If you want to start a company in Hungary, or to move your business there, you need to know how to pay taxes in EU member states. Also, it’s crucial to understand Hungarian tax laws and regulations.
Since learning about the intricacies of the country’s tax system is difficult to do on your own, it is always better to hire a professional accountant who has experience with foreign businesses operating in Hungary.
A seasoned accountant will help you plan your taxes, find the best business opportunities, and become familiar with the regulations set by the Hungarian tax authority, which is called the National Tax and Custom Administration.
This article will explain the basic concepts of paying VAT in Hungary, which will get you started in the right direction.
Hungarian Tax Payments and VAT – Basic Information You Need to Know
Many companies choose Hungary as a business location because this country has an excellent strategic placement within the EU. It also provides businesses with lower running costs and it offers a welcoming environment for foreign enterprises.
The main sources of the country’s tax revenue include VAT, corporate tax, Social security, and income tax. All of these taxes are applied at the national level.
Here is a closer look at VAT and how it affects businesses.
What Is VAT?
VAT, which is short for Value-Added Tax, is a type of consumer tax that gets assessed incrementally. In Hungary, this tax is called “áfa.” VAT applies to all commercial activities that have to do with the distribution or production of goods or services.
When you make purchases from VAT-registered businesses in Hungary, you pay the tax as part of the transaction. In turn, your customers also pay VAT when they buy your products or services. The invoices you receive and provide act as tax receipts.
Value-added tax is collected through a partial payments system which provides neutrality. Unlike with sales tax, there is no cascade effect, and this system is considered to be less difficult to exploit.
VAT tax reports are due quarterly, though new companies need to send them monthly (the rules also depend on the size of your business). When submitting a report, your accountant has to include all the incoming and outgoing invoices. The idea behind VAT is that you only pay tax on the value you added to products before selling them.
How to Register for VAT in Hungary?
All countries in the EU use the value-added tax system, and all companies are required to register their VAT numbers at the central tax office. This includes non-Hungarian companies (from any country), as they have to register for Hungarian VAT if they are going to do business in Hungary.
If your company wants to register for VAT in Hungary (VAT number and registration), the Hungarian tax office will require you to complete the appropriate forms.
These forms have to be submitted along with the standard VAT documentation, which includes the following:
- Articles of Association.
- A VAT certificate copy in Hungarian – this document is needed in order to prove that your business is already registered for VAT somewhere else in the EU, if that applies.
- A statement that explains your company’s economic activities (in Hungarian).
- A power of attorney.
- An extract from your firm’s national trade register (in Hungarian).
- Signatures of company’s representatives (original specimen).
VAT registration has to be completed within 30 days if the provided documentation is correct.
Non-Hungarian companies should submit their documents and registration forms to the following address:
Directorate of Exclusive Taxpayers (Kiemelt Adózók Igazgatósága)
Dob utca 75-81
VAT Rates in Hungary
As of January 2012, the standard VAT rate is a flat rate of 27%. This is actually higher than any other EU VAT rate.
But there are some exceptions:
- The reduced rate for certain food products and most medicines is 5%.
- The reduced rate for catering, restaurants, bakery products, hotel services, and open-air events is 18%.
- When it comes to international and intra-community transport, the rate is 0%.
Requirements for Invoices
The Hungarian VAT system requires that an invoice has to be issued after product sales of any kind. Businesses have 15 days to issue their invoices after their first taxable supply. Also, invoices have to be stored for at least eight years.
Companies have to use invoicing software which complies with a special Finance Ministry decree, and the software’s manufacturer has to provide a declaration of compliance. In other words, it’s not sufficient to use Word or Excel to create your invoices, you have to buy specialized software for it.
The other option is to use invoice booklets, which are sold in office supplies stores. This is essentially a notepad with a grid you can fill out, and you create two carbon copies when filling out each page. Using invoicing software is almost always the more convenient choice.
Although invoices can be issued in English or any other language, authorities may request Hungarian translations. Receipts have to be issued in Hungarian.
Business owners have to use the correct formatting on invoices and they must include the following elements:
1. Heading – “Invoice” (Számla in Hungarian)
The heading element of the invoice application has to be “Számla”, which is “Invoice” in Hungarian.
2. Invoice Number
This has to be a sequential number, and it has to be unique.
