VAT refunds for foreigners:

New opportunities for foreign businesses following the Court of Justice of the European Union ruling!

Foreign businesses that receive an invoice containing Hungarian VAT for services or goods purchased in Hungary and do not have a Hungarian tax number can claim back VAT through a special VAT refund procedure. In this procedure, it is not necessary to attach all invoices and documents to the application, therefore the Hungarian Tax Authority often obliged the applicant to present documents by setting a deadline. According to the practice of the tax authorities, if the applicant did not submit the documents within the time limit, applicant could not do so later and would lose the requested VAT refund.

The Court of Justice of the European Union (hereinafter: CJEU) recently ruled that this practice is non-compliant, so a foreign taxpayer claiming a VAT refund can submit documents and information in support of its claim (even at the appeal stage), and the Hungarian Tax Authority must examine the documents on the merits.

The decision will bring about a positive change, first and foremost regarding VAT refunds for foreigners, but it may also create a legal basis for the acceptability of documents submitted during the appeal procedure in other VAT cases (including tax audits of domestic businesses).

The ruling will obviously result in a more liberal approach by the Hungarian Tax Authority to ongoing and future refund procedures (including claims submitted by 30 September), which will result that more VAT being paid back to foreigners than before. In addition, those who have not received VAT in the past for reasons such as the above should also consider how they can "reopen" closed cases.

Unjustified strictness in the past

In many cases, the strict and formal approach of the Hungarian Tax Authority has prevented foreign businesses from reclaim the Hungarian VAT that was passed on to them, even if the presentation of documents or contact with the Hungarian Tax Authority failed for purely administrative reasons. There was therefore no question of the taxpayer having obstructed the procedure in bad faith or through negligence.

Mitigation: content is more important than form!

In its decision, the CJEU ruled that the Hungarian practice is contrary to EU requirements, violates the principles of VAT neutrality and effectiveness, and the right to proper administration, thus preventing the VAT refund of those taxpayers who, for one reason or another, are late, but comply with the content of the necessary requirements of the reclaim.

According to the decision, the Hungarian Tax Authority should decide on the case even if the one-month deadline for the submission of documents has expired, and in the case of rejection, there must be an appeal procedure whereby the taxpayer can supplement the documents not previously submitted. Therefore, the deadline for document replacement is not considered forfeitable!

Can domestic taxpayers also refer to the decision during VAT audits?

In addition to foreign businesses, the decision may also create a basis for domestic taxpayers to refer to facts and evidence which have not been take into account by the Hungarian Tax Authority or the court due to the fact that the documents were submitted after the deadline.

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If you have any questions about this newsletter, please do not hesitate to contact our tax advisory colleagues!

Reclaiming VAT paid abroad can be a complicated process with many pitfalls, so in some cases it is recommended to involve an expert in the processes. VGD Hungary's experienced tax advisors are more than happy to assist you in this regard!