The majority of the provisions of Council implementing regulation (EU) No 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax (hereinafter: Implementing Regulation) entered into force on 1 July 2011. Effective from that date, they are also mandatorily and directly applicable in Hungary without a separate approval of the Hungarian Parliament.
In addition to the adaptation of the interpretative provisions of Council Regulation (EC) No 1777/2005 of 17 October 2005 laying down implementing measures for Directive 77/388/EEC on the common system of value added tax, the Implementing Regulation also contains important rules concerning the interpretation of the provisions of the VAT Directive modified by what is called the VAT package with effect from 1 January 2010, as regards, in particular, the following issues:
- for the purpose of determining the place of supply of services, the interpretation of a place of establishment (a uniform Community-wide definition of place of establishment of a business “ and “fixed establishment”);
- the taking into account of having a place of business (a place of establishment of a business or a fixed establishment) in identifying the person liable for payment of VAT;
- an examination of the customer (legal status, capacity, location) in order to determine the place of supply and the VAT treatment of the service provided.
- Interpretation of having a place of business (a “place of establishment of a business” or a “fixed establishment”)
Pursuant to the VAT Directive, as a general rule, the place of supply of services provided to taxable person acting as such shall be the place where that person has established his business. However, if those services are provided to a fixed establishment of the taxable person located in a place other than the place where he has established his business, the place of supply of those services shall be the place where that fixed establishment is situated.
The place of supply of services for non-taxable persons is the place where the place of the business of the supplier is. If these services are provided from such a fixed establishment of the supplier that is situated at a location other than the place where he has established his business, then the place of supply of services is the place where that fixed establishment is located.
As the interpretation of the concept of “place of establishment of a business” and “fixed establishment” is a key to the determination of the place of supply of services, the Implementing Regulation uses the following uniform Community-wide definitions of “place of establishment of a business” and “fixed establishment”:
- Place of establishment of a business (“registered office for VAT purposes”)
Pursuant to the Implementing Regulation and in keeping with the interpretative provisions of the Hungarian VAT Act, the place of establishment of a business (‘registered office’ for VAT purposes) means the principal place of business and central administration of the taxable person’s economic activity. Pursuant to the Implementing Regulation, in order to determine the place of central administration account shall be taken of
- the place where essential decisions concerning the general management of the business are made,
- the registered office specified in the deed of foundation,
- the place where management meets.
Where these criteria do not allow the place of establishment of a business to be determined with certainty, the place where essential decisions concerning the general management of the business are taken shall take precedence.
In line with the foregoing, the place of establishment of a business to be taken into account for the purposes of determining VAT and the place of supply of services may be different from the registered office specified in the deed of foundation if fundamental decisions on general management are made at a location other than the registered office specified in the deed of foundation.
In line with the foregoing, if a Hungarian taxable person provides services for a company whose registered seat is, according to the deed of foundation, located abroad, it shall be examined whether the place of establishment of the customer is also located in the same country pursuant to the Implementing Regulation as well. If fundamental decisions on general management of the customer are determined in Hungary, the risk arises that the place of establishment of the business of the customer and the place of supply of the services provided are both located in Hungary, therefore, the supplier shall charge Hungarian VAT.
Relying on the case law of the European Court of Justice, the Regulation provides the following definition of ‘fixed establishment’: a fixed establishment shall be any establishment characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the services which it supplies.
Accordingly, the fact of having a VAT identification number shall not in itself be sufficient to consider that a taxable person has a fixed establishment.
- Role of having a place of business in determining the person liable for payment of VAT
Pursuant to the VAT Directive, according to the general rule governing VAT payments, VAT shall be payable by the supplier of goods or services. If, by way of derogation from the foregoing, the supply of goods or services is provided by a taxable person who is established in a Member State other than the one where the VAT liability is incurred, Member States may stipulate that the person liable for payment of VAT be the person who purchases goods or the customer of the services. In keeping with the above stipulation, the Hungarian VAT Act also allows the application of the reverse charge mechanism to some cross-border transactions, especially to supply of services.
In order to provide a uniform Community-level definition of the place of taxation, the Implementing Regulation also determines – in identifying the person liable for payment of VAT – when a taxable person having a fixed establishment or a registered seat in the given Member State can be regarded as established.
Pursuant to the provisions of the VAT Directive and the Hungarian VAT Act, in identifying the person liable to pay VAT, the taxable person who has fixed establishment within the Member State where the tax is due shall be regarded as not established in that Member State if its fixed establishment in the Member State concerned does not intervene in the supply. The Regulation contains guidance as to when a fixed establishment located in a Member State can be regarded as one involved in the fulfilment of the transaction concerned.
Accordingly, in identifying the person liable for paying VAT, only such a fixed establishment of the taxable person shall be taken into account that is characterised by a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to provide the goods and services which in which it entervenes.
Where a taxable person has a fixed establishment within the territory of the Member State where the VAT is due, that establishment shall be considered as not intervening in the supply of goods or services unless the technical and human resources of that fixed establishment are used by him for transactions inherent in the fulfilment of the taxable supply of those goods or services made within that Member State, before or during this fulfilment. According to the clarification provided by the Regulation, where the resources of the fixed establishment are only used for administrative support tasks such as accounting, invoicing and collection of debt-claims, they shall not be regarded as being used for the fulfilment of the supply of goods or services.
However, under the Regulation, if an invoice is issued under the VAT identification number attributed by the Member State of the fixed establishment that fixed establishment shall be regarded as having intervened in the supply of goods or services made in that Member State unless there is proof to the contrary.
