VAT grouping is an optional regime available under Hungarian tax law for domestically established affiliated companies. It enables the optimization of VAT payments within related enterprises. This article outlines the key aspects and operational details of VAT grouping.
Legal Framework
Article 11 of the EU VAT Directive allows Member States to treat multiple legally independent but closely related entities as a single taxable person. The detailed regulations are set at the national level, and in Hungary, these are stipulated in the VAT Act under the section "VAT Grouping".
Conditions for Establishing a VAT Group
VAT groups can only be formed by entities that are economically established or have a permanent residence in Hungary and qualify as affiliated companies. Joining a VAT group does not create a new taxpayer status, and the definition of affiliated enterprises is determined by other legal regulations, including the Act on the Rules of Taxation, the Corporate Tax Act, and the Civil Code. The members of a VAT group are considered a single taxpayer for VAT purposes, meaning that internal transactions are not regarded as economic activities, while external transactions are subject to joint tax rights and obligations.
Application and Authorization for VAT Grouping
A VAT group is formed upon approval by the tax authority, based on a written application jointly submitted by the participating entities. The group can be established no earlier than the date when the authorization becomes final, but applicants may specify a preferred starting date. The tax authority assigns a group identification number and a community VAT number, which must be indicated on all tax-related documents by the group representative and members.
Representation of VAT Groups
A VAT group creates a new taxable entity without legal personality, meaning that only the members retain legal capacity. Accordingly, Section 8(4) of the VAT Act stipulates that, concerning tax obligations, only the designated group representative can make valid legal declarations on behalf of the VAT group for the entire duration of its existence and even after its termination.
Joining and Leaving a VAT Group
Entities initially excluded or newly established businesses can later join the group if they meet the legal requirements and all current members unanimously agree. Both joining and exiting require tax authority approval through a written application. Upon exit, the departing member remains jointly liable for obligations arising from the VAT group membership.
Termination of VAT Grouping
A VAT group may be dissolved at the request of its members or by decision of the tax authority, for example, if the group representative resigns, legal requirements are no longer met, or the record-keeping system fails to ensure transparency. It also ceases if any member fails to fulfill its joint liability obligations. Termination becomes effective when the tax authority's revocation decision becomes final.
Determining Taxable Transactions within a VAT Group
Which Entity Conducts the Supply or Acquisition of Goods and Services?
The transaction date determines whether a supply or acquisition is attributable to the VAT group or to individual members. If the date falls within the group's existence, the transaction belongs to the VAT group. Otherwise, it is linked to the individual entities.
Intragroup Transactions
The transaction date also dictates whether an internal transaction is subject to VAT. Transactions conducted before the VAT group's formation or after its dissolution are subject to VAT. However, transactions occurring during the group's existence are not considered taxable supplies and require only an accounting record instead of an invoice.
Documentation Requirements
If a predecessor entity fails to issue an invoice, the obligation falls on the successor, using the VAT number valid at the time of issuance. If a future group member performs a transaction before joining but issues the invoice later, both the group VAT number and the member's individual VAT number must be indicated. Conversely, if an invoice is issued post-termination, only the former member's VAT number should be used. Incoming invoices should always reflect the VAT status at the issuance time.
Handling Invoice Corrections
If an entity joining the VAT group had previously issued an invoice as an independent taxpayer and later needs to modify it within the group period, the correction must include both the VAT group number and the original VAT number. If an invoice issued within the group period is corrected post-termination, the former member's VAT number must be used. The same applies to incoming invoices, aligning with the group's VAT status.
Advantages of VAT Grouping
- VAT Exemption for Intragroup Transactions: Transactions between group members fall outside the VAT scope, eliminating the need for VAT calculation and invoicing, which is particularly beneficial for frequent retrospective adjustments such as transfer pricing corrections.
- Financial Advantages: VAT grouping improves cash flow by eliminating VAT pre-financing for intragroup transactions.
- Optimization of VAT Deduction Rate: For companies engaged in both taxable and VAT-exempt activities, strategic group composition can enhance VAT recovery rates, especially when providing substantial services to an exempt member.
- Simplified Administration: VAT groups submit a single consolidated VAT return, reducing administrative burdens, with the group representative handling tax filings.
Disadvantages of VAT Grouping
- Tax Authority Scrutiny: Establishing a VAT group may attract increased tax audits.
- Record-Keeping Requirements: The common record-keeping system must be meticulously structured.
- Reduced VAT Recovery for Certain Members: Mixed-activity groups may experience a decline in the deductible VAT ratio for members previously entitled to a full VAT deduction, although this impact can be mitigated through an optimized structure and increased allocation of directly attributable VAT.
- Need for Pre-Implementation Modelling: As VAT grouping is not universally beneficial, businesses should model the expected effects based on current and planned activities before making a decision.
Summary
VAT grouping is an optional regime available under Hungarian tax law for domestically established affiliated companies. It enables the optimization of VAT payments within related enterprises. VAT grouping presents significant advantages for affiliated businesses but requires careful planning and consideration to ensure compliance and optimize tax benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
