KNP Blog

10. 11. 2021. KNP LAW


After many years of legal uncertainty and inconsistent tax authority rulings, the value added tax (“VAT”) payment and reclamation opportunity for foreign travelers has likely been resolved in a recent decision from the Supreme Court of Hungary (“Curia”), based on a prior decision from the Court of Justice of the European Union (“CJEU”) in the ‘Bakati’ case.

The VAT Payment Controversy

For several years there were some controversies and misunderstandings surrounding the VAT payment and reclamation mechanism available to third country national private persons (individuals residing outside of the European Union (“EU”)).

The VAT reclamation system was available for (i) purchases totaling at least EUR 175.00, (ii) the quantity of these purchases did not exceed the size of a traveler’s personal luggage, (iii) the purchased goods served non-commercial purposes, and (iv) the purchased goods were taken out of the EU within 90 days from the date of purchase, which was certified by the customs authority on the sales receipt of the goods in question.

There was a great deal of uncertainty related to the meaning of “traveler’s personal luggage” and the “non-commercial purpose(s)” terms, none of which was defined in Act CXVII of 2007, a.k.a. the VAT Act. This allowed the Hungarian Tax and Customs Administration (“NAV”) to apply their own discretion in each case and interpret these terms inconsistently with reference to certain customs regulations, and the application of the customary meaning of these phrases.

When the tax authority found that the goods purchased by a traveler exceeded the size of the foreign traveler’s luggage, they automatically denied the potential applicability of the export VAT exemption from the seller of the goods – then, they ascertained tax underreporting and imposed sanctions. This significantly burdened the everyday operations of those businesses which were typically set up along Hungary’s EU border(s) and routinely supplied products to foreign travelers.

Findings by the Curia

The decision from the Curia, as well as the underlying findings of the CJEU stipulated that the VAT and customs definitions are not interchangeable, and the everyday meaning of certain words is not sufficient to establish a legally applied definition without focusing on the objectives of the VAT legislation. These findings will likely change the earlier practices used by NAV. Nevertheless, neither the decision from the Curia or the CJEU have suggested a precise definition for the traveler’s personal luggage - leaving the necessity of excessive due care to the seller of the goods.

Another beneficial result of the decision from the Curia was that they confirmed: even if the preconditions of the VAT exemption of a foreign traveler are not met, the possibility of an export VAT exemption cannot be ignored, regardless of whether the parties involved in the transaction have initiated an export customs procedure with the necessary customs formalities or not. In other words, since an underlying customs procedure is not required under EU VAT rules to be eligible for the export VAT exemption, NAV cannot automatically deny the VAT exemption on these grounds either, especially because the seller of the goods has no influence on the buyers’ potential intent to avoid the VAT payment. This could result in NAV having to revise their earlier applied practices.

It remains to be seen what effect the decision from the Curia will have on NAV’s practices. It is likely that the audits of NAV will stay within an objective framework, which is based on more formalized inspection criteria, thereby creating more predictability for sellers of goods to foreign travelers.

The KNP LAW tax team is available to answer any questions you or your organization may have related to the above, or other broader Hungarian tax matters.



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