Overcoming Obstacles: Potential Changes to VAT Refund Procedures in Hungary Following EU Court Opinion

The recent opinion issued by the Advocate General of the European Court of Justice challenges a Hungarian tax rule that restricts foreign taxpayers from submitting additional documents during the second-instance (appeal) stage of VAT refund procedures. If the final judgment aligns with this opinion, it could not only streamline the domestic VAT refund process for foreign businesses but also open avenues for reclaiming past VAT payments. In this article, we delve into the details of the opinion and its potential implications for foreign entities seeking VAT refunds in Hungary.

Understanding the Advocate General’s Opinion:

Interpretation of Directive 2008/9/EC Article 20(2): the Advocate General suggests that the one-month deadline specified in Article 20(2) of Council Directive 2008/9/EC, concerning the detailed rules for the refund of value-added tax to non-established taxable persons, should not be considered as a forfeit deadline. This pertains to the time frame within which supplementary information requested by the tax authorities of another Member State should be made available.

Amended Directive 2006/112/EC Article 170 and Directive 2008/9/EC Article 20(2): the Advocate General opines that national laws excluding the reference to supplementary information or documents submitted only during the appeal stage, as requested by the first-instance tax authority, contradict the amended Article 170 of Directive 2006/112/EC and Article 20(2) of Directive 2008/9/EC. This implies that such documents should be admissible during the appeal process.

Directive 2008/9/EC Article 23: the Advocate General suggests that national regulations allowing the termination of the VAT refund procedure for non-compliance with the obligation to provide supplementary information, without considering an effective remedy against the termination decision, are not in conflict with Article 23 of Directive 2008/9/EC. However, if an effective remedy is available, the termination decision should be treated as a refusal of the refund.

Current Obstacles to VAT Refunds for Foreign Entities in Hungary:

Foreign businesses often face hurdles when attempting to reclaim Hungarian VAT incurred on services or products. Unlike domestic businesses, foreign entities cannot offset this VAT in their own tax returns due to the lack of Hungarian residency or tax identification numbers. Instead, they must initiate a special procedure each year to reclaim the VAT. While it’s not mandatory to submit all invoices and supporting documents with the initial claim, the relevant invoice numbers must be specified on the form.

The Hungarian tax authorities communicate with foreign entities exclusively through the designated electronic channels, typically via the provided email address. However, issues may arise if the foreign entity provides incorrect contact information or if the designated contact person is unavailable, leading to a failure to submit the requested documents within the one-month deadline. In such cases, the tax authorities terminate the procedure, denying the VAT refund to the foreign entity.

Potential Resolution:

The Advocate General’s opinion challenges the current Hungarian tax regulations, suggesting that restrictions on submitting additional documents during the appeal stage are inconsistent with EU law. If the European Court of Justice upholds this view in its final decision, it could prompt Hungary to revise its existing regulations. This, in turn, may raise questions about the retroactive applicability of the decision and whether businesses that faced similar issues in the past can now reclaim withheld VAT.

Anticipating the EU Court’s Decision:

The European Court of Justice will likely consider the Advocate General’s opinion carefully in its upcoming decision. While the Court tends to align with Advocate General opinions in tax matters, it is not bound by them. If the expected outcome materializes, the Hungarian regulatory landscape for VAT refunds could undergo significant changes. Businesses that have experienced challenges in the past may also seek recourse based on this decision, potentially unlocking previously withheld VAT funds.

Conclusion:

The current hurdles faced by foreign businesses seeking VAT refunds in Hungary may see a significant transformation if the European Court of Justice aligns with the Advocate General’s opinion. The potential changes could not only streamline future VAT refund procedures but also offer a chance for businesses with unresolved claims to revisit their cases. As we await the final decision, businesses operating in Hungary should closely monitor developments and assess the potential impact on their VAT refund processes. Please contact us if you need more information and/or assistance in this regard.