- Place of establishment of a business (registered office for VAT purposes)
The Regulation further stipulates that where a taxable person who has a place of establishment of a business within the territory of the Member State where the tax is due, the registered office shall, in all cases, be regarded as involved in the supply of goods or services. Accordingly, if the taxable person supplying goods or services has its place of establishment of business within the territory of the Member State where the tax is due, for tax payment liability to be determined, there is no need to examine whether the company has a fixed establishment abroad or whether the fixed establishment is involved in the fulfilment. We wish to note that the above regulation can also be logically inferred from the VAT Directive and the effective provisions of the VAT Act.
- Status of the customer as a taxable person (legal status, capacity, location)
When determining the place of supply of services, also in line with the VAT Directive and the Hungarian VAT Act, it is important that the legal status, capacity and location of the customer be examined, because the supplier of services may issue a VAT-exempt invoice to the customer according to the reverse charge mechanism only if the customer
- is a taxable person, and
- acts as a taxable person while using the service, and
- does not have a permanent domestic fixed establishment, or if it does, it is not involved in the use of the services.
The VAT Regulation effective from 1 January 2010 does not contain any provisions as to how the supplier can ascertain whether the above conditions are fully met, and, hence, can issue a VAT-exempt invoice for the service that he provides. Accordingly, if the above conditions fail to be met, the taxable person providing the service runs tax risk.
In order to mitigate the tax risk run by the supplier, the Implementing Regulation determines the way in which the supplier can ascertain whether the conditions of the application of the reverse charge mechanism exist in the case of the service provided by him. It should be noted that the application of the procedures prescribed by the Implementing Regulation to examine the customer has been recommended so far as well so that the tax risk run by the service providing taxable person can be reduced.
We expressly recommend that adopting the below procedures prescribed by the Implementing Regulation, companies providing services for non-resident customers should – upon the supply of the service, prior to issuing an invoice in accordance with the rules governing the reverse charging mechanism – ascertain the legal status, the capacity as a taxable person and the location of the customer, and keep the evidence gathered in the course of checking the customer.
In order to protect suppliers exercising due care and adopting the required procedures to examine the customer, the Implementing Regulation stipulates that in order for the rules governing the place of supply of services to be applied, only the circumstances existing at the time of the chargeable event shall be taken into account. Any subsequent changes to the use of the service received shall not affect the determination of the place of supply, provided there is no abusive practice.
Pursuant to the Implementing Regulation, unless he has information to the contrary, the supplier may regard a customer established within the Community as a taxable person where the customer has communicated his individual VAT identification number to him, and the supplier obtains confirmation of the validity of that identification number and of the associated name and address from the VIES system. In keeping with this, unless he has information to the contrary, the supplier may regard a customer as a non-taxable person if he can provide evidence that the customer has not communicated his VAT identification number to him.
By way of derogation from the foregoing, where the customer has not yet received an individual VAT identification number, but informs the supplier that he has applied for it and the supplier obtains any other proof which demonstrates that the customer is a taxable person or a non-taxable legal person required to be identified for VAT purposes and carries out a reasonable level of verification of the accuracy of the information provided by the customer, by normal commercial security measures such as those relating to identity or payment checks.
Unless he has information to the contrary, the supplier may regard a customer established outside the Community as a taxable person if he obtains from the customer a certificate issued by the customer’s competent tax authorities as confirmation that the customer is engaged in economic activities. Where the customer does not possess that certificate, if the supplier has the VAT number, or a similar number attributed to the customer by the country of establishment and used to identify businesses (e.g. company registration number) or any other proof which demonstrates that the customer is a taxable person and if the supplier carries out a reasonable level of verification of the accuracy of the information provided by the customer, by normal commercial security measures such as those relating to identity or payment checks.
In line with the effective provisions of the VAT Directive and the Hungarian VAT Act, the Implementing Regulation states that, for the purpose of applying the rules concerning the place of supply of services, a taxable person, or a non-taxable legal person deemed to be a taxable person, who receives services exclusively for private use, including use by his staff, shall be regarded as a non-taxable person. Under the previous regulation, in the absence of any applicable procedural rules, it was not clear how the supplier was able to ascertain whether the customer was acting in his capacity as a taxable person, and, subject to that, whether it was necessary to obtain a declaration from the customer to the effect that he does not use the service for private purposes or not exclusively for such purposes.
Pursuant to the Implementing Regulation, unless he has information to the contrary, such as information on the nature of the services provided, the supplier may consider that the services are for the customer’s business use if, for that transaction, the customer has communicated his individual VAT identification number.
If the customer is established in more than one country, the fixed investment of the customer that is the most directly affected in regard to the provided service shall be examined.
Pursuant to the Implementing Regulation, where the taxable person using the service is established in more than one country, that supply shall, according to the general rule, be taxable in the country where that taxable person has its place of establishment of business (i.e. registered office for VAT purposes). However, where the service is provided to a fixed establishment of the taxable person located in a place other than that where the customer has established his business, that supply shall be taxable at the place of the fixed establishment receiving that service and using it for its own needs.
Pursuant to the Implementing Regulation, in order to identify the customer’s fixed establishment to which the service is provided, the supplier shall examine the nature and use of the service provided. Where the nature and use of the service provided do not enable him to identify the fixed establishment to which the service is provided, the supplier, in identifying that fixed establishment, shall pay particular attention to whether the contract, the order form and the VAT identification number attributed by the Member State of the customer and communicated to him by the customer identify the fixed establishment as the customer of the service, furthermore whether the fixed establishment is the entity paying for the service.