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Foreign VAT refund - The Court of Justice of the EU comes to the aid of taxpayers

The Court of Justice of the European Union (CJEU) has ruled (C-746/22) that a Hungarian rule which does not allow foreign taxpayers to submit their VAT refund documents even in the second instance procedure is not in line with the EU law. The CJEU found that the Hungarian legislation infringes the principle of VAT neutrality and the principle of effectiveness, as it prohibits taxpayers from providing the additional information requested by the first-tier tax authority in an appeal to the second-tier tax authority.

Foreign VAT refund - why is the Hungarian practice wrong?

A common problem in foreign VAT refund procedures is that the Hungarian tax authority rejects foreign taxpayers' applications in all those cases where the requested information and documents are not received in time.

This also happens when the missing document were provided during the appeal and the taxpayer would otherwise be entitled to the refund. This practice has now been successfully challenged before the Court of Justice of the European Union.

Background to the EU court ruling

The Court of Justice of the European Union published on 16 May 2024 its judgment in case C-746/22, brought in connection with the rejection of a VAT refund application submitted by Slovenské Energetické Strojárne a.s., a Slovak taxpayer, in Hungary. On the basis of Council Directive 2008/9/EC (so-called 8th Directive),the Slovak company submitted in February 2021 an application to the Hungarian tax authority for a refund of the VAT charged to the company in connection to its engineering activities on Hungarian real estate.

The Hungarian tax authority requested additional information and documents in connection with the application, which the Slovak taxpayer failed to provide, and the Hungarian tax authority rejected the application in the first instance.

Slovenské Energetické Strojárne a.s. appealed against the rejection decision and at the same time provided the requested documents.

The second-tier tax authority upheld the decision of the first-tier tax authority, inter alia because it considered that the provisions on tax administration, based on the Article 124(3) of the Act on Tax Administrative Procedure (Air),do not allow, in appeal proceedings, new evidence to be relied on where the appellant was aware of that evidence before the adoption of the first-tier decision, but did not present it, even though it was requested to do so by the tax authority.

Questions in relation to the principle of VAT neutrality 

The Slovak taxpayer appealed against the decision to the Budapest High Court, which stayed the proceedings and referred the matter to the CJEU for a preliminary ruling to clarify whether the Air provision at issue infringes the principles of VAT neutrality and effectiveness, in addition to the right of appeal under the 8th Directive.

The question also arises as to whether the one-month time limit for completing the missing information is to be considered a limitation period?

Foreign VAT refund assistance

Foreign VAT refund : decision of the CJEU

In its ruling, the Court of Justice of the European Union first of all stated that, similarly to the right of deduction, the right of refund is a fundamental principle of the common VAT system established by EU legislation and in principle may not be restricted. The principle of VAT neutrality requires that input VAT must be deducted or refunded if the substantive legal requirements are met, even if the taxable person has failed to comply with some of the formal requirements.

However, the situation is different where non-compliance with such requirements has the effect that it is not possible to prove that the substantive legal requirements have been met.

The Court has also ruled that it is a matter for the domestic legal order of each Member State to decide how and in what form it accepts or refuses to take into account evidence submitted after a negative decision at first instance, provided, however, that these rules are no less favourable than those applicable to similar domestic situations (principle of equivalence) and do not make it impossible or excessively difficult in practice to exercise the rights conferred by the EU legal order (the principle of effectiveness). 

In the view of the CJEU, the Hungarian legislation described, and all other similar national legislation, "systematically prevents" the refund of VAT to taxable persons who, despite having belatedly complied with a request for additional information, meet all the substantive legal conditions for such a refund.

The Court also found that the Hungarian and similar national rules are contrary to the principle of the right to good administration, which requires the tax authorities to carry out a diligent and impartial examination as part of their inspection duties, thereby ensuring that they have the fullest and most reliable information available to them when they take their decision. 

However, if the national tax authority cannot take into account the answers provided late by the taxpayers because of the provisions of the Air, it necessarily infringes the principle mentioned above, since it makes a decision that it knows is likely to be based on incomplete or even incorrect information.

On the basis of the above, the CJEU found that the Hungarian legislation in question infringes the principle of VAT neutrality and the principle of effectiveness, as it prohibits taxpayers from providing the additional information requested by the first-tier tax authority in an appeal to the second-tier tax authority.

Impact of the decision of Foreign VAT refund  

We have seen in a number of cases that failure to meet the deadline for foreign taxpayers in foreign VAT reclaim procedures has become a definitive obstacle to VAT refunds, thus the ECJ's ruling could prove extremely useful in these cases. The effects of the favourable decision for taxpayers may, however, extend beyond foreign VAT refund procedures, as the reasoning of the CJEU refers at several points to the principles of VAT in other procedures and the disputed rule in Air applies generally to appeals against decisions in tax matters.

Foreign VAT refund assistance

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