishment is created for the lessor foreign company in Hungary.

However, given that renting out real estate qualifies as a service related to real estate according to the implementing regulation of the VAT Directive, where the place of performance is the country the real estate is located in, then as a general rule, the value added tax incurred must also be paid in the country of the real estate. So for lack of a fixed establishment, the foreign lessor is only exempted from the obligation to register for VAT and pay VAT in Hungary if the lessee is a Hungarian taxpayer to whom the foreign company can issue an invoice subject to the rules on reverse charging.

If, however, the foreign company sets up a permanent establishment in Hungary as a result of renting out real estate, the foreign taxpayer must register and fulfil its tax payment liability in Hungary under the general rules. This entails substantial additional administration.

What about corporate tax?

While – from a VAT perspective – more careful consideration is required to determine whether renting out real estate gives rise to a fixed establishment, for corporate tax purposes the situation for taxpayers is relatively easier.

When assessing the creation of a corporate tax permanent establishment, both the provisions of the Act on Corporate Tax and the convention on avoiding double taxation concluded with the country of the foreign taxpayer must be examined.

Under the conventions on avoiding double taxation, revenue from real estate is generally taxable in the country where the real estate is located. Pursuant to Hungarian legislation, using real estate, transferring or selling rights and concessions in relation to real estate in exchange for compensation, as well as the in-kind contribution and sale of real estate create a permanent establishment.

From the combined interpretation of the above legislation, if a leased property is situated in Hungary, a permanent establishment is created for corporate tax purposes for the foreign lessor in Hungary, irrespective of the duration of the rental. The corporate tax must be paid in compliance with the Hungarian legislation, for which the taxpayer must register in Hungary.

Local business tax in brief

Given that used (rented out or leased) property, among other things, is considered a permanent establishment under the Act on Local Taxes, a permanent establishment is created for the foreign taxpayer in Hungary upon renting out real estate, so it is obligated to pay local business tax.

As revealed by our article, it is highly important to thoroughly investigate the renting activity if a company decides on renting out real estate located in a country other than where it conducts its business activities. However, if the renting activity is incorrectly classified, the given real estate is not considered a permanent establishment and the foreign taxpayer fails to fulfil the related registration and tax payment obligation, the tax authority can subsequently impose severe penalties on the entity. WTS Klient Hungary has decades of experience in international taxation and planning the tax arrangements of foreign companies, so feel free to contact us if you need tax advice and/or tax planning in connection with utilising a foreign company’s real estate situated in Hungary.

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