A Comprehensive Guide to Maximizing Your Refunds and Ensuring Compliance: Guide to Rules, Procedures, and Best Practices

1. Overview of VAT in Hungary

Hungary applies a standard VAT rate of 27%—one of the highest in the European Union—with reduced rates of 18% and 5% applicable on specific goods and services (for example, basic foodstuffs, certain dairy products, medicines, books, and new residential property under special rules). As with other EU member states, Hungary’s VAT system is designed to ensure that VAT is ultimately borne by the end consumer while allowing businesses to recover VAT incurred on their business-related purchases.

2. Understanding VAT Recovery in Hungary

Principle of Input VAT Deduction

Definition and Purpose:
In Hungary, businesses registered for Value Added Tax (VAT) have the right to recover the VAT paid on their purchases of goods and services (known as input VAT). This recovery is achieved by offsetting the input VAT against the VAT charged on their sales (output VAT). If, in a given tax period, the total amount of deductible input VAT exceeds the output VAT collected from customers, the business generates a VAT credit, which can be either refunded or carried forward to future periods.

Fiscal Neutrality Concept:
VAT is designed as a consumption tax, meaning the burden of the tax should fall on the final consumer rather than businesses. The input VAT deduction mechanism ensures fiscal neutrality by allowing businesses to reclaim VAT paid on their inputs, preventing VAT from becoming a cost that affects their profitability. This system helps businesses remain competitive by reducing unnecessary tax burdens.

Conditions for VAT Recovery

To successfully reclaim input VAT, businesses must meet specific conditions outlined by Hungarian VAT regulations. These conditions help prevent fraudulent claims and ensure that only legitimate business expenses qualify for VAT recovery.

• Business Use Requirement:
  VAT on purchases can only be deducted if the goods and services are directly related to the company’s taxable business activities.
  Purchases made for private use or for activities that are VAT-exempt (such as certain financial and healthcare services) are generally not eligible for full VAT deduction.

  In cases where purchases are used for both business and private purposes, the deductible amount must be adjusted proportionally.

• Documentation Requirements:
  A proper VAT invoice, issued according to Hungarian tax regulations, is required for VAT recovery.

  The invoice must include details such as the supplier’s and buyer’s tax number, invoice date, invoice number, a clear description of the goods/services, the VAT rate applied, and the total VAT amount.

  Inadequate or incorrect invoices can lead to the rejection of VAT recovery claims.

• Exceptions and Restrictions:
  Certain categories of expenses have limited or no deductibility due to their nature. These include:

Entertainment and Hospitality Costs:

VAT on client meals, business entertainment, and gifts is typically non-deductible, except in limited cases where such expenses are part of taxable business transactions (e.g., events organized for taxable sales promotion).

Passenger Cars:

VAT on the purchase, lease, and maintenance of passenger cars used for business and personal purposes is only partially deductible (50% in most cases).

Full deduction may be possible if the vehicle is exclusively used for business activities and this is properly documented (e.g., using mileage logs).

Mixed-Use Business Activities (Taxable & Exempt Sales):

If a business engages in both taxable and VAT-exempt activities, the input VAT cannot be fully recovered. Instead, the deductible portion must be calculated based on the proportion of taxable sales compared to total sales.

This requires businesses to apply a pro-rata method (apportionment), where they determine the percentage of their input VAT that is eligible for deduction based on their revenue mix.

3. The VAT Recovery Process

Filing VAT Returns

Return Frequency: Hungarian VAT returns are generally submitted monthly, quarterly, or annually. The frequency depends on factors such as the size of the VAT liability. For example, newly registered businesses and those with a net VAT liability exceeding HUF 1 million (in the preceding periods) are required to file monthly.

Electronic Filing: The majority of VAT returns are submitted electronically to the National Tax and Customs Administration (NAV), which helps streamline the recovery process.

Claiming a Refund

Credit vs. Carry Forward: When input VAT exceeds the VAT collected on sales, the resulting negative balance can either be carried forward to the next tax period or claimed as a refund.

Thresholds for Refunds: The minimum VAT credit required to trigger a refund depends on the filing frequency:

Monthly Filers: Refund applications may be submitted if the VAT credit is HUF 1 million or more.

