Before a transfer of a business asset takes place, it is worth considering how the transaction will be treated under the VAT system. This is because, if the statutory conditions are fulfilled, the transaction may fall outside the scope of Act CXXVII of 2007 on Value Added Tax (“VAT Act”) or, conversely, may fall within the scope of the VAT Act. This may in turn lead to unintended consequences in several respects, namely, it may generate a VAT payment obligation or prevent the exercise of the right to deduct VAT.

Article 19 of Council Directive 2006/112/EC (the “VAT Directive”) allows Member States to “In the event of a transfer, whether for consideration or not or as a contribution to a company, of a totality of assets or part thereof, Member States may consider that no supply of goods has taken place and that the person to whom the goods are transferred is to be treated as the successor to the transferor.“.

Hungary has taken advantage of this possibility and Article 17(4) of the VAT Act states that “Likewise, the transfer of a going concern by a taxable person does not have the effect of a supply of goods or services, provided that it is carried out in accordance with the conditions set out in Article 18(1) to (2) and the transferor acquires the going concern for the purpose of its continued operation.” In other words, provided that the prescribed conditions are fulfilled, the transfer of a going concern is neither a supply of goods nor a supply of services and is therefore excluded from the scope of the VAT Act.

First of all, it is important to determine whether the assets being transferred qualify as a going concern at all. According to Section 259 (25/A) of the VAT Act, a going concern is “an operating unit of an enterprise which, independently of its organisation, is capable of carrying on an independent economic activity on a lasting basis by means of the assets belonging to it”. The concept implies that the person acquiring the assets must transfer all the assets necessary for the long-term pursuit of the economic activity which the acquirer wishes to carry on. This is in line with the above-mentioned rule, since the acquirer acquires the business for the purpose of (long-term) operation and it is therefore a necessary condition that he acquires the assets on which it is based.

Section 18 of the VAT Act contains the conditions for repeal. Paragraph (1) lays down three conjunctive conditions or obligations on the acquirer. Firstly, the transaction may take place if the acquirer is or becomes a resident taxable person as a result of the transaction. Second, the acquiring party makes an express commitment to act as successor in title to the assets acquired, i.e. the acquirer is entitled to the rights and subject to the obligations attached to the assets. Thirdly, the law provides that the transferee must not have a legal status that is liable to prevent or impair the performance of the obligations of the successor in title.

Subsection (1a) of this section now establishes a set of conditions in relation to the business. This means that subsection (1a) must in any event be fulfilled, i.e. that the economic activity carried on by the transferred going concern must be exclusively a “supply of goods or services giving rise to a right to deduct”. This in fact means that the acquirer of the business will be entitled to deduct input tax on the economic activity carried out by it, even if the place of supply of the economic activity carried out by the acquirer is abroad and the transaction(s) are therefore repealed by the VAT Act, provided that the same transaction would be a supply of goods or services subject to deduction if it were carried out in the domestic territory.

Paragraph (1a) (b) determines additional conditions only in the case where the corpus of assets includes immovable property. In fact, if the transaction includes immovable property, the transfer of shares in a business which includes immovable property is a transaction outside the scope of VAT only if the acquirer of the property has opted for the taxable treatment under Section 88(1) of the VAT Act, provided that the immovable property concerned:

– is subject to VAT ab ovo (because it is considered “new immovable property” under section 86(1) ja) to jc) in accordance with paragraph (1a) (b) (bb); or

– the transferor of the business has made the property liable to VAT by electing to make it taxable under section 88(1) in accordance with paragraph (1a) (b) (ba).

If, on the other hand, the property involved in the transaction falls within the exemption under section 86(1) (j), (k), (l), it is irrelevant for the purposes of the transfer of the business that the acquirer has elected to become taxable (or is conceptually excluded from being treated as new property).

Does the taxable event in paragraph 88 (1) have to be elected for the sale of the property or can it also be elected for the letting of the property?

If the new immovable property is taxable ab ovo, the acquirer may elect to be taxable only on the sale of the immovable property (Section 88(1)(a)). Conversely, if the acquirer’s election to be taxable is made because the transferor has exercised that right, the VAT Act does not impose any further conditions as to whether the acquirer’s election is to sell or to let, i.e. it may elect either (or both).

Within the taxable treatment of the choice of sale or lease, can the two persons concerned in the case make different taxable choices for residential and non-residential immovable property?

Of course, this question only applies to the cases covered by paragraph 1a (b)(ba). An election to become taxable on residential and/or non-residential property is possible and it is therefore important to consider whether the classification of the property for which the acquirer exercised his right to make the election is relevant. It is our understanding that the condition is met if the taxable event was for the specific type of property involved, i.e. if the taxable event was for a residential property but the property involved is not a non-residential property, the condition is not considered to be exhausted. Of course, both the transferor and the transferee are covered by this restriction