International Tax, Accounting and Law Firm in Hungary
Incorrectly invoiced VAT can result in the refusal of the VAT deduction by the Hungarian tax office as well as penalties. Therefore, foreign companies should not automatically use their Hungarian VAT ID in the course of using or providing services with Hungarian business partners.
Internationally active companies are often registered for VAT in Hungary and use their VAT ID number mostly for intra-Community transactions. In the case of intra-Community deliveries of goods, it is largely possible to use a VAT ID number from another EU member state, including Hungary. On the other hand, in the case of providing or using services the unjustified use of the Hungarian VAT ID number can lead to an incorrect VAT return and fines.
The provision of services between, for example, a German and a Hungarian company is generally treated as a cross-border service from a VAT point of view, even if the German company has a Hungarian VAT number. Whether, in the above example, the German company should use its German or Hungarian VAT ID depends on the circumstances of the service where several criteria should be checked. Above all, it must be determined whether the company has a permanent establishment in Hungary, whether the business is between entrepreneurs or whether non-entrepreneurs are affected and where the service is “taxable” for VAT purposes (place of service). The concept of a permanent establishment is generally understood to mean a company infrastructure that is operated by employees and is considered to be permanent.
If a foreign company provides a service in Hungary that is not related to its Hungarian permanent establishment, the foreign company itself is considered to be the service provider.
The next question to consider is whether the transaction is with a VAT registered company or with a private individual. Since most cross-border services are provided in the business sector, and different rules apply to services to private individuals, our following statements relate to the B2B sector.
Having determined that the service is in the B2B area and without the participation of a permanent branch, it is now necessary to check where the place of service is. When determining the place of service, the domicile of the recipient of the service is decisive, i.e. a service provided by a foreign company to a Hungarian customer is usually subject to VAT in Hungary. There are a few exceptions to the above rule, for example in the case of services concerning real estate or passenger transport.
If the place of service is in Hungary, the VAT obligation generally lies with the Hungarian service recipient using the reverse-charge procedure. An example is the rental of a device or a repair service by a French company to a Hungarian company. In both cases, the Hungarian company is considered to be liable for the Hungarian VAT in the reverse charge procedure.
Although it would theoretically be possible for the French company in the example mentioned above to issue its invoice under its Hungarian VAT ID number with Hungarian VAT, this is not permitted by law. Instead, the Hungarian service recipient will be obliged to pay the VAT with the place of performance in Hungary under the reverse-charge mechanism (Article 140 of the VAT Act).
It is to be noted that there are some factual constellations in the provision of services in which the reverse charge procedure is not applicable when the place of service is in Hungary. In such cases, the foreign company as the service provider will issue the invoice under its Hungarian VAT ID with Hungarian VAT. This procedure applies, for example, if a Spanish facility security company provides services in connection with real estate in Hungary belonging to a Dutch group of companies.
If a foreign company based in the EU uses services in Hungary, these services are usually subject to foreign VAT in the reverse charge mechanism due to the recipient location principle. Therefore, if the foreign company presents it’s Hungarian VAT ID, this can lead to the Hungarian supplier of the service erroneously assuming that the place of performance is Hungary and issuing his invoice with Hungarian VAT.
The unjustified use of the Hungarian VAT ID by a foreign company can result in the Hungarian tax office NAV refusing the deduction or refund of the invoiced VAT and imposing a fine on the foreign company.
In order to avoid the above consequences, the invoice should be corrected and the incorrectly paid Hungarian VAT returned to the recipient of the service. The VAT return should retrospectively be adjusted by the party concerned for the tax period in question.
In practice, the correction of invoices and the reimbursement of the unduly collected VAT often proves to be problematic, especially on the part of the Hungarian contractual partners, because the correction of the invoice and the reimbursement of VAT to a foreign customer often involves a complex administrative process and the adjustment of VAT returns. In the event of the insolvency or liquidation of the Hungarian contractual partner, reimbursement becomes practically impossible, even if the invoice can be corrected.
The Hungarian court practice regarding the VAT treatment of cross-border services basically follows the practice of the ECJ. A ruling by the Hungarian Supreme Court, the Kuria, concerned the unjustified use of the Hungarian VAT number by a German company selling vehicle brakes in Hungary. The company delivered the components required for the brakes to Hungary and had the brakes manufactured there by local subcontractors. The brakes were then sold within Hungary under the Hungarian VAT ID of the German company. The German company used the Hungarian VAT number not only to sell the brakes, but also to use the contract manufacturing services of its subcontractors.
The Supreme Court ruled that the Hungarian Tax Office NAV rightly refused to refund the Hungarian VAT to the German company in connection with the contract manufacturing services. According to the judgment, the Hungarian subcontractors should have issued their invoices without Hungarian VAT, because under EU VAT law the place of service was Germany. The place of service in Germany was justified by the fact that the German company did not have a permanent establishment in Hungary for the production of the brakes (judgment Kfv.V.35.023/2019/4).
The court practice confirms that for the correct VAT treatment of cross-border services it is essential to properly assess whether a company's fixed establishment in another Member State is involved. This has been the subject of several rulings by the ECJ, such as the cases ECJ, C-605/12, Welmory; ECJ, 168/84, Berkholz; ECJ, C-260/95, DFDS; ECJ, C-190/95, ARO Lease BV; ECJ, C-73/06, Planzer Luxembourg.
The correct VAT assessment of a cross-border service can be facilitated by using the following checklist tailored to cover typical Hungarian VAT issues:
By correctly answering the above questions, the correct VAT treatment of cross-border services can be determined.
In the context of VAT risk management, the correct process of invoicing and VAT accounting must be carefully considered in advance, especially in the case of services, otherwise there is a risk of comparatively high fines in Hungary. In this process, particular care should be taken when determining whether a permanent establishment exists or is involved.
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