Quarterly Filers: The threshold is HUF 250,000.

Annual Filers: The threshold is HUF 50,000.

Processing Time: In many cases, if all supporting invoices have been paid by the due date, refunds are processed within 30 days. If conditions are not fully met, the excess credit is carried forward to subsequent periods.

For example, as detailed by global VAT compliance resources, if a monthly filer records a VAT credit above HUF 1 million, they can request a refund rather than having the excess automatically credited to the following period 

Documentation and Supporting Evidence for VAT Recovery

To successfully reclaim VAT in Hungary, businesses must provide proper documentation that complies with Hungarian tax regulations. Maintaining accurate records is essential to ensure compliance, facilitate audits, and substantiate VAT refund claims.

Invoice Requirements:

A valid VAT invoice is the primary document required for VAT recovery. It must meet specific criteria set by Hungarian tax laws to be accepted by the National Tax and Customs Administration (NAV).

Mandatory Invoice Elements:

To qualify for VAT deduction, an invoice must include the following details:

Invoice Date: The date the invoice was issued.

Invoice Number: A unique, sequential identifier to ensure traceability.

Supplier Information:

Full legal name and registered address of the supplier.

Supplier’s Hungarian VAT number or, in the case of cross-border transactions, their EU VAT identification number.

Customer (Buyer) Information:

Full legal name and registered address of the customer.

Customer’s Hungarian VAT number if they are VAT-registered and required to account for VAT.

Description of Goods or Services: A clear and detailed description of the supplied goods or services. Generic descriptions (e.g., “consulting services”) should be avoided.

Quantity and Unit Price: The amount and per-unit cost of the goods/services.

Applicable VAT Rate(s): The VAT percentage(s) applied to the transaction (e.g., 27%, 18%, 5%, or 0%).

VAT Amount(s): The total VAT amount charged.

Total Invoice Value: The final amount payable, including VAT.

Payment Terms: Details regarding the due date and payment method (if applicable).

Special Invoice Types and Considerations:

Simplified Invoices: For transactions under HUF 100,000, a simplified invoice may be issued with fewer details. However, it must still include VAT information.

Electronic Invoices: E-invoices are acceptable if they comply with Hungarian invoicing regulations and ensure authenticity and data integrity.

Reverse Charge Invoices: In cases where reverse charge VAT applies (e.g., construction services, intra-EU purchases), the invoice must explicitly state “Reverse Charge Mechanism Applied” and exclude VAT.

Failure to meet these invoicing requirements can result in the rejection of VAT recovery claims.

Record-Keeping Requirements

To support VAT recovery and ensure compliance with Hungarian tax regulations, businesses must maintain comprehensive records of all VAT transactions.

Retention Period:

• VAT-related records, including invoices, contracts, and accounting books, must be retained for at least 8 years.
• If the records pertain to real estate transactions, the retention period may extend to 20 years.

Types of Records to Maintain:

• Original VAT invoices (both incoming and outgoing).
• Credit and debit notes related to invoice adjustments.
• Contracts and agreements for transactions involving VAT.
• Import documents for VAT recovery on imported goods.
• Bank statements verifying payments related to VAT transactions.
• VAT returns and supporting calculations showing how input and output VAT were determined.
• Expense reports (especially for costs with partial or restricted deductibility, such as travel and entertainment).

Audit Compliance and NAV Inspections:

The Hungarian tax authority (NAV) conducts audits to verify the accuracy of VAT claims. Businesses should be prepared to:

Present complete documentation upon request.

Justify the business purpose of VAT-deductible expenses.

Provide electronic records in a structured format, as NAV increasingly relies on digital audits.

Proper documentation and diligent record-keeping help businesses minimize the risk of tax disputes and ensure smooth VAT recovery.

4. Special Considerations for VAT Recovery in Hungary

VAT recovery in Hungary involves additional complexities depending on a business’s structure, the nature of its transactions, and compliance requirements. Below are key considerations for businesses seeking to maximize their VAT refunds while ensuring full compliance with Hungarian tax regulations.

