Proposal for a COUNCIL IMPLEMENTING DECISION authorising Hungary to apply a special measure derogating from Article 193 of Council Directive 2006/112/EC on the common system of value added tax
Date: 2018-02-09
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Hungary, VAT, derogation from EU law, employment service, taxpayer, temporary employment

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   EUROPEAN COMMISSION  Brussels, 9.2.2018 COM(2018) 58 final 2018/0023 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION authorising Hungary to apply a special measure derogating from Article 193 of Council Directive 2006/112/EC on the common system of value added tax  
 
 
EXPLANATORY MEMORANDUM 

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax1 (hereafter ‘the VAT Directive’), the Council, acting unanimously 
on  a  proposal  from  the  Commission,  may  authorise  any  Member  State  to  apply  special 
measures  for  derogation  from  the  provisions  of  that  Directive  in  order  to  simplify  the 
procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance. 

By letter registered with the Commission on 26 June 2017, Hungary requested authorisation 
to prolong Council Implementing Decision (EU) 2015/23492 of 10 December 2015 and thus 
to continue the application of a measure derogating from Article 193 of the VAT Directive. In 
accordance with Article 395(2) of the VAT Directive and after it has received from Hungary 
further details on the justification of the request, the Commission informed the other Member 
States by letter dated 11 December 2017 of the request made by Hungary. By letter dated 12 
December  2017,  the  Commission  notified  Hungary  that  it  had  all  the  information  it 
considered necessary for appraisal of the request. 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

Hungary  informed  the  Commission  of  fraud  schemes  in  the  sector  of  supply  of  staff,  in 
particular  as  regards  temporary  employment  agencies  and  organisations  providing  similar 
services, such as school cooperatives whose members perform work for third parties.  

One  of  the  characteristics  of  supplying  this  type  of  services  is  that  large  investments  or 
specialised knowledge is not really required. It is therefore relatively easy to establish such a 
business which then disappears after a short period. Because of limited investments, the VAT 
received from clients often largely exceeds the deductible VAT on these investments or, more 
general, on the input. The non-deducted VAT on the input constitutes therefore only a small 
cost element when these undertakings, with little or no assets, disappear. The overall amount 
of unpaid VAT becomes difficult or impossible to recover. 

In  order  to  fight  VAT  fraud  in  the  sector  of  temporary  employment  agencies,  Hungary 
requested  in  2014  a  derogation  from  Article  193  of  the  VAT  Directive  to  be  authorised  to 
provide that for supplies of staff engaged in activities other than those covered by point (a) of 
Article  199(1)  of  the  VAT  Directive,  the  person  liable  for  payment  of  VAT  is  the  taxable 
person to whom the supplies are made (the reverse charge mechanism). The authorisation was 
granted by Council Implementing Decision (EU) 2015/23493 which expired on 31 December 
2017.  

Hungary requested the authorisation to continue to apply the special measure derogating from 
Article  193  of  the  VAT  Directive  and  at  the  same  time  to  extend  its  scope  to  pensioners' 
cooperatives.  

According to information submitted by Hungary, the reverse charge mechanism has proven to 
be  an  appropriate  and  effective  tool  in  combating  corrupt  practices  in  the  temporary 
employment  agencies  sector.  Hungary  namely  submits  that  once  the  reverse  charge  was 
introduced, the number of temporary agencies dropped. At the same time the data show that 

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3 

OJ L 347, 11.12.2006, p. 1. 
OJ L 330, 16.12.2015, p. 53.  
OJ L 330, 16.12.2015, p. 53.  

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while the number of taxpayers in the given sector decreased, there was a sharp increase in the 
taxable amount of domestic supplies in 2016.  

Hungary submits that a significant number of measures were introduced to combat the VAT 
fraud  (e.g.  increased  supervision  and  controls  of  new  registering  companies,  legislative 
changes  to  increase  the  efficiency  of  control  activities,  monthly  VAT  returns  for  newly 
registered  companies,  the  introduction  of  a  minimum  services  fee  for  school  cooperatives, 
monitoring of receipts from cash registers on-line, domestic VAT recapitulative statements in 
certain cases, etc.). Other anti-fraud measures with particular focus on temporary employment 
agencies  are  planned  by  Hungary  (e.g.  narrowing  the  scope  of  the  temporary  agency  work 
sector,  introduction  of  a  guarantee  linked  to  the  activities  in  this  sector,  extension  of  an 
employment  security).  Notwithstanding  these  measures,  Hungary  considers  that  to  further 
reduce  the  damage  done  to  the  sector  the  protective  reverse  charge  mechanism  needs  to  be 
maintained.  

