Reclaiming VAT on bad debts under the new 2020 rules may well conjure up images of a TV show obstacle course.  Initial experiences suggest that anyone trying to reclaim VAT will be up against the wall. But the undertaking isn’t unfeasible.

Recently, a Hungarian court accepted the right of a taxpayer to recover VAT on a bad debt where the VAT claim has already elapsed. The court made it clear that the statute of limitations does not count from the day of the original invoice but from the date when the debt became definitively irrecoverable. This decision may give hope to taxpayers in many pending cases.

While there were still as many as 60 types of tax in Hungary five years ago, this number was reduced to 54 by the end of last year. This process was interrupted by the recent introduction of crisis taxes. It remains to be seen whether this trend will now be reversed.

For two years, new rules apply to proceedings at the ordinary courts, which make litigation a lot more difficult and formalised. As a result, lawyers are increasingly confronted with the question of whether the arbitration court or the ordinary court is more appropriate for ruling on any potential disputes. Of course, the time-worn answer is: it depends… But on what?

One does not simply walk into the courtroom and hope for the best. To win a civil case you will need to navigate through the strict formalitites that were introduced by the new Hungarian civil procedure code. It closed many well-known paths of litigation tactics and antics but also opened up new possibilities. 

It has long been a problem that the tax authority refuses to refund to a supplier the VAT that has already paid by him, even if the customer has not paid the gross purchase price at all. However, in a recent ruling, the European Court of Justice has clearly ruled that if the claim has become definitively unrecoverable, the Hungarian tax authority NAV is also required to refund the VAT on that claim to the seller. This decision now also allows other affected taxpayers to request a refund of the VAT on their unrecoverable receivables within a maximum of six months.

It has been clear for some time that Hungary is in breach of EU law by not allowing the refunding of VAT on bad debts. The fact that cases of Hungarian taxpayers have now been brought before the European Court of Justice (ECJ) has forced Hungarian lawmakers to move on the issue. While the package of tax amendments submitted last week provides an opportunity to reclaim such VAT, in certain cases – due to the planned administrative restrictions – it will still only be possible to enjoy this right with reference to EU law.

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.