ECJ backs deduction and recovery of VAT previously paid on public investments

Handover of pubic investment – creating access roads, utilities, etc. – to the local municipality or to the state for free is required in many cases by law in Hungary. According to the current interpretation of the tax authority and courts in Hungary, such handover triggers VAT payment obligation for the real estate investor (given that VAT was previously deducted in this regard). Since in most cases the real estate investor is unable to charge the VAT to the municipality or the state respectively, VAT was practically its loss in such cases.

The latest judgement of the European Court of Justice (ECJ - C-528/19 Mitteldeutsche Hartstein-Industrie AG), however, should overwrite the Hungarian VAT treatment of free of charge public investment transfers.

The ECJ examined the VAT treatment of public utility transfer in connection with the extension of a public road to a limestone quarry in Germany. In the given case, extension of the municipal road in question was essential, both from a legal and practical point of view, for the operation of the quarry. Therefore, in such circumstances, the ECJ confirmed one hand that input VAT is deductible on costs incurred in connection with public investments. In addition, it established that free transfer of public investment does not necessarily trigger VAT payment obligation for the investor, provided that the investment is used (partly) in connection with its own economic activity.

In light of the above, it is expected that the VAT treatment of such transactions should be reconsidered in Hungary as well. If so, output VAT paid previously on such transfers may be available for refund within the limitation period of 5 years, even back to the last VAT reporting period of 2014.