Doing business in Hungary can expose foreign individuals and companies to Hungarian tax obligations – and, consequently, to the scrutiny of the Hungarian Tax Authority (Nemzeti Adó- és Vámhivatal, or NAV). A common misconception is that a foreign entity or individual cannot be audited by the Hungarian authorities simply because they are not Hungarian residents or do not have a Hungarian registered office.
In reality, the Hungarian Tax Authority may audit foreign taxpayers where there is a sufficient connection to Hungary. Understanding when NAV may exercise its powers, what an audit involves and how to respond to a tax authority decision is essential for foreign businesses and individuals operating in Hungary.
When can NAV audit a foreign taxpayer?
A foreign company or individual may come within the scope of a Hungarian tax audit if, for example, they:
- carry out business activities in Hungary;
- have a Hungarian permanent establishment or other taxable presence in Hungary;
- are registered for Hungarian VAT or have Hungarian VAT reporting obligations;
- claims a VAT refund from the Hungarian state budget;
- employ individuals in Hungary;
- derive Hungarian-source income;
- own or transfer assets subject to Hungarian taxation; or
- participate in transactions with Hungarian related parties.
The existence of a Hungarian tax registration is particularly important. A foreign company may have no Hungarian subsidiary or registered office but may nevertheless have Hungarian tax obligations, for example in relation to VAT, employment or permanent establishment issues.
In addition, Hungary's extensive exchange-of-information arrangements mean that NAV can obtain information concerning foreign taxpayers from foreign tax authorities. This information may subsequently trigger an audit or become relevant evidence in an ongoing tax procedure.
What does a NAV audit involve?
Under the Hungarian tax procedure law a tax audit can take different forms depending on its purpose and the tax issue under review. NAV may examine tax returns and supporting documentation, verify the fulfilment of specific tax obligations, or conduct a comprehensive review of a taxpayer's tax position.
During an audit, the taxpayer may be required to provide contracts, invoices, accounting records, bank statements, correspondence, transfer pricing documentation and other evidence relevant to the investigation’s scope. NAV may also request explanations concerning particular transactions or business arrangements.
Apart from a few language exceptions – like English, French or German –, NAV may also require that the taxpayer submit the available foreign language documents’ proper Hungarian translation.
The authority may also request information from third parties or cooperate with foreign tax authorities under applicable international and EU mechanisms. As a result, a Hungarian tax audit can sometimes involve information located outside Hungary.
What happens if NAV identifies a tax discrepancy?
If NAV concludes that the taxpayer has failed to comply with its Hungarian tax obligations, it may establish an additional tax liability. Depending on the circumstances, the taxpayer may also face a tax penalty (generally 50%, and in exceptional cases up to 200% to the amount of the established tax shortage) and late-payment interest.
Foreign taxpayers should therefore not treat a NAV audit as a purely administrative exercise. The taxpayer's position should be assessed carefully from the outset, including the relevant Hungarian domestic rules, applicable tax treaties and, where relevant, EU law.
How can a foreign taxpayer challenge a NAV decision?
A taxpayer does not necessarily have to accept the findings of the NAV. Hungarian tax law provides procedural mechanisms for challenging tax authority decisions.
The tax dispute resolution process Hungary provides administrative remedies against NAV decisions, including the NAV decision’s judicial review before the Hungarian courts. The exact procedural steps and deadlines depend on the type and content of the decision.
The taxpayer's submissions should address both the factual findings and the legal reasoning underlying NAV's position. Documentary evidence can be particularly important, especially in disputes concerning the substance of business activities, the allocation of functions and risks, the location of management, or the economic purpose of transactions.
Where the case reaches court, a tax litigation lawyer Hungary can assist with assessing the prospects of the claim, preparing the statement of claim and representing the taxpayer during the judicial proceedings.
Why is early legal advice important?
One of the most common mistakes in a tax audit is waiting until NAV has already issued a final decision before seeking legal advice. In many cases, the most important work takes place during the audit itself. (E.g.: as a general rule, taxpayers cannot submit new evidences after the tax audit.)
Early involvement of a Hungarian tax litigation lawyer can help a foreign taxpayer understand the scope of the audit, identify the relevant legal issues and ensure that documents and explanations provided to NAV are consistent with the taxpayer's overall position.
It can also help prevent misunderstandings arising from differences between Hungarian tax rules and the taxpayer's home-country legislation. In cross-border matters, it is often necessary to consider not only domestic Hungarian law but also double tax treaties, EU legislation and the taxpayer's position in another jurisdiction.
Understanding the Hungarian tax procedure framework
The Hungarian tax procedure law Hungary gives NAV significant powers to investigate taxpayers and establish tax liabilities. At the same time, taxpayers have procedural rights and opportunities to present evidence, make submissions and challenge unlawful or incorrect findings.
For foreign individuals and companies, the key is to approach the Hungarian tax audit proactively. A foreign status does not, by itself, prevent NAV from investigating the taxpayer or establishing a Hungarian tax liability. Conversely, the mere fact that NAV has initiated an audit does not mean that the authority's preliminary position is necessarily correct.
Because of this, it is crucial to reach out for a Hungarian tax litigation lawyer with adequate expertise as early in the process as possible.
How we can help
Our tax litigation lawyers advise foreign individuals and companies on Hungarian tax audits and disputes, including the assessment of Hungarian tax exposure, communication with NAV, preparation of submissions and representation in tax litigation.
If you are contacted by the Hungarian Tax Authority or are concerned about potential Hungarian tax exposure, obtaining advice at an early stage can help you understand your position and determine the most appropriate strategy.