3. Name, Address, VAT Number, and Bank Account Details of the Issuer
4. Name, Address, and VAT Number of the Customer (Assuming the Customer Pays VAT)
If the customer has to pay the value-added tax on the transaction, their name, address, and tax number have to be included.
5. Date of Issue of the Invoice
Every application must have the date of issue of the invoice in order to be considered valid. If the date of supply is different from the date of issue, it needs to be included too.
6. Description of the Goods or Services (for Identification Purposes)
7. Total Net Amount, Total Payable Amount, and the Rate and Amount of VAT
Cash accounting has been available in Hungary since 2013. This method means that the value-added tax should be paid (and deducted) only when the invoice value is paid. The cash accounting value-added tax method can be applied upon choice (if the company’s yearly turnover is under 125 million forints).
This system is quite beneficial in case the buyers prefer to pay later. But it can only be applied by:
- Taxpayers that qualify as small enterprises.
- Taxpayers that have a fixed establishment in Hungary – in case taxpayers don’t have a fixed establishment, a permanent address where they reside will suffice.
- Taxpayers for whom the sum of the expected and actual consideration in a year doesn’t exceed 125 million HUF – this is approximately 420,000 Euros.
Taxpayers that are under the cash-based taxation method have to make pay the output VAT.
In case a taxpayer’s revenue exceeds a certain threshold, the cash-based taxation will be automatically terminated.
Recovery of Input Tax
Input tax is the value-added tax that has been charged on goods or services purchased by your business in Hungary. As a foreign business, you may be able to reclaim the VAT you paid. Of course, there are some regulations that need to be considered.
Input VAT cannot be deducted for certain goods or services, including:
- Passenger cars
- Engine fuel for passenger cars
- Parking service
- Restaurant service
- Food and beverages
Common services where VAT refunds are available include lodgings and accommodations, short-term car rentals and road tolls, diesel fuel and parking for trucks, all costs associated with attending or hosting seminars, etc.
Who Is Eligible for VAT Refunds?
As was previously mentioned, not everyone can claim VAT refunds. The rules are different for EU claimants and non-EU claimants, so let’s go through them both.
VAT Refunds – EU Claimants
According to articles 170 – 171a VAT Directive, you are eligible for full VAT refunds if you are a VAT-registered company located in an EU state, and you have conducted transactions (cross-border) with an EU state where you aren’t VAT-registered.
In order to apply for the VAT refund if you are an EU claimant, you have to submit the electronic refund claim to your national tax authority portal. You are requested to provide:
- Claimant details
- Refund request summary
- Details of each invoice that is related to your VAT refund application
- Scanned copies of all import documents and invoices where the taxable amount goes over 63,000 HUF when it comes to fuel, and 300,000 HUF when it comes to other goods or services
Note that you might be required to include other scanned invoices later in the process.
VAT Refunds – Non-EU Claimants
According to the 13th Directive, if your company is VAT-registered outside the EU, and if you are charged with the value-added tax on activities conducted in any EU state where you haven’t been VAT-registered, you can get a refund from the country where you paid the tax.
When applying for a VAT refund as a non-EU claimant, you have to send the following documents with the standard application:
- Claimants details (including bank account details)
- Summary of the refund requests
- An original certificate of VAT status – it must not be older than 1 year and it has to prove the business activity
- Power of Attorney to a Hungarian tax advisor
- Original invoices related to the VAT refund
- Details of each invoice
NOTE: The deadline for claims submissions (for all companies in another EU state, or outside the EU) is set to be on September the 30th.
The Rule of Reciprocity
It’s important to know that all EU claimants can apply and claim VAT refunds from any other EU state.
Non-EU claimants can only claim VAT refunds if the country where they registered their company has similar VAT refund arrangements, as well as an agreement with Hungary.
This is referred to as the Rule of Reciprocity, and it allows Hungarian authorities to give refunds to some non-EU companies. Currently, Hungary has an agreement with Serbia, Lichtenstein, Switzerland, Norway, and Turkey.
Start Your Business in Hungary
Starting a business in Hungary is an excellent decision for many reasons, and it can bring many benefits to your company and business. But it’s important to understand the rules of paying the 27% VAT in Hungary, and you have to make sure to comply with all the regulations. Most importantly, your invoices have to pass muster.
Now that you know some of the basics, you may want to browse the National Tax and Custom Administration’s website. Consider getting in touch with experts who can be with you on every step of the process.