Hungarian-relevant VAT cases before the EU Court in 2022; is the decision on the WebMindLicenses case on the agenda again?
In this article, we present the decisions of the European Court of Justice in 2022 in cases with Hungarian relevance. As is usual in tax matters, the vast majority of cases referred to the ECJ for a preliminary ruling, including the cases detailed, concern VAT.
None of these cases has been decided on the merits by the ECJ, but both have specific features that attract the attention of Hungarian tax practitioners.
DuoDecad Kft. (C-596/20)
Although the ECJ refused to give a preliminary ruling on the case for lack of jurisdiction, two interesting aspects emerge.
For one thing, the case highlights the limits of harmonisation of EU tax law, even in the area of indirect taxation, the most harmonised tax area. As the Advocate General pointed out in his Opinion, although both Member States concerned (Hungary and Portugal) have fully transposed the provisions of the VAT Directive on the taxation of cross-border services into their national legislation, its application to the cross-border supply of services has led to divergent results. Both Member States considered that the place of supply of services was on their territory and claimed VAT on the same transaction, which led to double taxation.
The other interesting fact is that DuoDecad Ltd. provided IT services to WebMindLicences Ltd., whose ECJ case was one of the main legal cases in the field of VAT planning. As is known, in case C-419/14 WebMindLicences Ltd, the ECJ held, inter alia, that the mere establishment of a service in a Member State in order to take advantage of the lower VAT rate in force there does not constitute an abusive tax practice. A transaction can only be abusive if it is based on a fictitious agreement, which requires an examination of all the circumstances of the case, including the existence of the conditions of a fixed establishment.
DuoDecad Ltd. (hereinafter: the ‘Company’) is a company registered in Hungary, whose main activity is computer programming. This company provided technical support services to Lalib - Gestão e Investimentos Lda. (hereinafter: 'Lalib'), a Portuguese company.
A tax audit of DuoDecad Ltd. covering the second half of 2009 and 2011 resulted in a tax assessment of almost HUF 500 million, as it found that the actual customer of the services provided by the Company was not Lalib, but WebMindLicenses Ltd. (hereinafter: ‘WML Ltd.’) WML Ltd. possessed the know-how enabling the provision of entertainment services by electronic means and had concluded a licence agreement with Lalib to exploit this know-how.
DuoDecad Ltd. contested the tax authority's position, arguing, inter alia, that Lalib had carried out an actual economic activity in Portugal at its own risk and had all the technical and human resources necessary to provide the service. Lalib presented itself to the outside world as the provider of those services: it concluded contracts in its own name, it had a database of clients who paid for the services, it controlled the revenue collected, it controlled the development of know-how and it also designated Lalib's head office as the physical location of the customer service.
Nevertheless, during the investigation at WML Ltd. the tax authority found that the services were not provided by Lalib, but by WML Ltd. from Hungary, because the license agreement between Lalib and WML Ltd. was, in the tax authority's view, "fictitious".
As a result, the Capital Court referred the question to the ECJ for a preliminary ruling. The Capital Court referred to the fact that in the WebMindLicenses judgment of 17 December 2015 (C-419/14), which is related to the present case, the ECJ interpreted the relevant provisions of Directive 2006/112, but in the view of the Capital Court, further interpretation is required in the main case, as the Portuguese tax authority and the Hungarian tax authority treated the same transaction differently from a tax point of view, despite that judgment.
In its ruling on the DuoDecad case, the ECJ ruled that it had no jurisdiction to answer the questions raised in the case. It held that the referring court had not sufficiently explained why the guidelines given in the related WebMindLicenses judgment were not sufficient for it to determine which company should be considered the actual provider of entertainment services. The ECJ therefore ultimately considered that the referring court was not seeking the opinion of the ECJ on the interpretation of EU law, but on the assessment of the facts, for which the ECJ did not have jurisdiction.
Therefore, in the DuoDecad case, it remains for the Hungarian courts to decide on the case and, on the basis of the previous judgment in a related case, to find that the conditions for finding such abusive conduct exist, on the basis of which it can be considered that the customer of the service provided by the Company was not Lalib, but WML Ltd.
Megatherm-Csillaghegy Kft. (C-188/21)
This case also has two noteworthy aspects. Firstly, at the time the circumstances described in the case occurred, the Hungarian VAT law was indeed not yet fully in line with the principle of fiscal neutrality of VAT (inviolability of the right to deduct VAT) as enshrined in the VAT Directive and confirmed by EU case law for the taxpayers concerned by the reactivation of their cancelled VAT number. The Hungarian legislation merely stated that the taxpayer's right to deduct VAT is extinguished when the VAT number is cancelled. In the context of the preliminary ruling procedure in the Megatherm-Csillaghegy Ltd. case, Hungary amended the relevant Section 137 of the VAT Act with effect from 27 October 2020 with provisions on the right to deduct VAT in the event of a VAT number being reactivated after cancellation. Based on this amended provision, the right to deduct VAT may be exercised by self-revision of the relevant VAT return within the limitation period.
The other, non-VAT lesson of the case is that failure to comply with the requirement to disclose and file annual financial statements can have unintended consequences for businesses (e.g. cancellation of a VAT number).
In the case in question, Megatherm-Csillaghely Kft. (hereinafter: ‘the Company’) sought to enforce its right to a tax deduction, which arose at a time when its VAT number was cancelled by the tax authority in its 2015 decision due to its failure to disclose its 2013 annual financial statements.
According to the tax authority, the Company's right to deduct VAT under the current provisions of the VAT Act has been extinguished for this period. The case was finally referred to the EU Court of Justice for a preliminary ruling.
Given that Hungary has in the meantime remedied the shortcomings in the legislative framework, the ECJ has ruled that the EU VAT Directive precludes national legislation which denies a taxable person the right to deduct VAT despite the following conditions being met. According to the order:
- The substantive legal conditions for the right to deduct VAT can be proven if:
- the supply of the goods or rendering of services has taken place,
- the holder of the right to deduct VAT acted as a taxable person,
- the goods or services acquired are used by the recipient for the purposes of its taxable economic activity.
Even if the above substantive conditions are satisfied, the right to deduct VAT cannot be challenged even if the parties do not fully comply with the formal requirements.
Although the formal requirements concerning the right to deduct VAT have been breached by Company (lacking a VAT number), this does not prevent compliance with the substantive requirements from being established, nor does it mean that the right to deduct VAT was relied upon fraudulently or abusively.
In conclusion, the above case has had a gap-filling role in Hungarian VAT legislation.
Article by: Edina Bély, Senior Tax Advisor at VGD Hungary Kft., tax expert.
