Category: Hungary

Former Wolf Theiss Senior Associate Artur Tamasi has left the Budapest office of that firm to co-lead the Dispute Resolution team at Baker McKenzie as Counsel.

Tamasi, who will lead the team with Budapest Managing Partner Zoltan Hegymegi-Barakonyi. has over 18 years of experience in dispute resolution and general commercial law. He joined Wolf Theiss from Squire Patton Boggs last September along with colleagues Akos Eros, Judit Nador, and Agnes Budai (as reported by CEE Legal Matters on September 11, 2018), after spending over 14 years at that firm.

According to Baker McKenzie, “his professional expertise covers Hungarian commercial and administrative litigation, co-ordination of foreign court, and enforcement procedures, as well as domestic and international arbitration cases.” The firm reports that “Tamasi is also an expert in corporate investigations and victim representation in white-collar crime proceedings.”

“We are pleased to welcome a professionally experienced counsel on board as a key pillar of our team,” Hegymegi-Barakonyi commented. “Artur, as a co-head of the dispute resolution group and as a recognized legal expert, will further strengthen our practice in civil and public litigation, arbitration and alternative dispute resolution.”

A recently released NAV guidance gives a list of those signs that could indicate that a security firm is involved in VAT fraud. The list will certainly help companies that accept invoices from such security firms, but it’s still a pity that the guidance wasn’t issued ten years earlier.

When it comes to VAT fraud, the security services sector is one of the most notorious industries. It’s not uncommon for someone at the end of the invoicing chain to forget to pay the VAT or employment-related taxes. As a consequence, the sector has been in the crossfire of tax audits for over a decade, and the tax authority (NAV) is waging a bitter struggle to recover the embezzled tax forints. However, because the person committing the fraud is usually nowhere to be found, the tax authority’s whip often cracks on one of the intermediate participants, penalising it on the grounds that it should have known about the tax fraud in the chain of invoices. In these cases, the tax authority denies the right of that intermediate participant to deduct VAT. 

Who decides what you’re supposed to know?

In order to support its claim that the intermediate participant should have known about the tax fraud in the invoicing chain, the tax authority often tried pulling circumstantial evidence out of its conjurer’s hat. This, however, often gave rise to disputes.

The tax authority’s recently published information tries to clarify this situation, by listing the general checks that a prudent participant in the security services supply chain needs to perform in respect of its contracted partners. For example, a subcontractor’s tax number, certificate of incorporation and financial statements should always be checked. In addition to this, NAV offers further help in deciding whether the subcontractor is acting in good faith: if the net contracting fee proposed by the subcontractor is lower than HUF 1,350 per hour, then the client should suspect that there is a risk of tax fraud.

According to NAV’s information notice, there are also grounds for suspicion if a security firm’s client does not properly check that the statutory conditions for providing the security service are being met. For example, one should check whether the subcontractor has all the necessary permits, it is listed in the registry of security service providers, and it uses only a maximum of one subcontractor for the performance of the service. (The Act on the Provision of Security Services prohibits the use of more than one subcontractor.) It could also give cause for suspicion if the hourly rate exceeds the minimum mentioned above, but it is still below the overhead hourly rate (approx. HUF 2,300) below which bids can’t usually be submitted in public procurement tenders.

What if the signs are wrong?

All this gives rise to two pertinent questions. Firstly, if someone has met all the conditions set out by NAV, can they be confident that nobody will call into question their right to deduct VAT? And secondly, will a failure to conduct any of the above checks automatically result in the denial of the tax deduction right? The answer to both questions is: no.

First of all, it’s important to keep in mind that NAV’s guidance notice is not a piece of law, and as such it has no legally binding force. Anyone with a differing opinion is entitled to argue its case in a court of law. Secondly, just because someone meets the conditions set out by NAV, that doesn’t necessarily mean that it didn’t know, or couldn’t have known, about a tax fraud committed in the invoicing chain. In such a case, however, that tax authority would face serious difficulties proving this. So, it’s safe to say that an honest taxpayer, acting in good faith, who fulfils the conditions set out by NAV, has a good chance of not having its right to deduct tax retrospectively questioned.  

By Péter Barta, Attorney-At-Law Jalsovszky

A trendy investment product of recent years has been solar energy projects: under the feed-in tariff (FIT) scheme, the government guarantees what looks like a cash cow for all those who choose to seek their fortune in this sector. But as is usually the case, this money won’t just fall into your lap. Without the necessary professional expertise or the proper legal groundwork, solar power projects can easily run out of steam too.

Don’t make a move without the proper know-how

A financial investor might easily feel tempted to simply buy into a project company that already has a FIT license, and just let things happen from that point on. Usually, however, this is not nearly enough. Both during the acquisition of the assets necessary for the investment, and when dealing with all the red tape, it takes a great deal of professional and market experience to get the project on track. For this reason, the involvement of an industry investor or strong professional partner seems indispensable.

