COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC
Date: 2020-12-17
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Hungary, VAT, basis of tax assessment, derogation from EU law, employment service, provision of services, tax collection, tax offence, taxpayer, temporary employment agency

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  EN 

   EUROPEAN COMMISSION  Brussels, 17.12.2020  COM(2020) 811 final  COMMUNICATION FROM THE COMMISSION TO THE COUNCIL in accordance with Article 395 of Council Directive 2006/112/EC  
 
 
1.  

BACKGROUND 

Pursuant to Article 395 of Council Directive 2006/112/EC of 28 November 2006 on the 
common  system  of  value  added  tax1  (the  VAT  Directive),  the  Council,  acting 
unanimously  on  a  proposal  from  the  Commission,  may  authorise  any  Member  State  to 
introduce special measures for derogation from the provisions of this Directive, in order 
to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or 
avoidance. As this procedure provides for derogation from the general principles of VAT, 
in accordance with the case-law of the Court of Justice of the European Union (CJEU), 
the national derogating measures referred to in Article 395 of the VAT Directive which 
are allowed ‘in order to simplify the procedure for charging the tax or to prevent certain 
types of tax evasion or avoidance’, must be interpreted strictly and those measures must 
also be necessary and appropriate for realising the specific objective which they pursue 
and  have  as  little  effect  as  possible  on  the  objectives  and  principles  of  the  VAT 
Directive2. 

By  letter  registered  with  the  Commission  on  17  June  2020,  Hungary  requested  an 
authorisation  to  continue  applying  a  measure  derogating  from  Article  193  of  the  VAT 
Directive.  In  accordance  with  Article  395(2)  of  the  VAT  Directive,  the  Commission 
informed the other Member States by letter dated 16 September 2020 of the request made 
by Hungary. By letter dated 17 September 2020, the Commission notified Hungary that it 
had all the information it considered necessary for appraisal of the request. 

As a general rule, the person liable for the payment of VAT to the tax authorities under 
Article 193 of the VAT Directive is the taxable person supplying the goods or services. 
The purpose of the derogation whose extension Hungary requests is to place that liability 
on  the  taxable  person  to  whom  the  supplies  are  made  (the  so-called  reverse  charge 
mechanism), in the case of supplies of staff engaged in activities other than those covered 
by  point (a)  of  Article 199(1)  of  the  VAT  Directive.  Article  199(1)(b)  of  the  VAT 
Directive allows Member States to apply the reverse charge mechanism to supply of staff 
engaged  in  construction  work,  including  repair,  cleaning,  maintenance,  alteration  and 
demolition services in relation to immovable property. Therefore, the derogating measure 
allows  Hungary  to  apply  the  reverse  charge  mechanism  to  the  supply  of  staff  in  all 
sectors  of  economic  activity.  The  aim  of  the  requested  derogation  is  the  fight  against 
fraud. 

2.  

REVERSE CHARGE 

The person liable for the payment of VAT pursuant to Article 193 of the VAT Directive 
is the taxable person supplying the goods or services. The purpose of the reverse charge 
mechanism  is  to  shift  that  liability  onto  the  taxable  person  to  whom  the  supplies  are 
made.  The  reverse  charge  is  often  used  in  order  to  tackle  VAT  fraud  taking  place  in 

1 OJ L 347, 11.12.2006, p. 1 
2 See judgment of 27 January 2011 in case Vandoorne C-489/09, EU:C:2011:33, paragraph 27. 

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targeted  sectors  of  the  economy,  in  particular  through  the  use  of  ‘missing  trader’ 
structures. 

Missing trader occurs when traders sell goods or provide services, collect the VAT from 
their  customers  and  subsequently  disappear  without  remitting  the  VAT  they  collected 
from their customers to the tax authorities. By designating the person to whom the goods 
or services are supplied as the person liable for the payment of VAT in such cases, the 
domestic  reverse  charge  mechanism  has  been  found  to  eliminate  the  opportunity  to 
engage in that form of tax evasion. 

In the additional information submitted to substantiate its request, Hungary stated that the 
fraud  committed  on  the  supply  of  staff  sector  had  similarities  with  missing  trader 
structures,  given  that  these  services  are  easy  to  provide  and  the  main  cost  for  service 
providers is the cost of employees, which does not entail any VAT to be paid. Therefore, 
the gain for fraudsters is, in practice, the whole amount of VAT charged to the customer. 

3.  

THE REQUEST 

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

In  2017,  Hungary  submitted  another  request  in  order  to  make,  for  the  same  services 
involving  the  supply  of  staff,  the  recipient  liable  for  the  payment  of  VAT.  As  a  result, 
Council  Implementing  Decision  (EU)  2018/4864,  granted  that  authorisation  until  31 
December 2020. 

