Do you have HUF millions of VAT paid on utility transfers? - We can help you recover them
A recent ruling by the European Court of Justice has opened up the possibility of reclaiming VAT charged on public utility investments provided free of charge to the municipality or the government. In this newsletter, we summarise the main issues concerning VAT on so-called "public purpose" investments affecting many Hungarian businesses.
What is a problem for businesses?
The problem arises when businesses build roads, utility lines or other public improvements in connection with their business investments, which gives rise to an obligation to transfer them free of charge to local authorities or the state.
According to the domestic case law of previous years, input VAT arising from this type of investment was either not deductible or deductible, but had to be paid later when the investment was transferred free of charge to the municipalities or the state.
The VAT, therefore, appeared as a financing burden.
However, a ruling of the European Court of Justice may also bring about a significant change in the VAT treatment of domestic public investments, which could be beneficial for the businesses concerned.
What exactly does the ECJ ruling say?
In the context of a public investment project, the European Court of Justice has concluded that even if the input VAT on the purchases related to the project is deductible, the free transfer of the investment to a public authority does not necessarily give rise to VAT liability.
The Court of Justice reasoned in favour of the investors that in such cases the free transfer of assets does not necessarily constitute their withdrawal from the business activity of the company, meaning the transaction is out of the scope of VAT and therefore does not give rise to a VAT payment.
What does this mean for ongoing investments in Hungary?
Although the domestic jurisprudence has not yet generally adopted this approach, recent developments in Hungary (e.g. successful taxpayer refunds of the VAT on irrecoverable debts) show that the European VAT Directive and the respective rulings of the European Court of Justice can be legitimately invoked before the competent authorities.
In the case of ongoing investments, investors can be reassured by requesting a favourable legal interpretation from the authorities and possibly by applying for a conditional tax assessment.
There are, however, numerous risks and pitfalls in pursuing such claims, so it is highly recommended to consult an expert before taking this route. With the assistance of a tax expert the affected company can reach a more favourable liquidity position, and thus a better competitive position, with almost no risk.
What can you do to recover the VAT “wrongly” paid on past investments?
Not only may the above interpretation of the law provide significant financing advantages for the future of companies carrying out domestic public investments, but also it can be a chance for VAT recovery on past investments.
In the past, a provision has been incorporated into Hungarian law under which a self-revision return may be submitted on the grounds of an infringement of a binding legal act of the European Union, thus allowing the recovery of previously financed VAT within the limitation period by means of a special or even "normal" self-revision.
How can VGD experts help your company?
- We will examine whether your past or ongoing investments meet the criteria for the favourable interpretation of the European Court of Justice decision;
- We will analyse and make recommendations as to how to make a claim, indicating the possible risks (e.g. whether a self-revision of the related VAT returns is applicable and sufficient and, if so, what should be the deadline; is it required to take the case to court or VAT can be reclaimed directly from the tax authority? etc.);
- We will assess the amount of the VAT to be reclaimed and fully assist you in the administration of the VAT claim and represent your company in the procedure (before the tax authorities and, if necessary, before the court, too).
If you can be affected by the above possibility and are interested in the available enforcement options, please contact the tax experts of VGD Hungary Kft.
Bp, 16. feb, 2023
* * *
This newsletter provides general information and does not constitute tax advice.
