The domestic provisions on late payment interest are not in line with EU law – ECJ judgement

24 August 2017

The Court of Justice of the European Union established its judgement in the Hungarian case no. C-254/16 in July 2017. The background of the case is that Glencore Agriculture Hungary Kft. which deals with grain trade, requested VAT refund from the tax authority in an amount of approximately HUF 4.5 billion. The Hungarian tax authority initiated a tax audit before the reimbursement and during this audit, the tax office had repeatedly imposed a default penalty on the company for not fulfilling its document filing obligation.

The audit was delayed for years and during this period the company did not get the money back. Therefore, the company requested the tax authority to pay late payment interest in connection with the delay. However, the tax office refused to pay the interest referring that the company itself contributed to the delay by not handed over the requested documents.

The court acting in the dispute between the company and the tax authority stated that the delay in tax audit was not primarily due to the company's conduct. That court asked the European Court of Justice whether the provision of Hungarian law is in line with the EU VAT Directive which says that the refund of the VAT is suspended until the end of the tax audit without giving any compensation to the taxpayer for the delay.

The ECJ confirmed in its decision that if refund of the overpaid VAT to the taxable person is not made within a reasonable period, the principle of fiscal neutrality of the VAT system is violated. Thus, the financial losses incurred by the taxable person by the unavailability of the money should be compensated through the payment of default interest. Therefore, the Hungarian legislation on which the tax authority’s position is based does not comply with EU law and principles.

This judgement makes it clear that the EU VAT Directive sets limits to protracting tax authority audits and VAT refund for several years.

According to the principle of tax neutrality endorsed by EU law, VAT charged to taxpayers should be refunded within a reasonable period. Otherwise, the tax authority should compensate financial losses through the payment of default interest. The judgement in this case shows that certain Hungarian procedural rules are not - or not fully - in conformity with these provisions, and may not be taken into account by the Hungarian courts when making decisions. Instead, EU law must be directly applied.

The above shows that in many cases Hungarian legislation and authority practice are either more stringent or are not in conformity with EU provisions. Therefore, we recommend that taxpayers who feel they have been treated unfairly as regards the above or any other legal principles, use all means of appeal with reference to EU law also for past cases in which the tax advisory team of BDO Hungary Tax Advisory Ltd. is at your disposal.