Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2018/789 authorising Hungary to introduce a special measure derogating from Article 193 of Directive 2006/112/EC on the common system of value added tax
Date: 2021-07-30
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Hungary, VAT, derogation from EU law, goods and services, liquidation, supply, taxpayer

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   EUROPEAN COMMISSION  Brussels, 30.7.2021  COM(2021) 433 final 2021/0247 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2018/789 authorising Hungary to introduce a special measure derogating from Article 193 of 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  18  February  2021,  Hungary  requested 
authorisation  to  continue  to  derogate  from  Article  193  of  the  VAT  Directive  regarding  the 
person liable for payment of VAT in case of certain supplies carried out by taxable persons 
subject  to  liquidation  or  any  other  proceedings  legally  establishing  its  insolvency.  In 
accordance  with  Article  395(2)  of  the  VAT  Directive,  the  Commission  informed  the  other 
Member States by letter dated 7 April 2021 of the request made by Hungary. By letter dated 
8 April 2021 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 

Based on Article 199(1)(g) of the VAT Directive, Member States may provide that the person 
liable  for  the  payment  of  VAT  is  the  taxable  person  to  whom  the  supply  of  immovable 
property  sold  by  a  judgement  debtor  in  a  compulsory  sale  procedure  is  made  (the  reverse 
charge  mechanism).  In  2017,  Hungary  requested  the  extension  of  the  application  of  the 
reverse  charge  mechanism  to  supplies  of  capital  goods  and  to  supplies  of  other  goods  and 
services with an open market value exceeding HUF 100 000 (approximately EUR 275) at the 
time  of  supply,  when  the  taxable  person  supplying  the  goods  or  services  is  subject  to 
liquidation  or any other  proceedings legally  establishing its insolvency.  The derogation was 
authorised by Council Implementing Decision (EU) 2018/7892 until 31 December 2021. 

Capital goods are typically high value tools, machinery and objects.  Furthermore, according 
to Hungary, there are a large number of transactions exceeding the threshold of HUF 100 000 
carried out by insolvent taxable persons. The liquidator frequently fails to pay the VAT due 
since the amount has to be used to settle earlier claims. At the same time, the purchaser, being 
taxable  person  with  the  right  of  deduction,  can  still  deduct  the  VAT  incurred,  negatively 
impacting the budget and basically financing the liquidation. Hungary also registered cases of 
fraud  whereby  companies  in  liquidation  would  issue  fictitious  invoices  to  active  companies 
greatly reducing their payable tax without the guarantee that the issuer would  pay the VAT 
due.  

though 

the  figures  provided  by 

Even 
the  Hungarian  National  Tax  and  Customs 
Administration  show  a  steady  fall  in  the  number  of  insolvency  proceedings  during  the 
2017-2020  period,  the  economic  effects  of  the  COVID-19  outbreak  could  lead  to  a  sharp 
increase  in  the  number  of  liquidations  in  the  near  future,  making  necessary  keeping  the 
reverse charge mechanism for these transactions. 

Hungary therefore argues that there is a need to safeguard the tax revenue and the budgetary 
interests on account of the number of taxable persons in financial difficulties performing the 
above supplies. The reverse charge mechanism is, according to Hungary, an appropriate tool 

1 
2 

OJ L 347, 11.12.2006, p. 1. 
OJ L 134, 31.5.2018, p. 10–11.  

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to this aim. The taxable person in liquidation would not be liable to pay the VAT due and the 
customer would not be penalised while losses to the public budget would be avoided. 

Even though Hungary requested the authorisation to be prolonged until 31 December 2026, it 
is  proposed  to  authorise  the  extension  of  the  derogation  until  31  December  2024.  A 
derogation allowing making use of the reverse charge mechanism constitutes a means of last 
resort  and  should  be  limited  in  time  as  much  as  possible.  Moreover,  that  period  should  be 
sufficient to implement other conventional measures to reduce the losses to the public budget, 
in particular for those losses connected with fraudulent behaviours, thereby avoiding that this 
measure is prolonged again.   

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 it is based, the proposal falls under 
the exclusive competence of the European Union. Hence, the subsidiarity principle does not 
apply. 

• 

Proportionality 

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

Given  the  limited  scope  of  the  derogation,  the  special  measure  is  proportionate  to  the  aim 
pursued, i.e. to simplify tax collection and combat tax evasion. It does not go beyond what is 
required to fulfil these aims. 

• 

Choice of the instrument 

The instrument proposed is a Council Implementing Decision. 

Under Article 395 of the VAT Directive, a derogation from the common VAT rules is only 
possible upon authorisation by the Council, which is acting unanimously on a proposal from 
the  Commission.  A  Council  Implementing  Decision  is  the  most  suitable  instrument  since  it 
can be addressed to an individual Member State. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

No stakeholder consultation has been conducted. The present proposal is based on a request 
made by Hungary and concerns only this particular Member State. 

