Action brought on 1 June 2010 — European Commission v Republic of Hungary

(Case C-274/10)

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2010/C 221/42

Language of the case: Hungarian

Parties

Applicant: European Commission (represented by: D. Triantafyllou and B.D. Simon, Agents)

Defendant: Republic of Hungary

Form of order sought

Pleas in law and main arguments

The subject of this application is the provision of Hungarian tax law under which, at the end of the tax year, taxable persons may apply for the refund of excess value added tax (‘VAT’) only in so far as that excess exceeds the amount of the VAT payable on transactions which have not yet actually been paid for. Thus, the consequence of the contested Hungarian legislation is that a taxable person may not apply for a refund of the part of the excess corresponding to the VAT chargeable on purchases which have not been paid for but must carry it forward to the following tax year. If, at the end of the tax year, the amount of the excess VAT declared is less than or equal to the amount of the VAT chargeable on purchases not paid for, the taxable person must carry forward the whole of the excess VAT to the following tax year. The same procedure must be followed at the end of the following tax year: the legislation places no temporal limit on the procedure with the result that it is possible for a taxable person to be required to carry forward excess VAT indefinitely.

The Commission does not dispute that Article 183 of Directive 2006/112 (‘the directive’) grants the Member States a discretion as to whether to carry forward or refund excess VAT. However the Member States may only exercise that discretion in accordance with the principles of the common system of VAT as a whole and in particular the principle of tax neutrality. As a provision which impedes the full application of the principle of tax neutrality, Article 183 of the directive, which allows Member States to carry forward a VAT excess to the following year once, must be interpreted narrowly and may not serve as a basis for the adoption of national provisions contrary to the principle of tax neutrality or the purpose of the deduction mechanism.

In accordance with the principle of neutrality, the purpose of the deduction mechanism is to free a trader entirely from the burden of VAT which he has to pay or has paid in the course of any of his business transactions. That principle precludes the Member States from imposing requirements for the refund of excess VAT which entail a burden on the taxable person and affect that person’s financial position or liquidity or commercial decisions. The withholding of the VAT excess allowed by the contested Hungarian provision has such negative effects on the taxable person for two reasons.

First, because a surplus of deductible VAT over VAT to be paid must be regarded as an amount due to the taxable person and the postponement of payment of that amount reduces the profitability or liquidity of the taxable person and increases his commercial risk. The taxable person must pay the VAT due on the goods or services supplied by him even if they have not been paid for, while he may only obtain a refund of the VAT he paid on the goods and services supplied to him if he actually paid for them.

Second, the withholding of the VAT excess constitutes a burden not only for the taxable person in the position of seeking a refund but also on the taxable person who is the other party to the taxable transaction, that is to say, the seller. The decrease in the buyer’s liquidity leads to an increasing risk that the seller will not receive the consideration for the goods or services supplied or will receive it late, while, regardless of whether he does or not, the seller is required to hand over the VAT on his supply of goods or services.

In the view of the Commission, the fact that the legislation places a burden on taxable persons cannot be offset by the imposition of further burdens on taxable persons. The balance which the legislation seeks to attain can only be achieved if, to offset the burden falling on the taxable person in the position of debtor, that is to say, to offset the obligation to pay the tax, it provides for the possibility for the taxable person in the position of creditor to obtain a refund of the VAT paid when he was in the position of debtor.

Finally, given that Article 183 of the directive only provides for the excess VAT to be carried forward once ‘to the following tax year’ the contested Hungarian legislation breaches that article in that it does not provide for the taxable person to obtain a refund of the excess at the latest by the end of the second tax year. Moreover, the Hungarian legislation which, essentially, by reducing the buyer’s liquidity, is in its turn reducing the likelihood of the refund being made and does not guarantee that the taxable person will ever recover the excess. If the taxable person ceases activity without paying for all purchases made because he is insolvent, there is no means of recovering the VAT chargeable on transactions which were not paid for as the State will ultimately retain it.

Having regard to the foregoing arguments, the Commission takes the view that the Hungarian legislature has exceeded the discretion granted to it and has infringed Article 183 of the directive by adopting legislation on the requirements to be met for the refund of excess VAT which infringes the principle of tax neutrality and allows the excess to be carried forward year after year.

(1)  Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax

(OJ 2006 L 347, p. 1).