In practice, this means that a formally compliant invoice and a genuinely performed transaction are no longer sufficient in themselves to guarantee the safety of the right to deduct VAT. Although the Hungarian tax authority and the courts had already examined in previous years to what extent the taxable person was aware of potential tax evasion connected to certain transactions, and whether such evasion could reasonably have been recognised, Opinion No. 1/2025. KK represents a declared shift in emphasis in both administrative and judicial approaches in Hungary.

A paradigm shift in the assessment of the right to deduct VAT?

One of the key messages of the new Curia opinion is that the refusal of the right to deduct VAT is not merely an “objective” issue but essentially depends on the qualification of the taxpayer’s conduct and state of awareness. This reflects the transposition of European Court of Justice case law from the past decade into Hungarian judicial practice, and a definitive departure from the tax authority’s earlier tendency to objectify the liability of invoice recipients, particularly in subcontractor chains. At the same time – alongside the direction and scope of the tax authority’s burden of proof – it places business partner due diligence and compliance processes of companies in Hungary into a new perspective.

Cases of refusal of the right to deduct VAT

The Curia identifies four clearly distinguishable categories, each requiring different evidentiary standards and tax authority approaches:

1. Intentional active conduct – non-existent economic transaction

The classical case remains where no actual performance underlies the invoice. If the tax authority proves that the economic event did not occur, this alone justifies the refusal of the right to deduct VAT, and further examination of the invoice recipient’s state of awareness is not relevant in this category.

2. Intentional active conduct – abuse of rights

A major element of the new opinion is the structured incorporation of the previously known but less systematised “Halifax test” into Hungarian judicial practice.

Accordingly, the right to deduct VAT may also be refused where:

• the transaction formally complies with applicable legislation,
• but results in a tax advantage contrary to the purpose of VAT rules,
• and objective circumstances indicate that the primary purpose of the transaction was to obtain that tax advantage.

The examination of this possibility is particularly important in the case of:

• complex structures,
• chain transactions,
• intermediary arrangements, or
• economically questionable transactions

In this category, the invoice recipient may face a tax penalty amounting to 200% of the tax difference, and in extreme cases even criminal proceedings.

In practice, however, the greatest risk for companies does not stem from overtly fraudulent schemes, but from the two categories of passive participation.

3. Knowing passive participation

Knowing passive participation refers to situations where the taxpayer does not itself commit tax evasion but is aware that another participant in the transaction or supply chain engages in abusive conduct and still takes part in the transaction.

In such cases, the Hungarian tax authority must prove:

• the existence of tax evasion, and
• that the taxpayer had knowledge of it.

4. Negligent passive participation: the new “key focus area”

A genuine novelty of Opinion No. 1/2025. KK is the recognition of negligent passive participation as a separate category.

In practice, this means that the right to deduct VAT may also be refused if the taxpayer did not actually know about the fraud but could have recognised it with the level of due care reasonably expected.

In cases of passive participation:

• criminal liability of the invoice recipient does not arise,
• however, a “standard” tax penalty (up to 50% of the tax difference) may apply.

Payment of VAT does not provide protection

It is important to emphasise that, according to the Curia in Hungary, the existence of tax evasion does not depend exclusively on a loss of tax revenue to the state budget. In other words, the mere fact that VAT relating to the transaction has been paid into the state treasury by someone does not automatically render the VAT deduction lawful on the recipient’s side.

This represents a significant shift in approach, as taxpayers previously often argued that “the VAT was ultimately paid,” and therefore no actual budgetary loss occurred. Under the new approach, however, the focus is no longer solely on the outcome, but on the legality of the transaction and the conduct of the parties involved.

What can the Hungarian tax authority expect from a “reasonably prudent” taxpayer?

With Opinion No. 1/2025. KK, the Curia has effectively confirmed in writing the Hungarian tax authority’s evolving audit practice, which increasingly focuses on:

• the circumstances of selecting business partners,
• the realism of pricing,
• the economic rationality of the transaction,the actual operation of business partners,
• the depth of partner due diligence performed by the taxpayer.