Legal preparation is the key to securing finance

In most cases, solar power plant projects naturally go hand-in-hand with the use of bank financing. Unsurprisingly, banks have recently devised special financing packages with terms and conditions specifically targeted at solar energy projects. However, experience shows that lenders’ expectations with regard to these projects have not been relaxed in the slightest. 

The bank’s lending decision is obviously based primarily on its own return. A failure to make the appropriate legal preparations, however, can easily cause the financing of a project to fall apart in these cases, too. During its due diligence audit of the project, the bank will check for the existence of the necessary permits, the most important of these being the FIT license that ensures that the state will buy the generated electricity. But often it is not clear who the beneficiary of the permit is. In several cases companies with FIT licenses split into project companies, the land boundaries might be altered on the property to which the license relates, or project companies may be sold. This frequently makes it difficult to keep track of who is actually entitled to carry out the investment. 

In addition to the FIT license, another key aspect that is examined during the due diligence audit is whether the construction permit for the project, as well as the environmental permits, have been obtained. And if any of these contain some stipulation that endangers the investment, then the project owner can kiss the bank financing goodbye. 

The lie of the land…

Another key issue relating to bank financing is the unambiguous legal status of the properties associated with the project. The bank regards the property involved in the project as one of the most important items of collateral. So ideally, at the start of the project, the site of the investment should already be taken out of agricultural use and be under the project company’s ownership, with the opportunity to encumber it as security without any major complications. This, however, is only the case for a tiny proportion of the investments. At the beginning of the project, the properties are usually classified as arable land or designated for other cultivation, and the project company – usually based on a preliminary agreement – is still waiting to obtain the title to the site. What’s more, the reclassification, and consequently the transfer of title, will in most of the cases not take place until the solar power plant is built. This can also lead to major complications with the financing of the project, as a preliminary agreement does not offer the bank adequate security, so it may demand the use of other solutions for ensuring legal certainty. 

The financing is complicated even further if the project company is not the owner of the property, but only rents it. In such cases the precise legal nature of the future solar park is ambiguous, since from a legal standpoint it is not clear whether the solar park should be treated as a building or a moveable asset, and therefore what legal methods can be used to ensure its lawful use by a person other than the landowner, and its pledging as security for the bank. Owing to the legal uncertainties that this entails, banks are reluctant to finance products of this nature, so it is advisable to make sure that these legal issues have been cleared up before applying for the financing. 

A stitch in time…

Even if legal uncertainties don’t actually render a project uncreditworthy, they will certainly have a serious effect on the timing. A by no means inconsequential benefit of a project, that has been properly considered from a legal perspective and prepared with the appropriate documents, is speed. In these cases, the time needed for the process of legal due diligence, and in turn the implementation of the project, can be substantially reduced, which is in the best interests of both the bank and the business. And ultimately, this may be reflected both in the overall profitability of the project and in the terms and conditions of the financing.  

By Boglarka Zsibrita, Attorney-At-Law Jalsovszky

60, 59, 58, 55… this is how the number of taxes has changed in Hungary over the past 4 years. The trend is certainly encouraging, but behind the figures there are some more complex phenomena at play.

According to World Bank statistics, corporates spend in Hungary an average of 277 hours on preparing corporate tax returns; this is far higher than the EU average (172 hours), and even the world average (237 hours). One of the main targets of the latest competitiveness programme of the National Bank of Hungary (MNB) is for this figure to drop to 170 hours. The number of taxes that we have to keep track of at the same time is certainly an important factor. Happily, it seems that the financial policy-makers are deliberately making an effort to reduce such number.

A small tax disappears

The government finally gave the green light to a rationalisation move that had long been talked about, when it abolished the cultural tax levied on pornographic content. This tax has brought in annual taxation revenue of between HUF 100 million and HUF 150 million over the past few years. Meanwhile, nobody is paying tax on the content provided from abroad via the internet; and the main source of procuring this kind of content is, obviously, the internet. In other words, there have been few arguments in favour of retaining this tax for many years now.

Multiple lay-off

Unlike the tax described above, scrapping the special tax on credit institutions can be seen as more of a technical move, as this was a variant of the bank tax levied on a different tax base, but without creating any additional tax burden. For this reason, its discontinuation does not mean that the bank tax has been abolished, although its rate has fallen by about a tenth of a percentage point.

The healthcare contribution and accident tax have “fallen victim” to a rationalisation exercise aimed at reducing the number of taxes. The former was merged into the reworked social contribution tax, and the latter into the insurance tax. Both of these are logical and welcome steps, given the high degree of similarity in the purpose of the taxes in these pairings.

