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Legal tax optimisation: VAT-free payment with the use of debt assumption

Certain business transactions can be carried out without the actual payment of VAT, yet very few taxpayers seize the opportunity afforded by VAT debt assumption.

VAT debt assumption is a lesser known legal concept which provides an opportunity for legal tax optimisation with the involvement of the tax authority for large-volume transactions and in case of payment difficulties, amongst others.

VAT debt assumption: who can benefit from it? 

For companies involved in high-volume transactions, projects and transfers of business units giving rise to VAT liability, as well as entities facing payment difficulties, the option of VAT debt assumption (an approach permitted by law that involves the tax authority's approval) is something to consider. The practical adoption of this legal concept could be particularly advisable in the case of related-party transactions.

Although the legal concept itself has been around for quite a while and the relevant practice of the tax authority is becoming more and more established, the benefits of VAT debt assumption for cash flow management, overcoming payment difficulties, risk mitigation and savings on transaction fees are not widely known.

The following example serves to illustrate the concept.

A large-volume one-off transaction is conducted between the Seller and the Buyer. Upon completion of the transaction, the Buyer is able to pay only the purchase price excluding VAT. At the time of performance, the Seller issues an invoice containing the VAT payable, but only the net purchase price is transferred by the Buyer to the Seller. 

The invoice liability is then included in the Seller's VAT return as an item payable to the tax authority, whereas the Buyer's VAT return will include the same VAT amount as deductible tax that the Buyer will claim from the tax authority. Thus the Seller owes the Hungarian Tax Authority the amount of the VAT, while the Buyer claims the amount of the VAT from the Hungarian Tax Authority. 

Therefore, the parties enter into a debt assumption agreement with the approval of the tax authority, whereby the Buyer assumes the Seller's liability to the tax authority arising from the large-volume transaction, as the amount of that liability will show up as deductible tax for the Buyer regardless of the payment of the entire purchase price. The tax authority adds an approval clause to the debt assumption agreement and reconciles the Seller's debt with the Buyer's refund claim. 

The legal concept of debt assumption is a guarantee for both the Seller and the tax authority since the completion and classification of the business transaction and the settlement of each liability are known to and approved by the state tax authority as well.

VAT debt assumption with the blessing of the Hungarian Tax Authority

Such an agreement approved by the tax authority allows the VAT liability of the entity issuing the invoice (the company required to pay VAT to the Hungarian Tax Authority) to be settled by the entity receiving the invoice (which is often the company that is entitled to deduct the VAT content of the invoice).  As the application of the concept of VAT debt assumption allows the assessment of the transaction to be requested from the tax authority immediately upon performance, taxpayers can avoid any unpleasant surprises later on.

Control over finances, risk mitigation and legal tax optimisation – these are the benefits of debt assumption, a legal concept that can be applied not only in the case of VAT, but also to any other type of tax that is not paid when due, either with the assumption of a guarantee or, in a narrower scope, without it.

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