Hungary also informed the Commission that a new legal institution was to be introduced in 
Hungary, namely the pensioners' cooperatives. Similarly to school cooperatives, employment 
by  pensioners'  cooperatives  is  to  be  considered  analogous  to  temporary  agency  work. 
Hungary  therefore  requests  the  reverse  charge  mechanism  to  apply  also  to  the  latter 
cooperatives.  

It  is  to  be  noted  that  the  VAT  Directive  already  foresees  in  an  optional  application  of  the 
reverse  charge  mechanism  in  relation  to  the  supply  of  staff  (Article  199(1)(b)  of  the  VAT 
Directive).  This  possibility  is  limited  to,  essentially,  the  immovable  property  sector  (Article 
199(1)(a) of the VAT Directive). The proposed derogating measure should therefore only be 
applicable to situations not already covered by the VAT Directive. 

Finally, as the adoption of the derogating measure will take place after the expiry of Council 
Implementing Decision (EU) 2015/2349 (i.e. after 31 December 2017), this proposal cannot 
extend the previous measure.  

It  is  proposed  to  grant  the  derogation  until  31  December  2020.  As  until  the  expiry  of  the 
derogation, the measures undertaken and to be introduced by Hungary should be effective in 
the fight against fraud in the sector concerned, Hungary should not need any longer period to 
derogate from Article 193 of the VAT Directive with regards to supplies of staff by temporary 
employment agencies. A renewal of the derogation should therefore not be necessary.  

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 395 of the VAT Directive. 

• 

Subsidiarity (for non-exclusive competence)  

Considering  the  provision  of  the  VAT  Directive  on  which  the  proposal  is  based,  the 
subsidiarity principle does not apply. 

• 

Proportionality 

The proposal complies with the proportionality principle for the following reasons. 

The Decision concerns an authorisation granted to a Member State upon its own request and 
does not constitute any obligation. 

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Given  the  limited  scope  of  the  derogation,  the  special  measure  is  proportionate  to  the  aim 
pursued, i.e. to combat tax evasion. It goes not beyond what is required to combat fraud in a 
specific sector. 

• 

Choice of the instrument 

Under  Article  395  of  the  VAT  Directive,  derogation  from  the  common  VAT  rules  is  only 
possible  with  the  authorisation  of  the  Council  acting  unanimously  on  a  proposal  from  the 
Commission.  Moreover,  a  Council  Decision  is  the  most  suitable  instrument  since  it  can  be 
addressed to individual Member States. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

This proposal is based on a request made by Hungary and concerns only this Member State. 

• 

Collection and use of expertise 

There was no need for external expertise. 

• 

Impact assessment 

The  proposal  for  Implementing  Decision  aims  at  preventing  certain  forms  of  tax  evasion  or 
avoidance in the sector of supplies of staff in Hungary. The reverse charge mechanism should 
help  Hungary  to  further  combat  the  VAT  fraud  in  this  sector.  Consequently,  the  derogating 
measure will have a potential positive impact.  

Because of the narrow scope of the derogation and the limited application in time, the impact 
will in any case be limited. 

4. 

BUDGETARY IMPLICATIONS 

The proposal will have no negative implications for the EU budget. 

5. 

OTHER ELEMENTS 

The proposal includes a sunset clause set at 31 December 2020. 

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2018/0023 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising Hungary to apply a special measure derogating from Article 193 of Council 
Directive 2006/112/EC on the common system of value added tax 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union,  

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax1 and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

Pursuant to Article 193 of Directive 2006/112/EC, any taxable person carrying out a 
taxable supply of goods or services is, as a general rule, liable for the payment of value 
added tax (VAT) to the tax authorities. 

