In its recent resolution of principle, the Hungarian Supreme Court (Kúria) has stated, that on the grounds of abusive behaviour, the tax authority may only reclassify contractual agreements between parties and prohibit the use of tax deduction only in cases where such agreement has no economic content.
The decision is significantly important, since in the previous years the tax authority has refused companies’ right to deduct VAT in numerous cases, based on their alleged abusive exercise of rights, without proving that the sole purpose of the transaction would be to gain tax advantage. The recent resolution of the Supreme Court may affect change in such “non-taxpayer-friendly” practice of the recent period.
In the case involved in this procedure, the taxpayer carried out VATable as well as non-VATable activities within the framework of a mandate agreement and issued an invoice to the customer on business consulting services.
The tax authority and the first instance court both came to the conclusion that the main purpose of invoicing was to reclaim the substantial VAT amount indicated on the invoice by the invoice receiver party, while the issuer of the invoice was able to deduct a higher ratio of VAT by artificially increasing its ratio of VATable sale of goods. The statement of the authorities was primarily based on common personal connections between the parties and that the respective contracts – especially compared to their high value – were template-like. According to the identical standpoint of the tax authority and the court, it supports the abusive behaviour of the companies, if companies who availed the services did not actually need such services. Based on that, the tax authority and then the first instance court concluded that the issued invoices have no credibility, the companies behaved in an abusive manner, therefore, the right of tax deduction cannot be exercised by the recipient of the invoice.
Based on our judicial claim, the Supreme Court has accepted our reasoning, based on which a substantially more stringent test than the one described above shall be carried out to reclassify legal relationships. In its decision the Supreme Court stated – amongst others – that common personal connections between the parties in itself may not provide grounds for establishing abusive behaviour; when examining abusive exercise of rights the test created by the European Court of Justice in the Halifax case (C-255/02) shall be taken into consideration.
The Supreme Court in its decision stated, in principle, that the tax authority cannot be arbitrary regarding what may be considered economically rational, therefore, in this respect, objective circumstances shall be taken into account. Although it is not relevant in this case due to the decision of the Supreme Court, the Supreme Court also stated that a 200% tax penalty may only be imposed only if the discreditation of the invoice is the result of the taxpayer’s intentional and conscious behaviour. In this respect, the Supreme Court has also restricted the practice of the tax authority, based on which it applies 200% tax penalty even more frequently and with broader scope.
The decision – with special regard to its principle manner – may lead to a new era when it comes to judge such cases by the tax authority or the court. We believe that the companies have substantially better chance to fight against the decision of the tax authority when the tax authority refuses their right to tax deduction on the grounds of abusive exercising of rights.
In recent years, our firm has represented domestic and international clients in tax disputes before the tax authority and the courts. We have prominent experience in disputes arising from the refusal of VAT reclaim, from the beginning of the tax audit until the final, legally binding resolution of the court.
If you have questions, please contact our colleagues specialized in tax disputes.
Dr. Balazs Soth tax advisor, attorney-at-law
Dr. Gabor Butor attorney-at-law