Currently, there is no detailed public guidance of the Hungarian tax authority specifying exactly which due diligence steps are sufficient. In practice, expectations typically emerge retrospectively during audits, in audit reports or resolutions. However, based on audit experience, the following can be expected:

• verification of the partner’s VAT number and company data,
• examination of representation rights,
• verification of actual business activity,review of references, online presence, registered seat and infrastructure,documented assessment of unusual pricing or structures,
• evidentiary documentation of the circumstances of performance.

Particularly in higher-risk industries or in high-value transactions, it may become a key issue whether the taxpayer can demonstrate that it has taken all reasonably expected steps, potentially exceeding standard due diligence measures.

Typical risk indicators

Enhanced partner due diligence is required in particular in the following circumstances:

• unusually low prices,
• relatively newly established or undercapitalised partners,
• difficult-to-reach management,unrealistic performance conditions,cash-based structures,
• lack of economic rationale.

What should companies do now?

Based on Opinion No. 1/2025. KK, it is clear that traditional “paper-based compliance” is no longer sufficient. The tax authority increasingly examines companies’ internal control systems, decision-making processes and partner due diligence mechanisms.

Therefore, it is particularly advisable for companies in Hungary to:

• review partner due diligence processes,
• establish internal checklists and documented procedures,
• conduct prior tax expert reviews of high-risk transactions,
• document business decisions and control steps,
• provide targeted training for finance and procurement staff.

The new Curia opinion confirms that the loss of the right to deduct VAT not only threatens businesses participating in intentional fraud, but also those unable to credibly demonstrate that they acted with due care. It is therefore clear that VAT risk is no longer merely an invoicing or documentation issue, but a complex compliance and risk management matter. If your company requires an experienced tax professional to assess VAT risks in Hungary, feel free to contact us with confidence.

A Refusal of right to deduct VAT 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.

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.

It took 6 years to realise they were doing things wrongly

On 21 March 2018 the Court of Justice of the European Union published its judgment in case no. C‑533/16, namely the case initiated by an application for a preliminary ruling submitted by the Najvyšší súd Slovenskej republiky (Supreme Court of the Slovak Republic) on 20 October 2016. In this case, companies related to the Hella Group (Hella companies) sold casting moulds for the manufacture of lights for Volkswagen AG (Germany) passenger cars, with the place of performance being Slovakia.

The Hella companies did not include VAT on their invoices because they considered the transactions not as supplies of goods but as “financial compensation”, which is exempt from VAT. However, in 2010 they realised this was incorrect, and issued invoices charging the VAT due by Volkswagen AG, and filed corrective VAT returns for the period between 2004 and 2010 and paid the unpaid tax to the Slovak state.

Was the right for a refund of VAT statute-barred?

Volkswagen submitted an application to the Slovak tax authority for a refund of the VAT charged on the supplied goods. The Slovak tax authority partly upheld Volkswagen’s application and ordered a VAT refund for the supply of goods between 2007 and 2010. However, it dismissed the refund of VAT for the supplies between 2004 and 2006 with reference to the fact that the right for a refund of VAT arose on the date of delivery of the goods, namely, at the same time as the tax liability.

Consequently, the right for a refund of VAT for the period from 2004 to 2006 had expired by the time the application for a refund was submitted (these periods are statute-barred). In Slovakia the case was forwarded to the Supreme Court, which turned to the Court of Justice of the European Union for a legal interpretation.

Member state legislation contradicting European Union law

According to the ruling of the Court, any Member State legislation under which in circumstances such as those at issue in the main proceedings in which the benefit of the right for a refund of VAT is denied on the grounds that the limitation period provided for the exercise of that right began to run from the date of supply of the goods and expired before the application for a refund was submitted is contradictory to European Union law.

The Court declared that a refund of VAT may be requested if all substantive and formal conditions giving rise to a right to deduct VAT are met, namely, it is not enough that the transaction was performed, the invoice is also necessary for the VAT refund.

A major modification of the rules on deducting input VAT entered into force in Hungary on 1 January 2016, which must be adopted in practice by taxpayers from 2018.

If you have any questions about VAT deductions or the right for a refund of VAT, do not hesitate to contact the VAT consultants of WTS Klient Hungary.

