Monday, 4 January 2016

VALUE ADDED TAX IN HUNGARY

Value added tax for entities is a pure transitory item. Nevertheless, non-deductible pre-tax, falsely assessed VAT and penalties deriving from administrative mistakes can heavily burden the entities’ budget, especially in a country with the highest VAT rates within the European Union. In the following guideline we will introduce the main principles of the Value Added Tax in Hungary.

Although the VAT legislation is generally harmonized in all the EU Member States, it is advisable to have a general overview of the VAT system of each country of business for the entities engaged in international transactions. Beneath we provide you with a summary of the Hungarian VAT system as part one of our articles dealing with Hungarian value added taxation (in the second article you may get further information about the Hungarian VAT registration and VAT compliance rules).













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Taxable persons
In general, taxable transactions carried out by a taxable person in Hungary are subject to VAT. taxable person within the meaning of the Hungarian Act on VAT covers individuals and entities (with or without legal personality) that carry on business activities in their own name, regularly or on a professional basis irrespective of the activity’s place, purpose and result. Also, non-resident persons (persons without a seat or fixed establishment in Hungary) may be subject to VAT if they carry on taxable transactions in Hungary.

Associated persons/enterprises having their fixed establishment or habitual residence in Hungary are allowed to form a VAT group. By joining the VAT group, the independent taxpayer status of each individual member ceases and the group will become a single taxpayer from a VAT perspective. Transactions among the members qualify as out-of-scope items from a VAT perspective, while members act under one single tax number in their external business relations. This, however, will not affect other taxes. A company may join only one VAT group at the same time and the VAT Act does not require all associated enterprises to become members of such a group. Therefore, associated enterprises may be jointly and severally liable for the VAT of the group.

Private persons may be subject to VAT if goods from countries outside the European Community are imported into Hungary (i.e. import VAT) or if passenger cars are acquired in the European Union (intra-Community acquisition). Private persons may also be subject to VAT upon the supply of certain real estate on a regular basis.

Taxable transactions

Supply of goods and services
The concept of supply of goods implies a transfer of the (economic) ownership of tangible property. Performing construction work is also regarded as a supply of goods. Supply of services means any transaction that does not constitute a supply of goods. Services may consist in a positive action (e.g. the rendering of services) or tolerating actions of other persons (e.g. the leasing of immovable property, use of rights and patents). A supply is also the withdrawal of goods or the use of goods by a taxable person for his private use or for that of his staff if the goods form a part of the business of the taxable person. Irrespective of the above, donations for public purpose, and provision of samples or small value items (below a market value of HUF 5,000 (approx. EUR 16 including VAT) for business purposes do not constitute a supply for VAT purposes.

Withdrawal (self-supply)
Self-supply within the meaning of the Act on VAT comprises (i) the use of business assets for private purposes or for the use of the staff or their disposal free of charge; (ii) the supply of services carried out free of charge by the taxable person for his private use, or for that of his staff, or to third parties for non-entrepreneurial purposes (e.g. donation). Self-supply is taxable only if the acquisition of the goods that are the object of self-supply entitled to an input VAT deduction.

Import
The transfer of goods from a country outside the Community to Hungary is subject to import VAT. The Hungarian system generally does not allow for the postponed assessment of import VAT; however, in certain cases by way of an indirect customs representative self-assessment of import VAT may be applicable.

Intra-Community acquisitions
An intra-Community acquisition is the acquisition of goods transported from an EU Member State to Hungary, provided that both the supplier and the recipient are taxable persons for VAT purposes. The supplier carries on a tax-exempt intra-Community supply, while the recipient effects an intra-Community acquisition upon which he has to pay and deduct the VAT under the general conditions. A transfer of goods forming part of business assets by a taxable person from an EU Member State to Hungary must also be treated as intra-Community acquisition of goods for consideration (deemed supply of goods), unless further conditions are met.