In  order  to  combat  VAT  fraud  in  the  sector  of  temporary  employment  agencies, 
Hungary requested in 2014 an authorisation to introduce a special measure derogating 
from  Article  193  of  Directive  2006/112/EC  to  provide  that,  for  supplies  of  staff 
engaged in activities other than those covered by point (a) of Article 199(1) of the that 
Directive,  the  person  liable  for  payment  of  VAT  is  the  taxable  person  to  whom  the 
supplies  are  made  ("reverse  charge  mechanism").  The  authorisation  was  granted  by 
Council Implementing Decision (EU) 2015/23492 and expired on 31 December 2017.  

By letter registered with the Commission on 26 June 2017, Hungary has requested an 
authorisation to apply a measure derogating from Article 193 of that Directive in order 
to make the recipient liable for the payment of VAT for the supply of staff.  

In  accordance  with  Article  395(2)  of  Directive  2006/112/EC,  the  Commission 
informed the other Member States, by letter dated 11 December 2017, of the request 
made  by  Hungary.  By  letter  dated  12  December  2017,  the  Commission  notified 
Hungary that it had all the information necessary to consider the request. 

According to information  provided by Hungary,  a number of traders in the sector  of 
temporary employment agencies engage in fraudulent activities by supplying services 
without paying the VAT over to the tax authorities. Since this type of activity does not 
necessarily  require  important  input  or  investment,  the  VAT  these  agencies  receive 
often exceeds largely the deductible VAT they have paid to their suppliers. A number 
of  these  agencies,  often  with  little  or  no  assets,  disappear  subsequently  after  a  short 
period  of  only  a  few  months,  making  the  recovery  of  unpaid  VAT  difficult  or 
impossible. 

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2 

OJ L 347, 11.12.2006, p.1. 
Council Implementing Decision (EU) 2015/2349 of 10 December 2015 authorising Hungary to apply a 
measure derogating from Article 193 of Directive 2006/112/EC on the common system of value added 
tax (OJ L 330, 16.12.2015, p. 53).  

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(6) 

(7) 

(8) 

By designating the person to whom these services are supplied as the person liable for 
the payment of VAT in such cases, the derogation would eliminate the opportunity to 
engage  in  that  form  of  tax  evasion.  Hungary  submitted  that  after  the  introduction  of 
the  reverse  charge  mechanism  for  the  supply  of  staff  in  Hungary,  the  number  of 
employment  agencies  decreased  suggesting  a  cleansing  of  the  market.  According  to 
Hungary, the reverse charge mechanism has proven to be an appropriate and effective 
tool in combating corrupt practices in the temporary employment agencies sector.  

Based  on  information  provided  by  Hungary,  a  significant  number  of  measures  were 
introduced to combat VAT fraud, and other anti-fraud measures with particular focus 
on  temporary  employment  agencies  are  planned  by  Hungary.  Notwithstanding  those 
measures, Hungary considers that to further reduce the damage done to the sector the 
protective reverse charge mechanism should continue to apply.  

For a number of situations involving the supply of staff, listed in point (a) of Article 
199(1) of Directive 2006/112/EC, it is already possible to indicate the recipient as the 
person  liable  for  the  payment  of  VAT.  Hungary  should  therefore  be  authorised  to 
apply  the  reverse  charge  mechanism  to  supplies  of  staff  not  already  covered  by 
Directive 2006/112/EC. 

(9) 

The derogation should be limited in time.  

(10)  The  measures  to  be  undertaken  by  Hungary  should  eliminate  fraud  in  the  sector 
concerned  and  therefore  no  further  derogation  from  Article  193  of  Directive 
2006/112/EC should be required with regard to the supply of staff. 

(11)  The derogation has no impact on the Union's own resources accruing from VAT, 

HAS ADOPTED THIS DECISION:  

Article 1 

By way of derogation from Article 193 of Directive 2006/112/EC, Hungary is authorised to 
provide that the person liable for payment of VAT is the taxable person to whom supplies of 
staff, engaged in activities other than those covered by point (a) of Article 199(1) of Directive 
2006/112/EC, are made. 

This Decision shall take effect on the day of its notification. 

This Decision shall expire on 31 December 2020. 

Article 2 

This Decision is addressed to Hungary. 

Done at Brussels, 

Article 3 

For the Council 
The President 

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