A Right to deduct VAT and right for a refund of VAT bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.

In previous articles we reported on important judgments by the Court of Justice of the European Union that may influence Hungarian tax authority practices as well. Such issues included the rulings on leasing VAT or reverse charging. In recent months the Court of Justice of the European Union has again reached decisions in a number of important cases, which are worth taking a closer look at. The judgment made on 21 February 2018, and reviewed in this article, details which transactions VAT exemption must be applied for in the case of chain transactions, and whether incorrectly charged input VAT can be deducted.

Managing chain transactions

In case no. C‑628/16, which provides a new reference for tax law rulings on chain transactions, BP Marketing GmbH a German taxpayer, sold petroleum products to BIDI Ltd., a company registered for VAT in Austria. After being paid in advance, BP Marketing provided BIDI with collection numbers and collection permits for the petroleum products in question. BIDI undertook towards BP Marketing that it would deal with the transport of those products fromGermany to Austria.

BIDI, however, resold the goods to Kreuzmayr GmbH (also an Austrian taxpayer) without informing BP Marketing, agreeing that Kreuzmayr would arrange for the transport of the petroleum products from Germany to Austria, which Kreuzmayr did. BP Marketing regarded its supplies to BIDI to be exempt intra-Community supplies, while BIDI invoiced the supplies to Kreuzmayr with Austrian VAT. Kreuzmayr then used the goods for its taxed transactions and deducted the previously charged input VAT.

However, during a tax audit it emerged that BIDI had neither declared nor paid the Austrian VAT, which Kreuzmayr was not aware of. BIDI justified this by claiming that the supplies to Kreuzmayr had been invoiced in Germany, therefore they were tax-exempt and as such were not taxable in Austria. Following the audit, BIDI issued amended invoices for Kreuzmayr without VAT, but did not compensate Kreuzmayr for the VAT previously paid, as it became insolvent.

VAT exemption and tax deduction during chain transactions

The case passed through several Austrian courts until finally the Austrian Federal Finance Court turned to the Court of Justice of the European Union. Their question to the Court, in brief, was which of the two transactions in the given case (i.e. the one between BP Marketing and BIDI, or the one between BIDI and Kreuzmayr) was VAT exempt, and whether the VAT incorrectly deducted by Kreuzmayr could in fact be deducted considering the principles of tax exemption and the protection of legitimate expectations.

In the judgment of the court in this case, exemption can be applied to the second transaction because, according to the reasoning, the second transfer of the owner’s right over the products took place before the intra-Community transport occurs, in other words BIDI already held the owner’s rights over the products before they were transported from Germany to Austria.

With regard to the other question, the Court stated that where the second supply in a chain of two successive supplies involving a single intra-Community transport is an intra-Community supply, the principle of the protection of legitimate expectations must be interpreted as meaning that the person ultimately acquiring the goods, who wrongly claimed a right to deduct input VAT, may not deduct, as input VAT, the VAT paid to the supplier solely on the basis of the invoices provided by the intermediary operator which incorrectly classified its supply. It is important to note, though, that in the Court’s opinion Kreuzmayr may request the repayment from BIDI of the tax paid unduly to BIDI.

This legal case reaffirms how you must pay attention to detail in case of chain transactions: you always need to be aware if you are part of a chain transaction, and you must know the transporter of the goods as well as the tax numbers provided by each participant during the transaction. Only in possession of this information can you determine whether the VAT was handled properly.

WTS Klient Hungary will gladly assist you in identifying participants of even very complex chain transactions during a preliminary VAT consulting session. We can also help you negotiate with logistics companies and assess the applicable tax burden in advance in consultation with the buyer. Feel free to contact our tax consultants, we’re here to help!

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Another interesting case at the Court of Justice of the European Union – judgement on leasing VAT

Judgement of the Court of Justice of the European Union – unlawful NAV tax penalty

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A Tax law judgment on chain transactions based on new case ruling by Court of Justice of European Union bejegyzés először WTS Klient Hungary | tax | accounting | payroll | advisory | HR services | digital solutions | state aid-én jelent meg.