Place of supply

Supply of goods
The supply of goods and services will only be taxed under the Hungarian Act on VAT if the place of supply is considered to be Hungary. According to the general rule, the place of supply of goods is deemed to be the place where the goods are located at the time the right to dispose of them as an owner is transferred to the recipient. If the goods are dispatched or transported by the supplier, by the recipient or by a third person (carrier), the place of supply is the place where the goods are located at the time when dispatch or transport of the goods to the recipient begins. Special rules are – inter alia – applicable for distance selling where goods are supplied to private customers and are dispatched by the supplier from one EU Member State to another EU Member State. In the case of distance selling, the place of supply is not the place of departure of the goods, but the place where the goods are located at the end of transport. Intra-Community acquisitions are, in general, taxable where the dispatch or transport of the goods ends.

Supply of services
The Hungarian provisions on the place of supply of services are in line with the periodic amendments of the EU VAT Directive (2006/112/EC). Therefore, the place of supply of services must be determined depending on the taxable status of the recipient (B2B or B2C transactions).

B2B transactions
In general, the supply of services to taxable persons is taxable at the place where the recipient is established (has a seat or a fixed establishment to which the service is supplied; in the absence of such a place, domicile or habitual residence). If the taxpayer has several permanent establishments, the place of supply will be the place of permanent establishment mainly concerned or the seat. However, there are several particular regulations for determining the place of supply of services, as well (see the table below).

B2C transactions
If the services are supplied to non-taxable persons, they are generally taxable at the place where the supplier has established his business or has its fixed establishment. However, there are again some exceptions (as indicated in the table below).

From 2015 in case of telecommunications, broadcasting and electronic services the place of B2C supply is where the customer is established (resides). The MOSS (Mini One Stop Shop) System has been introduced in Hungary accordingly.

The following table provides a brief overview of how the place of supply is determined in 2016.




Taxable amount
In general, the taxable amount is determined by the consideration received for the supply of goods and services, excluding the VAT itself. The taxable amount may be adjusted if the consideration significantly differs from the market price and the supplier or the customer is not entitled to full deduction of input VAT. No VAT adjustment is granted if losses are caused by the insolvency of the customer.

Tax rates
In Hungary the following VAT rates are applicable:


  
Exemptions
The numerous exemptions from VAT can be classified in two categories depending on whether they preclude the deduction of input VAT or not. The most important exemptions are listed below.

VAT exemptions including the right to deduct input VAT:
  • export of goods (goods are transported outside the Community);
  • intra-Community supply of goods;
  • cross-border transport of export goods;
  • cross-border transport of passengers regardless of the means of transportation (either on the public highways, by vessels, or aircraft); and
  • work on and processing of goods to be exported outside the Community.

VAT exemptions, precluding the deduction of input VAT, include:
  • banking and financial transactions as well as insurance transactions;
  • the supply of buildings older than two years and land plots other than construction sites;
  • leasing or letting of immovable property or parts thereof;
  • certain educational services;
  • services supplied by dentists, doctors or paramedical professions;
  • cooperating partnerships; and
  • a special exemption for small businesses.
As from 2011 in accordance with the EU VAT Directive (2006/112/EC) a further type of tax exemption has been introduced with regard to the activity of the cooperating partnership. The services provided by the cooperating partnership to its members (the members can only be non-taxable persons, or a person – recipient of the service – acting as a non-taxable person) are tax exempt without the right to deduct the VAT. Additionally, detailed criteria have to be fulfilled in order to be able to apply this tax exemption rule.

Since 2013, under special conditions the sale of an existing business division may fall outside the scope of VAT (transfer of business in a going concern, TOGC). These conditions are:
  • the division has been acquired with the purpose of its further operation;
  • the alienator is regarded as a taxable person in Hungary and assumes the liability for the rights and obligations deriving from the business division as legal successor;
  • the business division should not carry out activities, in respect of which VAT is not deductible (even a minor portion leads to the application for the outside-the- scope treatment being refused).

Input VAT deduction
A taxable person is entitled to deduct the VAT paid on goods and services, importations and intra-Community acquisitions if the following conditions are fulfilled:
  • the supply of goods or services is carried out in Hungary;
  • by another taxable person;
  • for the business purposes of the recipient;
  • a properly issued invoice is available; and
  • no VAT exemption precluding VAT deduction is applicable.
Finally, the amount of the VAT liability in a taxable period consists of the VAT due on taxable transactions carried out by the taxable person less input VAT paid in the same period. The assessed VAT must be paid to the tax authorities, while the aggregated deductible VAT may be (1) carried forward to future tax periods or (2) be refunded by the tax authorities. The right to deduct input VAT is open during the statutory limitation period, however, as from 2016 a taxable person may only account for the VAT deduction in the actual VAT assessment period for 2 years. Over this limit, VAT deduction right may only be exercised by a self-revision of the original period when VAT become deductible.