Hungary now requests, under Article 395 of the VAT Directive, that the Council, acting 
upon  a  proposal  of  the  Commission,  authorises  it  to  continue  applying  this  special 
measure derogating from Article 193 of the VAT Directive as regards the application of 
the  reverse  charge  mechanism  to  domestic  supplies  of  services  involving  the  supply  of 
staff engaged in activities other than those covered by point (a) of Article 199(1) of that 
Directive. 

3 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). 
4 Council Implementing Decision (EU) 2018/486 of 19 March 2018 authorising Hungary to apply a special measure 
derogating  from  Article  193  of  Directive  2006/112/EC  on  the  common  system  of  value  added  tax  (OJ  L  81, 
23.3.2018, p. 15). 

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The request covers the supply of staff provided through temporary employment agencies, 
secondment of staff, school cooperatives, pensioners’ cooperatives and to all supplies of 
services  which  are  not  provided  under  these  legal  forms,  but  in  terms  of  their  content 
actually  entail  the  supply  of  staff.  Therefore,  the  authorisation  whose  extension  is 
requested,  allows  Hungary,  in  practice,  to  apply  the  reverse  charge  to  all  services 
consisting of the supply of staff. 

According to the Hungarian request, the supply of staff sector is extremely vulnerable to 
tax fraud. The main costs for temporary employment agencies are the salaries and related 
taxes  and  contributions,  which  do  not  entail  any  input  VAT,  while  their  purchases  are 
insignificant  by  comparison.  Consequently,  if  the  reverse  charge  is  not  applied,  the 
amount of VAT charged by operators in the sector to their customers, that is to say the 
output  VAT,  is  far  higher  than  the  amount  of  deductible  VAT,  the  input  VAT.  This 
should normally lead to a position of debt towards the Treasury regarding VAT. Further, 
supply  of  staff  services  are  very  simple  to  provide,  as  no  special  knowledge  neither 
special equipment are required to start the economic activity, making very easy to enter 
the supply of staff market. 

Fraudulent  undertakings  providing  temporary  employment  agency  services  typically 
build  up  a  chain,  and  the  undertaking  at  the  end  of  the  chain  that  actually  provides  the 
supply  of  staff  service  does  not  pay  the  VAT  applicable  to  the  service.  This  practice 
distorts  competition  thus  jeopardising  the  operation  of  law-abiding  undertakings. 
Furthermore, tax evasion in the sector involves not only VAT, but also employment taxes 
and contributions, which are about 40 per cent of the total cost of employment.  

According  to  the  information  submitted  by  Hungary,  the  introduction  of  the  reverse 
charge in the supply of staff sector led to a reduction in the number of providers operating 
in  the  sector,  despite  an  increase  in  the  taxable  amount  of  the  supplies  provided.  This 
trend, in their opinion, indicates an effect of “cleansing” of the market.  

Hungary  states  in  its  request  that  the  measure  has  proved  to  be  an  appropriate  and 
effective  instrument  in  combating  abuse  and  has  helped  reducing  VAT  fraud  in  the 
sector.  Considering  the  specific  nature  of  the  temporary  employment  agency  sector, 
which does not require any particular expertise to operate and where the amounts of VAT 
to  be  paid  are  much  higher  than  the  amount  of  deductible  VAT,  if  the  reverse  charge 
mechanism  could  no  longer  be  applied  the  original  conditions  would  according  to 
Hungary soon be restored and the fraudulent chains would re-emerge in no time. 

Furthermore,  Hungary  stresses  that  the  worldwide  economic  downturn  caused  by  the 
COVID-19 pandemic has seriously affected employment and, in particular, the supply of 
staff sector. Flexibility as regards the use of workforce would help businesses to recover 
from  this  situation.  Thus,  it  is  expected  that  the  rate  of  leased  workforces  through  the 
temporary  agency  services  will  exceed  the  rate  before  the  outbreak  of  the  COVID-19 
pandemic. This could be an incentive for fraudsters to try to enter this sector. Therefore, 

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the extension of the derogating measure would help avoiding the appearance of fraudsters 
in the sector. 

4.  

THE COMMISSION´S VIEW 

When  the  Commission  receives  requests  in  accordance  with  Article  395  of  the  VAT 
Directive, these are examined with a view to ensure that the basic conditions for granting 
a  derogation  are  fulfilled,  i.e.  whether  the  proposed  specific  measure  simplifies 
procedures  for  taxable  persons  and/or  the  tax  administration  or  whether  the  proposal 
prevents certain types of tax evasion or avoidance. In this context, the Commission has 
always taken a restrictive, cautious approach to ensure that derogations do not undermine 
the  operation  of  the  general  VAT  system,  are  limited  in  scope,  necessary  and 
proportionate. 