• 

Collection and use of expertise 

There was no need for external expertise. 

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• 

Impact assessment 

The  proposal  for  Implementing  Decision  aims  at  safeguarding  tax  revenues  and  budgetary 
interests on account of companies under insolvency procedure in case they carry out supplies 
of capital goods or supplies of goods or services with an open market value exceeding HUF 
100 000.  According  to  Hungary,  applying  the  reverse  charge  mechanism  to  these  types  of 
transactions  has  effectively  simplified  tax  collection  and  prevented  tax  evasion.  The 
implementation of the measure has limited losses to public revenues and generated additional 
budget  revenue  of  approximately  HUF  1.5-2  billion  (approximately  EUR  4.2–5.6  million) 
each year. Therefore, the derogating measure has a positive impact even though very limited. 
Given this limited impact, Hungary should implement other conventional measures to reduce 
the losses to the budget, which could achieve similar results.  

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

• 

Fundamental rights 

The proposal does not have any consequences for the protection of fundamental rights. 

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 2024. 

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2021/0247 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Implementing Decision (EU) 2018/789 authorising Hungary to introduce a 
special measure derogating from Article 193 of 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 valued added tax1, and in particular Article 395(1), first subparagraph, thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

In accordance with 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. 
By  Council  Implementing  Decision  (EU)  2018/7892,  Hungary  was  authorised  to 
introduce  a  measure  derogating  from  Article  193  of  Directive  2006/112/EC  (‘the 
special measure’) regarding the person liable for payment  of VAT in  case of  certain 
supplies carried out by a taxable person subject to liquidation or any other proceedings 
legally establishing its insolvency. 

By letter of 18  February 2021, Hungary submitted a request  to  the Commission  that 
the authorisation to apply the special measure be prolonged until 31 December 2026 
(“the request”). Hungary submitted a report, including a review of the special measure, 
together with the request. 

In accordance with Article 395(2), second subparagraph, of Directive 2006/112/EC, by 
letters dated 7 April 2021 the Commission transmitted the request to the other Member 
States. By letter dated 8 April 2021, the Commission notified Hungary that it had all 
the information necessary to consider the request. 

Hungary  argues  that  taxable  persons  in  liquidation  or  under  insolvency  procedure 
frequently  do  not  pay  the  VAT  due  to  the  tax  authorities.  At  the  same  time  the 
purchaser, being a taxable person with the right of deduction, can still deduct the VAT 
incurred, thus negatively impacting the budget and financing the liquidation. Hungary 
also registered cases of fraud whereby companies in liquidation would issue fictitious 
invoices  to  active  companies  and  greatly  reduce  their  payable  tax  without  the 
guarantee that the issuer would pay the VAT due. 

(6) 

In  accordance  with  Article  199(1),  point  (g),  of  Directive  2006/112/EC,  Member 
States may provide that the person liable for the payment of VAT is the taxable person 

1 
2 

OJ L 347, 11.12.2006, p. 1. 
OJ L 134, 31.5.2018, p. 10–11.  

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(7) 

(8) 

to whom the supply of immovable property sold by a judgment debtor in a compulsory 
sale procedure is made (‘the reverse charge mechanism’). The special measure allows 
Hungary to extend the application of the reverse charge mechanism to other supplies 
by  taxable  persons  under  insolvency  procedure,  namely  the  supply  of  capital  goods 
and the supply of other goods or services with an open market value exceeding HUF 
100 000. 

On  the  basis  of  information  provided  by  Hungary,  applying  the  reverse  charge 
mechanism to those types of transactions has effectively simplified tax collection and 
prevented tax evasion. The implementation of the measure has limited losses to public 
revenues and generated additional budget revenue. Furthermore, the economic effects 
of the COVID-19 outbreak could lead to a sharp increase in the number of liquidations 
in the near future, underlining the need for prolonging the special measure. 

The  requested  derogation  should  be  limited  in  time  to  allow  the  tax  administration 
time to introduce other conventional measures to tackle the respective problem and to 
reduce  the  losses  to  the  public  budget,  in  particular  for  those  losses  connected  with 
fraudulent  practices  until  the  expiry  of  the  derogating  measure,  thus  making  an 
extension  of  the  derogation  redundant.  A  derogation  to  allow  making  use  of  the 
reverse charge mechanism is  only  granted  exceptionally for specific fraudulent areas 
and constitutes a means of last resort. The authorisation should therefore be prolonged 
only until 31 December 2024.  

(9) 

The  derogating  measure  will  have  no  adverse  impact  on  the  Union's  own  resources 
accruing from VAT. 

(10) 

Implementing Decision (EU) 2018/789 should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Article 1 

In  Article  2  of  Implementing  Decision  (EU)  2018/789,  the  second  paragraph  is  replaced  by 
the following:  

“This Decision shall expire on 31 December 2024”. 

This Decision is addressed to Hungary. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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