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VAT risks of assembly or installation related to construction projects and capacity extensions

Many of our clients, mainly in the manufacturing and construction industries, face tax difficulties when they supply products or services to their customers involving assembly or installation work related to greenfield investments or expansion of manufacturing capacity. The VAT treatment of these transactions may be quite complex. One main reason for this is that based on the contractual or business context various types of transactions are conducted with different VAT implications.

Most common cases of assembly or installation and related tax challenges   

Transactions involving assembly or installation can occur in many areas of commerce, for example, the installation of a tool manufacturing machine in Hungary purchased from a foreign company or the installation of a solar park abroad by employees of a Hungarian company.  

Companies wishing to enter the international market must take into account the local rules of the country concerned.  These rules may be different from those in the country where the company is established and there is a risk that VAT registration will be required in the country where the transaction takes place. 

The difference in this legislation is due to the fact that the EU Member States' VAT regulations are based on the EU VAT Directive, but the implementation of the Directive may differ between Member States.

There are many forms of transactions involving assembly and installation.   Some businesses are engaged in the supply of products involving assembly or installation.  Another typical case is the supply of services involving assembly or installation, which in most cases is subcontracted.  Some of these transactions are classified as the supply of services relating to real property and others as the supply of products.

VAT issues pertaining to assembly or installation activities

The VAT status of the taxpayers involved can make the assessment of this type of transaction even more complex.  Therefore, before starting work, it is important to clarify where the parties to the transaction are established, if they have a permanent establishment in the country, are VAT registered or have any other presence there relevant for VAT purposes.  These questions are important to answer in order to determine whether local VAT should be charged or whether reverse charge applies on both the input (purchase) and output (sales) side.  

Last but not least, it is also important to ensure that the underlying contract and other related documentation are consistent with the intentions of the parties involved, the actual economics of the transaction and the invoicing.


Special rules pertaining to assembly or installation

From a VAT perspective, if a transaction is subject to VAT, it is either the supply of products or the supply of services.  To determine the place of supply and the person subject to the tax, the relevant general or special rules must be taken into account. Special rules apply to the supply of products involving assembly and installation.  

Where the goods supplied are subject to assembly or installation, the place of supply will be the place where the assembly or installation takes place.  If the transaction in question is a supply of services, it must be examined whether it is a supply of services connected to real property. We can only apply the general rule on the place of supply if the applicability of any of the special rules does not arise. If the service is connected to real property, the place of supply will be the place where the real property is located.

Supply of products involving assembly and installation is also subject to special rules regarding the taxable person, as these types of transactions may be subject to a reverse charge mechanism if certain conditions are met.

How can VAT risks related to assembly or installation activities be mitigated?

RSM Hungary helps the businesses concerned understand the complex VAT rules for assembly or installation. In addition, we help to determine the exact economic content of the activity carried out by the business, providing answers to the questions of the place of supply, which party is liable to pay VAT and whether the client needs to register for VAT in the country where the activity is carried out.

In order to determine the above, further questions need to be examined, for example, whether the products supplied by the client are assembled by another party on behalf of the customer, or the assembly and installation work is also carried out by the client? Is it only the supply of products? Is the assembly work carried out without the sale of products?  Is the object of the assembly and installation some real property?

Overall, the tax implications of transactions involving assembly or installation are quite complex. If businesses do not manage these transactions appropriately from a VAT point of view, they may be at risk.  In order to mitigate these risks, RSM's consultants will examine the transactions in detail, determine the correct VAT treatment, review the contractual background and the related invoicing. 

Should you have any questions regarding the above, please do not hesitate to contact us.

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