Hungarian case law in disputes concerning the VAT input deduction right was, for a long time, built on a relatively stable principle: the basis for deduction can only be a substantively authentic invoice, and in every transaction it must be examined whether the economic event described on the invoice actually took place, whether it occurred between the parties concerned, and whether any tax evasion was involved.
While Opinion No. 5/2016 (IX. 26.) of the Supreme Court of Hungary’s Administrative and Labour Law Chamber (KMK opinion) essentially distinguished certain cases of refusing the right to deduct on the basis of whether the underlying economic event had occurred, in its new Opinion No. 1/2025 (XII. 09.) (KK opinion) the Supreme Court of Hungary’s Administrative Chamber differentiates between cases based on (i) the examination of taxpayers’ conduct resulting in tax evasion and (ii) taxpayers’ awareness/knowledge connected to such tax evasion.
VAT input deduction right – what changes in substance?
I. Budgetary tax loss: no longer an exclusive condition
One of the most important changes is that budgetary tax loss is now only a possible, but no longer an exclusive, condition for establishing tax evasion.
1) The right to deduct cannot be made automatically conditional on the issuer’s payment of VAT
On the one hand, the reasoning of the KK opinion—aimed at protecting companies exercising the right to deduct VAT—essentially relies on the following points:
- the right to deduct VAT cannot be made dependent on whether the invoice issuer has actually paid the VAT;
- if the invoice issuer has duly fulfilled its VAT return obligations, the mere failure to pay the declared VAT does not, in itself, qualify as VAT fraud.
2) “VAT has been paid” is not a shield either
On the other hand, under the KK opinion, the lawful exercise of the right to deduct is not guaranteed even by the fact that VAT on the transaction has been paid into the state treasury, if—based on objective circumstances—it is established that the claimant seeking to exercise the right to deduct knew or should have known that the transaction in question formed part of tax evasion committed by the seller or service provider, or that another transaction preceding or following the claimant’s transaction in the supply chain involved VAT evasion.
II. Cases where VAT input deduction may be refused: 4 categories (new element: abuse of rights)
The new judicial approach divides the cases for denying the right to deduct into four parts; the second item did not appear in the earlier framework:
- Intentional active conduct – issuing invoices for a non-existent economic event
In this case, under the earlier practice, the absence of the economic event substantiates the denial of the recipient’s right to deduct VAT.
- Intentional active conduct – breach of the requirement of proper exercise of rights (abuse of rights)
This is a scenario that was not elaborated in detail in the earlier KMK opinion, but it had already been recognised in the case law of the Court of Justice of the European Union and has also appeared in the Hungarian Tax Authority’s (NAV) audit practice. Under the so-called Halifax test—based on the cumulative fulfilment of three conditions—the exercise of the right to deduct VAT is abusive if:
- the formal conditions for the right to deduct are met, but
- the result of the transactions is the obtaining of a tax advantage that is contrary to the purpose of the VAT provisions, and
- it is apparent from the overall assessment of objective circumstances that the essential aim of the transactions was to obtain a tax advantage.
- Knowing passive participation – the taxpayer knew about tax evasion committed by another
In line with the approach already applied previously, two elements must be proven. The tax authority must prove (i) the fact of tax evasion, and (ii) that the claimant was aware of it.
- Negligent passive participation – the taxpayer should have known about tax evasion committed by another
Here as well, consistent with the earlier opinion, the assessment focuses on whether the tax authority has proven the fact of tax evasion and that the claimant would have known about it if it had taken the measures that could reasonably be expected.
It is important to note that this—otherwise the most frequently applied category—can be completely avoided with appropriate business due diligence.
Does the new KK opinion mean a tightening for Hungarian companies in exercising the VAT deduction right?
In our view, yes, as the Supreme Court of Hungary’s opinion further strengthens the state tax authority’s audit practice in the field of denying the right to deduct VAT.
The new KK opinion provides the Hungarian Tax Authority with additional guidance on the types of cases and the evidentiary approach under which it may make its findings. This also suggests that taxpayers should design and implement robust pre-transaction business due diligence procedures, for which they may engage expert support.
