Judgment;Summary — ECLI:EU:C:2021:961
Date: 2021-11-25
Language of the case: Hungarian
Court formation: Seventh Chamber
Subject matter: Taxation;Value added tax
Procedure: Reference for a preliminary ruling
Origin: Hungary

summary, the 
first-tier tax authority reached the following conclusions concerning the services 
and cooperation agreement between the applicant and Sziget-Reklám Kft. which 
was the subject of the invoices: 
– The payment of HUF 48 000 000 plus VAT is disproportionately high, 
given that the same service has also been purchased for a lower price. 
– The contract is fraudulent, since the service provided barely amounts 
to a genuine service. 
– The contract sum is also disproportionately high because the 
expenditure does not generate any publicity value or commercial 
return; the applicant could have achieved the actual publicity value at 
far less expense. 
– Experts are able to pinpoint possible customers or clients from among 
potential commercial partners, namely paper factories, hot lamination 
workshops and other industrial plants; and if they cannot identify 
them, no type of advertising will solve the problem, since customers 
do not base their decisions on advertisements displayed on cars but on 
factors such as price, quality, delivery time or flexible payment terms. 
It could therefore have been predicted that the expenditure in question 
would generate losses and could not be expected to improve business 
results. 
Having regard to the points set out above, and based on the expert opinions, the 
first-tier tax authority found that the advertising on racing cars for which Sziget-
Reklám Kft. invoiced the applicant does not constitute expenditure in connection 
with the applicant’s taxable income-generating activities. 
In reaching its conclusion, the first-tier tax authority relied on the following 
statutory provisions: 
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Article 119(1) of the az általános forgalmi adóról szóló 2007. évi CXXVII. 
törvény (Law CXXVII of 2007 on Value Added Tax’; ‘the VAT Law’), which 
establishes that, unless otherwise provided for in the VAT Law, a right to deduct 
the tax arises at the time the amount due in respect of input tax is to be determined 
(Article 120), even where the tax due is calculated in accordance with 
Article 196/B(2)(a). 
Article 120(a) of the VAT Law, which establishes that, in so far as the taxable 
person, acting as such, uses or otherwise exploits goods or services in order to 
carry out a taxable supply of goods or services, he is entitled to deduct from the 
tax that he is liable to pay the amount of tax he was charged, in connection with 
the purchase of the goods or the use of the services, by another taxable person – 
including any person or entity subject to simplified corporation tax. 
Article 8(1)(d) of the a társasági adóról és az osztalék adóról szóló 1996. évi 
LXXXI. törvény (Law LXXXI of 1996 concerning tax on companies and 
dividends; ‘the Law on Tax on Companies and Dividends’), which establishes that 
profit before tax is to be increased by the amounts of any expenditure or costs by 
which the profit has been reduced ― including depreciation of intangible and 
tangible fixed assets ― that are not related to business or income-generating 
activities, having regard in particular to the provisions of Annex 3. 
Pursuant to point 4 of Annex 3 to the Law on Tax on Companies and Dividends, 
[for the purposes of Article 8(1)(d), the following, inter alia, will not be deemed 
expenditure or costs incurred for the benefit of business activities:] payment 
(whether total or partial) for a service that exceeds HUF 200 000, excluding VAT, 
where it can clearly be concluded on the basis of the circumstances (such as, in 
particular, the taxable person’s business activities, his turnover, the nature of the 
service or the payment for the said service) that use of the service is contrary to 
the requirements of reasonable management; payments received during a single 
financial year for services of the same kind from the same person are to be treated 
jointly. 
With regard to the last of these statutory provisions and the definition of 
reasonable management, the first-tier tax authority noted that the Law on Tax on 
Companies and Dividends does not define this concept, and therefore the content 
of the requirement has to be inferred from the relevant case-law. The 
interpretation of the requirement for reasonable management under tax law is not 
precisely the same as the content of the same fundamental principle under civil 
law, which has also been developed by case-law. According to tax case-law, in 
order to demonstrate reasonable management and a connection with income-
generating activities, two conditions must be shown to be satisfied: 
– First and foremost, it must be demonstrated that the economic 
transaction to which the payment relates actually took place, and also 
that the specific service in question, and thus the payment of the 
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corresponding consideration, are related to the taxable person’s 
business or income-generating activities. 
– Secondly, the question of whether the expenditure incurred was 
manifestly and disproportionately excessive must also be examined. 
In this regard, the first-tier tax authority found that the stickers ― that is to say, 
the advertisements ― were actually placed on the racing cars taking part in the car 
race, but that ― as is clearly confirmed by the experts’ concurring opinions ― the 
transaction did not produce any benefit for the applicant and is therefore not 
connected with its income-generating activities. Moreover, the consideration paid 
for the advertising service received by the applicant far exceeded the usual market 
price, and was therefore deemed to be contrary to the requirements of reasonable 
management. 