The refund of VAT may be claimed irrespective to the financial settlement status of the underlying invoices (result of Case C-274/10). The claim for VAT refund by a reliable taxpayer is possible within 45 days. The VAT refund term is 75 or 45 days for other taxpayers. Shorter refund term is still available provided that all the invoiced amounts are financially fully settled. Failing the payment condition but reclaiming the shorter term may be penalized by 5% default penalty but at least HUF 500,000 (approx. EUR 1,700).

VAT liability
In general, a taxable person carrying out a taxable transaction is liable to pay the invoiced VAT to the tax authorities. Exceptions apply – inter alia – for supply of goods with installation/assembly and for the supply of services carried out by a foreign taxable person (no seat or fixed establishment in Hungary) to another taxable person. In this case, the VAT liability shifts from the supplier to the recipient (reverse-charge mechanism).

Nevertheless, as from 2013 what is known as cash accounting scheme has been introduced that may be opted by the taxable person provided that the below conditions are fully met. This means that VAT becomes payable at the supplier only when the respective payment was effected by the customer. This also means that the recipient of the goods/services may only deduct the VAT charged in the invoice if the financial settlement has been completed. Small-sized enterprises according to the terms of the respective act may only opt for the cash accounting if they fulfil the following conditions:
  • the place of establishment is in Hungary (for lack of such, the domicile or habitation);
  • do not fall under liquidation or voluntary dissolution procedures;
  • did not opt for tax exemption;
  • the net value of sales revenues on supply of services and goods did not exceed HUF 125 million (approx. EUR 400,000) in the previous year and will likely not exceed this threshold in the given year either. When calculating this threshold, not only domestic but all transactions must be considered.

Tax assessment

Resident taxable persons
Any taxable person who starts or carries on business activities in Hungary must register for VAT purposes with the tax authorities. A taxable person carrying out taxable transactions has to file either monthly or quarterly VAT returns depending on the level of their activity. In the beginning of the activity monthly VAT returns are due for 2 years. In general, the VAT return filing deadline is the 20th day of the month following the VAT assessment period. A VAT return may also be filed on an annual basis; however, this is not relevant for persons carrying out intra-Community activities. Tax due must also be paid by the deadline for filing the VAT return. In addition, taxable persons carrying out intra-Community supplies and acquisition of goods or services have to file recapitulative statements on their intra-Community supplies and acquisition of goods and services indicating the VAT identification number of the other party.

A detailed reporting obligation (so-called domestic itemized reporting) lies with the customer if the VAT charged on the domestic acquisition of goods and services from the same supplier in the given VAT assessment period exceeds HUF 1 million (approx. EUR 3,200). Both the supplier and the customer are obliged to report every single outgoing/incoming invoice on domestic transactions, if the VAT charged in it exceeds HUF 1 million (approx. EUR 3,200).

Resident taxable persons fulfil their filing obligations electronically.

Foreign taxable persons
Foreign taxable persons (no seat or fixed establishment in Hungary) carrying out taxable transactions in Hungary have to register for VAT purposes at the Directorate of exclusive taxpayers of the tax authorities and submit VAT returns, domestic itemized reports and respective recapitulative statements electronically. The filing frequency should be determined similarly to domestic persons.

Moreover, foreign taxable persons who do not have their permanent residence, seat or fixed establishment in the European Community must have a fiscal representative if they carry out supplies subject to Hungarian VAT. The engagement of a fiscal representative is not obligatory if the foreign taxable person is identifies for VAT purposes at least in one of the EU Member States.

Foreign taxable persons who do not carry out taxable transactions in Hungary may claim a refund of input VAT incurred by filing an application with their competent national tax authorities (within the EU) or with the Hungarian tax authority (for Switzerland, Lichtenstein according to the actual reciprocity agreements).


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