Any derogation from the system of fractioned payment can, therefore, not be more than a 
last resort and an emergency measure and must offer guarantees as to the necessity and 
exceptional nature of the derogation granted.  

These  conditions  were  fulfilled  when  the  initial  derogation  was  granted  by  Council 
Implementing Decision (EU) 2015/2349. The 2015 report on the “Study to quantify and 
analyse  the  VAT  Gap  in  the  EU  Member  States”5,  published  by  the  European 
Commission, showed that the VAT Gap in Hungary, for year 2013, reached 24.4%, well 
above the EU median of 13.9%. Therefore, exceptional measures were needed in order to 
tackle the VAT fraud.  

When Hungary requested in 2017 to continue applying the reverse charge to the supply of 
staff  sector,  it  was  stated  that  a  significant  number  of  measures  were  introduced  to 
combat VAT fraud. Further, other anti-fraud measures with particular focus on temporary 
employment  agencies  were  planned  by  Hungary.  Notwithstanding  those  measures, 
Hungary  considered  that  the  protective  reverse  charge  mechanism  should  continue  to 
apply  to  further  reduce  the  damage  done  to  the  sector.  Nevertheless,  in  recital  11  of 
Council  Implementing  Decision  (EU)  2018/486  it  was  stressed  that  the  measures  to  be 
undertaken by Hungary should eliminate fraud in the sector concerned and, therefore, no 
further derogation from Article 193 of the VAT Directive should be required again in the 
future with regard to the supply of staff. 

The measures implemented by Hungary to reduce VAT fraud, not only in the supply of 
staff sector but in all sectors of the economy, include the following: 

-  On  1  January  2012  it  was  introduced  a  tax  registration  procedure  and  enhanced  tax 
authority  supervision  to  curb  the  formation  of  bogus  companies  and  company  transfers 
and to weed out persons engaging in risky behaviour.  

5 https://ec.europa.eu/taxation_customs/sites/taxation/files/docs/body/vat_gap2013.pdf 

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-  The  fine  for  tax  evasion  in  connection  with  the  concealment  of  income  has  increased 
significantly. In certain cases, the system of sanctions to be applied in the event of non-
compliance with the registration and document-retention obligations has been tightened. 
A  fine  replacing  the  closure  of  a  business  has  been  introduced  for  violations  where 
activities are pursued without any business premises. 

- In 2012, the general time limit for VAT disbursements and, therefore, inspections, was 
raised to 75 days to increase audit efficiency and eliminate unlawful VAT refund claims. 

- On 1 January 2013, the domestic VAT recapitulative statement was introduced. Taxable 
persons are required to report to the tax authority specific details on the invoices issued 
and received by them. Initially, the reporting obligation applied to all invoices where the 
amount of the output VAT was at least HUF 2 million. The threshold has been gradually 
reduced.  From  1  July  2020,  anyone  issuing  an  invoice  is  required  to  report  data  on  all 
invoices  issued  in  respect  of  taxable  persons  registered  in  Hungary,  for  transactions 
performed  in  Hungary,  including  transactions  subject  to  the  reverse  charge  mechanism 
and tax-exempt transactions, except intra-Community supplies. From 1 January 2021, the 
reporting  obligation  will  also  apply  to  invoices  issued  to  non-taxable  persons,  and  the 
threshold for invoices received will be abolished. The tax authority uses the data reported 
for risk analysis purposes and the fastest detection of invoicing chains. 

-  Since  1  January  2013,  taxable  persons  are  allowed  to  pay  a  maximum  of  HUF  1.5 
million in cash per month as consideration for goods or services. 

-  Since  1  January  2015,  newly  established  undertakings  have  to  submit  monthly  VAT 
returns, making it possible to detect earlier and weed out undertakings established for tax 
evasion purposes. In addition, with effect from the same date, it is no longer possible to 
submit  annual  VAT  returns  for  sales  revenue  in  excess  of  HUF  50  million.  Instead, 
quarterly  returns  have  to  be  submitted,  making  it  possible  to  detect  abuse  during  the 
course of the year. 

-  On  1  January  2016,  a  system  was  introduced  in  which  the  tax  authority  classifies 
taxable persons as reliable or risky. The classification of taxable persons is reviewed by 
the tax authority on a quarterly basis. 

-  On  1  July  2017,  invoicing  software  was  introduced  for  real  time  invoice  reporting, 
initially  on  a  voluntary  basis.  It  was  made  compulsory  on  1  July  2018,  and  from  1 
January 2021 will be extended to B2C invoices. The continuous inflow of data helps the 
tax authority to identify risks in real time. 