In the light of these considerations, the first-tier tax authority ruled that the service 
that was treated as expenditure was not reasonable from a financial standpoint, 
could not be connected to the applicant’s business or income-generating activities, 
and, according to the expert reports, had no publicity value; consequently, under 
the statutory provisions cited above, the VAT in the invoices for the said service is 
not deductible. In the light of the information available to it, the first-tier tax 
authority therefore found that the applicant, as the taxable person, had incorrectly 
deducted the VAT included in the invoices issued by Sziget-Reklám Kft., and 
consequently, under Article 120(a) of the VAT Law, it was not entitled to deduct 
the VAT charged to it in invoices for a service that had no value in terms of 
income generation. 
The first-tier tax authority therefore assessed the applicant as being liable for the 
VAT it had included in its tax return as deductible input VAT charged on the 
service it had received from Sziget-Reklám Kft., because the authority deemed the 
VAT to have arisen under invoices issued for expenditure that was not for the 
benefit of the company. 
Proceedings before the second-tier tax authority and the decision given 
Following an administrative-law appeal by the applicant, the defendant, acting as 
the second-tier tax authority, upheld the decision given by the first-tier authority 
[…] on 9 January 2019 (‘the second-tier decision’). 
According to the grounds for the second-tier decision, the first-tier tax authority 
was correct in finding that the applicant, as the taxable person, had incorrectly 
deducted the VAT included in the disputed invoices issued by Sziget-Reklám Kft., 
since the expert opinions clearly confirmed that the management with regard to 
the purchase of that service was not reasonable. Consequently, under Article 120 
of the VAT Law, the applicant was not entitled to deduct the input VAT charged 
to it in invoices for a service that had no value in terms of income generation. 
Therefore, in the opinion of the second-tier tax authority, the first-tier decision 
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cannot be considered to be contrary to law in so far as that decision assessed the 
applicant as being liable for the VAT it had included in its tax return as deductible 
input VAT included in the invoices from Sziget-Reklám Kft., which were issued 
in respect of expenditure that had not been incurred for the benefit of the 
company. 
Purpose of the administrative-law appeal 
In its administrative-law appeal, the applicant is asking for the first and second-
tier decisions to be declared contrary to law and for both decisions to be annulled. 
It is challenging both decisions in their entirety as regards both the legal basis and 
the amounts involved. 
In its opinion, the factors taken into account by the defendant ― namely, that its 
advertising expenditure is not reasonable, does not generate any commercial 
return, has no real publicity value and cannot be classed as income-generating 
activity ― have absolutely no bearing on the right to deduct VAT, because such 
an approach bears no relationship to the fundamental principles on which the 
system of value added tax is based. 
On this issue, with regard to the right to deduct tax, it relies on various judgments 
of the Court of Justice of the European Union: the judgment in Case C-107/10 
(Enel Maritsa Iztok 3), paragraph 32; the judgment in Case C-324/11 (Tóth), 
paragraphs 23, 24 and 25; and the judgment in Case C-376/02 (‘Goed Wonen’), 
paragraph 26. 
It also places particular reliance on the judgment in Case C-317/94 (Elida Gibbs), 
citing paragraphs 26 and 27 and also noting that the observations made in this 
judgment have been confirmed in several other judgments of the Court of Justice 
(such as those in Case C-285/10, paragraph 28, and in joined Cases C-249/12 and 
C-250/12, paragraph 33). In view of the content of those judgments, it considers 
there can be no doubt that the taxable amount is the consideration actually 
received by the vendor under a specific transaction; in other words, the defendant 
is incorrectly relying on ‘disproportionate value’ as grounds for refusing the right 
to deduct. 
It points out that, according to paragraphs 43 and 44 of the judgment in Case 
C-118/11, the common system of VAT seeks to ensure complete neutrality of 
taxation of all economic activities, whatever their purpose or results, provided that 
they are themselves subject, in principle, to VAT. 
In addition to these judgments it also refers to the paragraphs it cites from the 
judgments in the following cases: Case 230/87 (Naturally Yours Cosmetics), 
paragraph 16; Case 154/80 (Coöperatieve Aardappelenbewaarplaats), 
paragraph 13; Case C-126/88 (Boots Company), paragraph 19; Case C-258/95 
(Fillibeck), paragraph 13; Case C-404/99 (Commission v France), paragraph 38; 
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Case C-412/03 (Hotel Scandic Gåsabäck), paragraph 21; and joined Cases 
C-621/10 and C-129/11 (Balkan and Sea Properties), paragraphs 43 and 44. 