Perhaps many readers no longer remember the controversies stirred up by the “special tax on severance payments”; more formally known as the “special tax on certain incomes of private individuals”, which was originally introduced retroactively for the previous five years. We have now gracefully said goodbye to this tax, although few will mourn its passing.

Although it hasn’t disappeared yet, the first simplified small business tax, EVA, has now received the coup de grâce. From this year, it is no longer possible to choose this form of tax if you are not already registered for it. Instead, financial policy-makers recommend the other simplified taxes, KATA and KIVA. Although both of these taxes slow an unbroken growth, revenues from KIVA still failed to exceed those from EVA in 2018. However, if you believe the projections for 2019, this milestone will be reached this year.

Fee or tax?

As some taxes disappear, some others are added to the list. Among these, the introduction of the blank carrier media remuneration with effect from this year can be regarded as a technical addition. The classification of this payment obligation as a tax was always debatable. This is because, if a service is provided in return, it can’t be called a tax. This year, the tax authority NAV itself hurried to assist with this categorisation when, in a position statement issued last year, it stated for the record that fees of this kind are not regarded as VATable because – in its opinion – the authors (or the organisation managing joint intellectual property rights) who are ultimately entitled to the fee, are not providing any identifiable service in respect of which the fee is paid. This means that the payment obligation can be regarded as a tax, and certainly the manufacturers and distributors who have to pay it are likely to see it this way, too.

Is there scope for more simplification?

Fortunately, there’s still plenty of wind in the sails in terms of the effort to reduce the number of taxes. Tax rationalisation primarily needs to affect taxes that are generating relatively little revenue for the budget, compared to the amount of administration they require. The fee for registering household employees remains a textbook example of this. Based on this, in theory, anyone who pays people to do household chores (such as cleaning or babysitting) is required to pay HUF 1,000 a month in tax per person. In the past three years, this tax has brought in less than HUF 100 million in total, and last year only HUF 24 million was received. This means that this tax is only paid on an average of 2,000 people a month. For this reason, it is questionable whether this really is the best way of whitening this sector of employment.

Examined purely from a taxation methodology perspective, a similar fate could be in store for another, entirely new, tax: the immigration special tax. This is essentially a levy on activity that assists immigration, but its definition is so nebulous that its application looks likely to be a challenge both for those affected and for the tax authority. It will be interesting to see if the national economy receives any appreciable revenue from this tax in the first full year of its existence. 

By Tamas Feher, Partner, Jalsovszky

The deductibility of the VAT content of incoming invoices has long been a source of consternation both for equity investors and for the holding companies heading up corporate groups. In a relaxation of the general ban on VAT deduction in these cases, the European Court of Justice (“ECJ”) has given ‘active’ holding companies a way around the restrictions. Meanwhile, other recent judgments by the Court have further expanded the opportunities for VAT deduction. Nevertheless, the ECJ’s decisions also show that it’s better to err on the side of caution.

According to the long-established rule under EU law, a holding company that merely acquires and holds equity interests is not entitled to reclaim the VAT charged on its costs associated with the acquisition and holding of those equity interests. This is especially problematic when the holding company has incurred substantial consulting or transaction charges, on which VAT has been charged, in connection with the acquisition of a company stake. 

The ECJ expressed an important exception to this at a relatively early juncture. Specifically, if the holding company participates in the management of its subsidiary in a manner that goes beyond exercising its shareholder rights (making it an ‘active holding company’), it becomes entitled to deduct the VAT related to the shareholdings concerned. The ECJ’s more recent judgments, however, add some more dimensions to this situation. 

What qualifies as participation?

For a long time it was uncertain what constitutes “participation in the management of a subsidiary”. In its decision passed recently in the ‘Marle case’, the ECJ significantly broadened the definition of this term. In the case in question, the holding company leased a property to its subsidiary, which used the building as the site of its manufacturing operations. The court also classified this letting as ‘management’ activity, which in itself entitles the holding company to reclaim the VAT related to the acquisition of the shares in the subsidiary. 

It doesn’t even matter if the deal falls through 

The above approach, which is already relatively relaxed, was loosened further by another ECJ decision in a case involving Ryanair. Here, Ryanair wanted to acquire another airline by making a public share purchase offer, and it also wanted to exercise the right to reclaim VAT on the related consulting fees. The airline argued that after closing the deal, it would provide management services to the target company. Competition-law obstacles eventually prevented Rynair from completing its acquisition of the target company, but it still wanted to deduct the VAT that had been charged. The company reasoned that it was not “responsible” for the fact that it was unable to commence the intended business activity (namely provision of the management service) due to the failure of the deal. 

According to the ECJ, Ryanair is indeed entitled to recover the VAT related to the failed transaction, provided that the purpose of using the VATable services that it procured was to conduct the intended, but ultimately frustrated, economic activity. And this, in turn, paves the way for reclaiming the VAT incurred in M&A transactions that later fall through.

