The European Court of Justice (ECJ) has stepped in to address an issue that has long troubled foreign taxpayers seeking VAT refunds from Hungary. In a recent ruling (C-746/22), the ECJ found that Hungarian legislation, which prevents foreign taxpayers from submitting additional and related documents during the secondary appeal stage of VAT-refund procedures, is inconsistent with EU law. This Hungarian practice was deemed contrary to the principles of VAT neutrality and effective judicial protection, as it unjustly prohibits taxpayers from providing supplemental information required by the first-tier tax authority during an appeal to the second-tier.
Foreign VAT Reclaims – Where Does the Hungarian Practice Falter?
A recurring challenge in foreign VAT refund procedures is the Hungarian tax authority's (NAV) strict refusal to consider applications from foreign taxpayers if the requested documents or information are not submitted on time. This refusal occurs even when the shortcomings are rectified during an appeal, potentially depriving eligible taxpayers of their refunds. This practice was successfully contested at the European Court of Justice.
Background of the EU Court's Decision in the Hungarian VAT Reclaim Case
The European Court of Justice (ECJ) ruling pertains to a case involving a Slovak company whose VAT refund application in Hungary was rejected. The Slovak firm sought VAT reimbursement related to engineering activities performed on Hungarian properties, under the EU's 2008/9/EC Directive. The NAV requested additional documentation, which the company failed to provide within the stipulated time, leading to the application's initial rejection. On appeal, the company submitted the missing documents, but the second-tier authority upheld the original decision, stating that new evidence is impermissible if the applicant was aware of it prior to the first-tier decision, as per Hungary's statute on tax administration procedures.
Questions Regarding the Principle of VAT Neutrality
The Slovak company appealed the second-tier decision to the Budapest Administrative and Labor Court, which suspended proceedings and referred the matter to the ECJ to clarify whether Hungary's statute contravenes the principles of VAT neutrality and effectiveness, as well as the appeal rights under the EU's 8th Directive. Additionally, it raised the issue of whether the one-month deadline for document submission constitutes a definitive loss of rights.
The ECJ's Ruling on VAT Deduction Rights
The ECJ decisively ruled that the right to a refund, akin to the right to deduction, is a fundamental principle of the EU's common VAT system and should generally remain unrestricted. According to the principle of VAT neutrality, input VAT should be deductible or refundable if substantive requirements are met, even if certain formal requirements were not complied with. However, the breach of such formal requirements that prevent proving substantive compliance is an exception.
The ECJ emphasized that national laws must not make it practically impossible or excessively difficult to exercise EU-derived rights. Thus, Hungary's rule systematically obstructs VAT refunds to taxpayers who meet all substantive conditions despite belatedly providing supplemental information. Such laws are also at odds with the right to good administration, requiring tax authorities to conduct diligent and impartial investigations.
Impact of the ECJ Decision on Hungarian VAT Reclaim Procedures
The ECJ's decision offers a new avenue for foreign taxpayers who have faced insurmountable hurdles in reclaiming VAT due to missed deadlines for supplemental documentation. The implications of this taxpayer-friendly ruling extend beyond foreign VAT refunds, as the ECJ's reasoning references foundational VAT principles applicable across various procedures. Moreover, the contested rule from Hungary's statute on tax administration affects all appeal processes in tax matters, underscoring the ruling's broader significance.
For foreign companies navigating Hungarian tax waters, this ECJ decision serves as a beacon of hope, reinforcing their rights and the adherence to equitable tax practices within the European Union.
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