In the light of the above, the applicant considers that the right to deduct VAT can 
also be exercised where the expenditure paid out by the taxable person was neither 
reasonable nor economically efficient. It notes that in the present case the tax was 
passed on, since it paid Sziget-Reklám Kft. the tax charged by the supplier in its 
invoices by bank transfer. It states that its right to deduct the tax is enshrined in 
Article 119(1) of the VAT Law, under which the right to deduct arises at the time 
the amount due in respect of input tax is to be determined (Article 120). 
In its opinion, the requirement in Article 120(a) of the VAT Law to ‘otherwise 
exploit[s]’ ― which means that the right to deduct can be exercised only where 
the service purchased gives the taxable person a benefit that can be demonstrated 
in terms of numbers in budget lines ― is clearly contrary to EU law, and 
therefore, in accordance with the principles of the primacy of EU law and the 
approximation of laws, it constitutes an additional requirement that cannot apply. 
The defendant’s arguments 
In its response, the defendant requests that the administrative-law appeal be 
dismissed, and repeats the legal position set out in the grounds for the decision 
challenged in the appeal. 
The defendant continues to believe that the expenditure prompted by the invoices 
censured by the tax authority is manifestly and disproportionately excessive, and 
that the service recorded as an expense is not reasonable in financial terms, cannot 
be related to business or income-generating activities and, according to the expert 
opinions, has no publicity value. On this point it notes that, having considered the 
applicant’s income statements over several financial years, the type and local 
nature of the service provided by the company in the market and the image 
projected by the company on its website, the experts involved in the investigation 
concluded that the applicant’s potential commercial partners are unlikely to buy 
consumer goods on the basis of emotional decisions. The applicant operates in the 
electrical installation sector, and contracts for larger-scale projects will not be 
awarded on a non-professional basis. When selecting a commercial partner, the 
factors influencing the decision are price, payment terms and delivery conditions. 
In the applicant’s case, the results do not suggest that the expenditure produced 
any benefit either, and therefore both expert opinions concluded that displaying 
the applicant’s name on stickers on the sides of vehicles taking part in motor races 
was of no value. 
The defendant therefore believes that it has not breached the fundamental 
principle of the system of value added tax, since the circumstances it refers to in 
the administrative-law appeal ― the unreasonable nature, the absence of any 
publicity value and the lack of any connection with income-generating activities 
― are indeed relevant when assessing the unlawfulness of the deduction. 
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It therefore considers that the applicant’s argument that the right to deduct VAT 
can also be exercised where the taxable person’s expenditure is not reasonable or 
economically efficient is completely wrong. It emphasises that the lack of any 
economic rationale prevents the exercise of the right to deduct VAT and that the 
unrealistic consideration also makes the content of the invoice implausible. In 
order for the deduction to be lawful, there must be an immediate and direct 
connection between the purchase and the taxable business activities, and where 
there is no such connection there is no right to deduct. 
The defendant also notes that Article 80(1) of the VAT Directive unequivocally 
and exhaustively lays down the conditions that must be satisfied in order for a 
Member State to be able to make provision in its legislation for the taxable 
amount of a transaction to be corrected. All of this means that where the taxable 
amount is not genuine, Member States’ legislation may make adjustments to the 
taxable amount recorded in the invoice, as was done in the present case. 
Legislative framework 
1. EU law 
Article 168(a) of the VAT Directive, which establishes that in so far as the goods 
and services are used for the purposes of the taxed transactions of a taxable 
person, the taxable person is entitled, in the Member State in which he carries out 
these transactions, to deduct from the VAT which he is liable to pay the VAT due 
or paid in that Member State in respect of supplies to him of goods or services, 
carried out or to be carried out by another taxable person. 
Article 80(1) of the VAT Directive: ‘In order to prevent tax evasion or avoidance, 
Member States may in any of the following cases take measures to ensure that, in 
respect of the supply of goods or services involving family or other close personal 
ties, management, ownership, membership, financial or legal ties as defined by the 
Member State, the taxable amount is to be the open market value: 
(a) where the consideration is lower than the open market value and the 
recipient of the supply does not have a full right of deduction under 
Articles 167 to 171 and Articles 173 to 177; 
(b) where the consideration is lower than the open market value and the supplier 
does not have a full right of deduction under Articles 167 to 171 and 
Articles 173 to 177 and the supply is subject to an exemption under 
Articles 132, 135, 136, 371, 375, 376, 377, 378(2), 379(2) or Articles 380 to 
390b; 
(c) where the consideration is higher than the open market value and the 
supplier does not have a full right of deduction under Articles 167 to 171 
and Articles 173 to 177. 