The amount doesn’t matter

The ECJ also looked at the question of whether the right to recover VAT is restricted if the value of the services provided by the holding company to its subsidiary is lower than the value of services invoiced to the holding company. The court’s position is that it does not necessarily run counter to business rationality if the value of the service provided by the holding falls short of the value of all the consulting and other expenses that are demanded by the holding. The reason for this, according to the ECJ, is that the costs associated with the acquisition should be treated as general costs, leading to potential profits in the form of both service income and holding income (divided, capital gain). The fact that neither the dividend nor the capital gains are subject to VAT, however, does not affect the right of VAT deduction.

Is this the land of plenty? 

The ECJ does not, however, allow the unfettered recovery of input VAT, even in cases where the conditions described above are formally in place. First of all, the ECJ’s position is that VAT can be deducted in respect of such subsidiaries only to which the holding company genuinely provides VAT-able services. If it provides such services to some of its subsidiaries but not to others, then the holding company must split the input VAT using a “suitable method”, and can only exercise the right of deduction in relation to a proportionate part of the costs. An even more recent judgment by ECJ, brought in the case of C&D Foods, also gives reason to be cautious. In this decision, in addition to the factors described above, the ECJ also took into account the objective of the holding company’s decision to sell its stake in its subsidiary. The court found that in this particular case, a creditor of the company had “forced” the company to sell its holding to pay back the outstanding loan. The court ruled that the company sale in question took place in the interest of the creditor, and not the company, and accordingly the VAT associated with the transaction is not deductible. And finally, the ECJ makes it clear that the right to deduct VAT cannot be exercised if it results in tax avoidance. Put more simply: it isn’t a good solution for the holding company to provide its subsidiary with some kind of symbolic service that does not actually take place, but exists only on paper, purely so that it can reclaim the input VAT related to the shareholding.

So where do we stand now?

Far from clarifying things, the ECJ’s judgments often complicate matters further: after the decisions, it is hard to see clearly the precise circumstances under which an investor or a holding company is or is not entitled to deduct the VAT on its costs. For this reason, an individual assessment will, at all circumstances, be probably needed to decide whether a holding company can deduct input VAT on its expenses or not.

By Tamas Feher, Partner, Jalsovszky

Former Baker McKenzie Partner Jozsef Antal has become the Chief Legal Counsel at Hungarian spare auto parts trading company Unix Auto Kft.

Antal joined Baker McKenzie Budapest in 1999, after graduating summa cum laude from the Jozsef Attila University of Sciences Faculty of Law, in Szeged, Hungary. At Baker McKenzie he primarily advised clients on litigation, alternative dispute resolution, and public procurement matters. He was made partner and head of Dispute Resolution at the firm from 2007 to 2019.

Speaking to CEE Legal Matters, Antal explained that: “After 20 years as an external counsel, I felt the need for some fresh air in my professional life; to broaden my experience as a lawyer as well as to become a bit closer to business. This is why I decided to go in-house. Unix has been a great choice for me to start this new role. This company was established right after the fall of the communist regime in 1990, and now it has almost three thousand employees in three countries.  Unix is still in the strongly expanding phase, where a complex legal function is to be built up now, mirroring the growing complexity of the organization – which is an exciting challenge for me.” 

On 29 May 2019 the EU Commission published a guidance on the interaction between the Regulation on the free flow of non-personal data (FFD Regulation) and the General Data Protection Regulation (GDPR). In particular, private businesses, notably small and medium-sized enterprises and other entities which process data in the course of their professional activities, will benefit from the guidance.

According to the GDPR Regulation, non-personal data are distinct from personal data. The non-personal data can be categorised in terms of origin, namely (i) data which originally did not relate to an identified or identifiable natural person; or (ii) data which was initially personal data, but was later made anonymous. However, in most real-life situations, a dataset is very likely to be composed of both personal and non-personal data. This is often referred to as a “mixed dataset”. Examples of mixed datasets include a company’s tax records, mentioning the name and telephone number of the managing director of the company; or a company’s knowledge of IT problems and solutions based on individual incident reports.

Neither the FFD Regulation, nor the GDPR imposes an obligation on data processors to split the mixed datasets or to process personal and non-personal data separately. In the case of mixed datasets (i) the FFD Regulation applies to the non-personal data part of the dataset; while (ii) the GDPR’s free flow provision applies to the personal data part of the dataset.

If the non-personal data part and the personal data parts are “inextricably linked”, the data protection rights and obligations stemming from the GDPR fully apply to the entire mixed dataset, including in cases where personal data represents only a small part of the dataset.

By Adrienn Megyesi, Attorney at law, KCG Partners Law Firm