Furthermore, other measures directly targeting the temporary employment agency sector 
have been introduced: 

- Introduced in 2015, the legal instrument entitled ‘notification of evasion of tax liability’ 
was extended in 2020 to employees as recipients. If, while auditing an employer, the tax 

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authority  identifies  circumstances  relating  to  the  employment  relationship  and  issues  a 
final decision establishing circumvention of the provisions of taxation legislation, it will 
bring  those  circumstances  to  the  relevant  employees’  attention.  This  obligation  applies 
even  where  the  employee  is  no  longer  in  an  employment  relationship  with  the  taxable 
person at the time of notification.  

- The tax authority can also take action to combat the evasion of employment taxes and 
contributions, gathering data from the forms on declarations of employment and changes 
in employment and declarations of tax liabilities available in its databases. The reason is 
that the most common form of tax evasion is where employment is declared, but no tax 
liabilities are declared or paid. One way to resolve these discrepancies, in keeping with 
the taxpayer-friendly approach of the tax authority, is through a supportive procedure in 
which  the  taxable  person  is  informed  of  the  type  of  error  and  the  necessary  corrective 
action, which the taxable person can take of their own accord. Audits may be ordered in 
respect of taxable persons who fail to react of their own accord. 

- The tax authority developed an ‘Employee alert’ IT system in 2017 to identify and react 
swiftly to fraudulent behaviour on the part of employers. The system has been successful 
in helping to combat the shadow economy. 

According  to  the  data  estimates  provided  by  Hungary,  these  measures  have  allowed  to 
reduce VAT fraud in the supply of staff sector from more than 15 per cent in 2015 to less 
than 5 per cent in 2019. 

Hence,  the  package  of  measures  implemented  by  Hungary  have  demonstrated  their 
effectiveness to curb the VAT fraud and have led to a spectacular decrease in the amount 
of  VAT  fraud  in  all  sectors  of  the  economy,  as  it  is  shown  in  the  VAT  gap  reports 
successively  published.  As  previously  mentioned,  in  2013  the  VAT  gap  for  Hungary 
amounted  to  24.4%.  For  20156,  the  VAT  gap  amounted  to  13.74%,  still  above  the  EU 
median  of  10.85%.  In  the  latest  “Study  and  Reports  on  the  VAT  Gap  in  the  EU-28 
Member  States  -  2020  Final  Report”7,  the  VAT  gap  in  Hungary  for  2018  amounted  to 
8.4%, below the EU median of 9.2%. The forecast for 2019 is that the descending trend 
continues, estimating a VAT gap of 6.6% for that year. 

It should be noted that the figures for the VAT gap in relation to all economic sectors do 
not diverge much from the estimates provided by the Hungarian authorities for the size of 
VAT fraud on the supply of staff sector. As a result, the continuation of special measures 
in the latter sector, such as the reverse charge mechanism, does not seem justified.  

6 https://ec.europa.eu/taxation_customs/sites/taxation/files/study_and_reports_on_the_vat_gap_2017.pdf 
7 https://ec.europa.eu/taxation_customs/sites/taxation/files/vat-gap-full-report-2020_en.pdf 

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Measures  such as the tax registration procedure  and enhanced tax authority supervision 
and real time reporting, should be useful to detect VAT fraud at an early stage, avoiding 
the setting up of bogus companies. Since these measures have proved effective in other 
sectors  of  the  economy  they  should  overcome  the  concern  expressed  by  the  Hungarian 
authorities  that  fraudulent  chains  would  re-emerge  in  no  time  if  the  reverse  charge 
mechanism is no longer applied to the supply of staff sector. 

Therefore, the request submitted by Hungary does not fulfil the condition of being a last 
resort  and  an  emergency  measure,  which  must  offer  guarantees  as  to  the  necessity  and 
exceptional nature of the derogation granted. The conventional measures implemented by 
Hungary of a general nature, together with the specific measures abovementioned for the 
temporary employment agency sector, should be enough to address the VAT fraud in the 
supply of staff sector.  

Furthermore,  the  measure  requested  by  Hungary  does  not  seem  limited  in  scope, 
necessary and proportionate to address the specific fraud situation linked to the supply of 
staff  sector.  The  measures  of  a  general  scope  and  the  specific  ones  implemented  by 
Hungary,  in  particular  the  tax  registration  procedure  and  enhanced  tax  authority 
supervision and real time reporting, should be sufficient to tackle the VAT fraud in the 
supply of staff sector.  

Finally, the Commission has objected by means of a Communication to the Council8 to a 
similar request from Italy to apply the reverse charge mechanism to the atypical supply of 
staff. 

5.  

CONCLUSION 

On  the  basis  of  the  above-mentioned  elements,  the  Commission  objects  to  the  request 
made by Hungary. 

8 Communication from the Commission to the Council in accordance with Article 395 of Council Directive 
2006/112/EC (COM/2020/243 final). 

7