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For the purposes of the first subparagraph, legal ties may include the relationship 
between an employer and employee or the employee’s family, or any other closely 
connected persons.’ 
2. Hungarian law 
Legal provisions already cited above in the section on the facts: 
Article 119(1) of the VAT Law, under which, unless otherwise provided for in the 
VAT Law, a right to deduct the tax arises at the time the amount due in respect of 
input tax is to be determined (Article 120), even where the tax due is calculated in 
accordance with Article 196/B(2)(a). 
Article 120(a) of the VAT Law, which establishes that, in so far as the taxable 
person, acting as such, uses or otherwise exploits goods or services in order to 
carry out a taxable supply of goods or services, he is entitled to deduct from the 
tax that he is liable to pay the amount of tax he was charged, in connection with 
the purchase of the goods or the use of the services, by another taxable person – 
including any person or entity subject to simplified corporation tax. 
Article 8(1)(d) of the Law on Tax on Companies and Dividends, pursuant to 
which profit before tax is to be increased by the amounts of any expenditure or 
costs by which the profit has been reduced ― including depreciation of intangible 
and tangible fixed assets ― that are not related to business or income-generating 
activities, having regard in particular to the provisions of Annex 3. 
Point 4 of Annex 3 to the Law on Tax on Companies and Dividends: For the 
purposes of Article 8(1)(d) the following, inter alia, will not be deemed expenses 
or costs incurred for the benefit of business activities: payment (whether total or 
partial) for a service that exceeds HUF 200 000, excluding VAT, where it can 
clearly be concluded on the basis of the circumstances (such as the taxable 
person’s business activities, his turnover, the nature of the service or the payment 
for the said service) that use of the service is contrary to the requirements of 
reasonable management; payments received during a single financial year for 
services of the same kind from the same person are to be treated jointly. 
Reasons for the questions referred by the referring court 
As the applicant has said, these proceedings revolve around the answer to the 
question of whether a taxable person who is solely carrying on a taxable activity is 
entitled to deduct only where he can prove the ‘benefit’ of the service provided to 
him (in this case, an advertising service), and can back it up with specific 
objective information, 
According to the referring court, this question assumes particular importance in 
the present case when one considers also that, with regard to the right of 
deduction, Article 168(a) of the VAT Directive refers only to the expression ‘are 
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used’, whereas, by contrast, in addition to the term ‘uses’, Article 120(a) of the 
VAT law also includes the expression ‘otherwise exploits’ and, in Hungarian, 
exploitation means usage that produces results, that is, effective and profitable 
use. 
In the light of the above, in order to reach a decision in the proceedings the 
following question must in any event be answered: whether, with regard to the 
right to deduct the tax, the concept of ‘use’ as it appears in the VAT Directive 
must be understood to include the generation of a profit and a demonstrable return 
― and, thus, a benefit; in other words, whether these elements are essential in 
order for there to be ‘use’ within the meaning of Article 168(a) of the VAT 
Directive. The interpretation of EU law requested by the referring court therefore 
relates to the circumstances and subject matter of the main proceedings. 
The judgments of the Court of Justice cited by the applicant, or the parts of those 
judgments cited by it, do not specifically refer to this issue or have a bearing on it. 
Paragraph 32 of the judgment in Case C-107/10 states that the right to deduct is 
exercisable immediately in respect of all the taxes charged on transactions relating 
to inputs; in essence, the same point is made in paragraph 24 of the judgment in 
Case C-324/11, which addresses the principle of tax neutrality. Likewise, 
paragraph 26 of the judgment in Case C-376/02 and paragraph 43 of the judgment 
in Case C-118/11 also deal with the principle of tax neutrality. By contrast, the 
judgments in Cases C-317/94 (Elida Gibbs) and C-285/10, in joined Cases 
C-249/12 and C-250/12, in Case C-412/03 and in joined Cases C-621/10 and 
C-129/11 dealt with the taxable amount, which they held to be subjective. (For 
their part, in view of the dates of the judgments ― 5 February 1981, 23 November 
1988, 27 March 1990, 16 October 1997 and 29 March 2001 ― the judgments in 
Cases 154/80, 230/87, C-126/88, C-258/95 and C-404/99, naturally, do not affect 
the VAT Directive.) 
Therefore, in the view of the referring court, the replies to the questions referred in 
this decision cannot be clearly inferred from the judgments cited by the applicant, 
given that the subject matter of the proceedings is different. 
In the light of all of the above, the referring court has concluded that in order to 
rule on the proceedings, it needs to refer the matter to the Court of Justice for a 
preliminary ruling […] [procedural consideration of domestic law]. 
Veszprém, 20 July 2020 
[…] [signatures]