Partial Exemption Rules

Mixed Supplies and VAT Apportionment

Businesses that engage in both taxable and VAT-exempt activities must apply a partial exemption calculation to determine the amount of input VAT they can recover. This rule applies to companies operating in industries such as financial services, healthcare, and real estate, where some activities may be VAT-exempt.

• Proportional Deduction Method:

  The recoverable input VAT must be apportioned based on the ratio of taxable turnover to total turnover.

  Businesses must calculate the proportion each VAT period and apply it to their input VAT claims.

• Annual Adjustment:

  A final adjustment is required at the end of the fiscal year to ensure the apportionment percentage aligns with the actual taxable-to-total revenue ratio.

  If the initial apportionment was inaccurate, corrections must be made in the VAT return for the final tax period of the year.

• Sector-Specific Rules:

  Some industries (e.g., insurance, education, financial services) have stricter limitations on VAT deduction, requiring careful consideration of applicable rules.

  VAT Recovery by Non-Resident Businesses

  Foreign companies that incur Hungarian VAT on expenses (such as travel, event participation, and procurement) may apply for VAT refunds, but the process varies depending on their country of establishment.

EU-Based Businesses

The actual minimum VAT refund claim amounts for non-established businesses (EU VAT refund directive 2008/9/EC) in Hungary are:

• €400 (or equivalent in HUF) for quarterly claims (covering at least three months but not the full year).
• €50 (or equivalent in HUF) for annual claims (or if the final quarter of the year is included).

These thresholds align with EU VAT refund rules applicable across member states.

Claims must be filed by September 30 of the following year for expenses incurred in the previous year.

Non-EU Businesses

Non-EU companies must file refund applications directly with the Hungarian tax authority (NAV).

A fiscal representative must be appointed to handle the claim and ensure compliance.

Refund eligibility depends on a reciprocity agreement—Hungary will only refund VAT to non-EU businesses if their home country offers a similar VAT reclaim process for Hungarian businesses.

Supporting documents (such as original invoices, contracts, and proof of business activity) must be submitted with the application.

Penalties and Compliance Risks

Hungarian VAT regulations impose strict compliance requirements, with penalties for errors, late filings, or failure to meet documentation standards.

Late Filing and Payment Penalties

VAT returns must be submitted by the 20th of the month following the reporting period (or 25th February for annual returns).

Late payments are subject to daily interest charges, calculated as:

Failure to file VAT returns on time may result in fines up to HUF 500,000 per instance.

Error Corrections and Self-Revisions

If a business identifies an error in a previously filed VAT return, it must submit a corrective VAT return (self-revision).

If the correction results in additional VAT being owed, interest is charged at a rate based on the Hungarian National Bank’s base rate + 5%.

Fraudulent or deliberate misreporting can trigger tax audits and severe penalties, including potential criminal liability.

5. Best Practices for Efficient VAT Recovery

To optimize VAT recovery and maintain compliance, businesses should adopt the following best practices:

5.1. Timely Filing of VAT Returns

Ensure VAT returns are prepared and submitted by the required deadlines to avoid penalties.

Set internal reminders or use automated tax software to track submission deadlines.

5.2. Accurate Apportionment for Mixed Supplies

Businesses with both taxable and exempt sales should use reliable accounting methods to correctly apportion input VAT.
Implement a monthly or quarterly review process to adjust VAT claims based on actual revenue composition.

5.3. Maintain Comprehensive VAT Records

Original invoices, contracts, import documents, and VAT calculations should be stored for at least 8 years (or 20 years for real estate transactions).

Ensure all invoices comply with Hungarian VAT requirements, including supplier details, tax identification numbers, and VAT rates.

Organize digital and paper records to facilitate audits by NAV.

5.4. Leverage Technology for VAT Compliance

Businesses can use automated VAT compliance platforms that:

Perform real-time VAT rule checks to prevent filing errors.

Automatically detect ineligible expenses (such as entertainment or partially deductible costs).

Streamline multi-country VAT recovery by integrating with local tax regulations.

For more information on this subject please see: 

https://firmaxhungary.com/services/tax-advisory-in-hungary/