The proposed European Supply Chain Act, also known as CS3D, mandates that companies within the European Union must take comprehensive measures to address social and environmental impacts throughout their entire supply chain. This edition focuses on key topics like human rights compliance, environmental standards, and responsible corporate governance practices to drive a fairer and more sustainable global economy.
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ITR EMEA TAX AWARDS 2023: Andersen among the best in 3 categories
On 20 July, the prestigious international taxation magazine The International Tax Review published the shortlist of candidates for the ITR EMEA TAX AWARDS 2023 categories. Andersen ranked among the best in three categories and, similarly to the last two years, it is a strong candidate for winning the ‘Tax Firm of the Year in Hungary’ award.
Founded in 1989, the International Tax Review (ITR), one of the world’s leading tax journals, is awarding Europe’s best tax advisory service companies for the 19th time. A jury of ITR’s editors and experts ranks the candidates’ performance in several categories, based on different aspects for the period in question.
In this contest, Andersen won the award for the best Hungarian tax advisory firm two years in a row (ITR EMEA Tax Award 2021 & 2022 / Hungary Tax Firm of the Year). Thanks to its high-level work and results, the company has once again been ranked among the six best candidates, so it has a good chance of winning the prestigious award again this year.
The company’s performance and the level of services provided are well shown by the fact that it is shortlisted in two other categories as well, (1) Hungary Transfer Pricing Firm of the Year, and (2) Hungary Indirect Tax Firm of the Year.
When considering the information published by ITR, it is worth mentioning the regional emergence of Andersen. This is shown in partners of the international company group also being shortlisted in several Central and Eastern European countries. Andersen’s partner companies of in Romania, Ukraine, Slovenia and Poland ranked among the best candidates in several categories. What’s more, Andersen Poland ranked among the shortlisted candidates for the Best Newcomer award.
The winners will be announced on 27 September, at the awards ceremony held in London.
M&A and PE Market Trends – Semester 1 Europe
Target M&A hit a 10-year low, dropping by 49% compared to 2022 levels.
After a challenging start, the upcoming quarters are projected to witness a surge in the volume and number of deals globally, surpassing 2022 figures. Industrials and technology sectors are on the rise, becoming hotspots for mergers and acquisitions.
Private equity investments this year are set to focus on consumer non-cyclicals and healthcare sectors, unlocking exciting opportunities in these thriving industries.
European guide to support employers
Andersen’s European Employment and Labor Law Service Line has recently launched a new edition of the European Guide to Support Employers: Employment of Managing Directors.
When hiring managing directors who are legal representatives of a company, there are specific considerations and regulations that vary across European countries. The conditions of employment for managing directors differ from those applicable to employees, and they are shaped by both company law and labor regulations.
The guide provides an overview of the regulations concerning the employment and/or appointment of managing directors who also hold positions within the company’s governing bodies. This guide focuses on the rules applicable mainly to limited liability companies (LLCs) in over 30 European countries.
Litigation & Arbitration – Andersen in Europe
Our growth is a byproduct of the outstanding client service delivered by our people – the best professionals in the industry. Our objective isn’t to be the biggest firm, it is to provide best-in-class client services in a seamless fashion across the globe. Our professionals are selected based on quality, like-mindedness and commitment to client service. All of our Andersen Global professionals share our core values. Andersen Global was established to create an enduring place – ONE FIRM where clients across the globe are afforded the best, most comprehensive tax and legal services provided by skilled staff with the highest standards. Outstanding client service has and will continue to be our top priority.
European Corporate Insights
Andersen Global® was established in 2013 as the international entity surrounding the development of a seamless professional services model providing best-in-class tax and legal services around the world.
The association of legally separate, independent member firms comprises of more than 13.000 professionals worldwide, over 1.800 global partners, and a presence in over 390 locations in more than 170 countries worldwide. Our growth is a by-product of the outstanding client service delivered by our people, the best professionals in the industry. Our objective is not to be the biggest firm, it is to provide best-in class client service in seamless fashion across the globe. Each and every one of the professionals and member firms that are a part of Andersen Global share our core values. Our professionals share a common background and vision and are selected based on quality, like-mindedness, and commitment to client service. Outstanding client service has and will continue to be our top priority.
VAT Treatment of tokens
Crypto-assets take many forms, and their legal characteristics and consequent tax and other regulatory classifications require a case-by-case analysis. Tokens are digital assets that represent a unit of value or utility, and they are often used as a means of exchange within a particular ecosystem or platform. They can be used for a variety of purposes, such as accessing features or services, participating in governance processes, or even as a form of investment.
We can distinguish between many different tokens, such as: currency tokens, utility token, equity token, securities token, currency token, asset token, non-fungible token and should treat them accordingly depending on their nature.
Currency tokens are digital assets that enable access to a particular ecosystem or platform. They are used to facilitate transactions and interactions within the ecosystem, and can often be traded on cryptocurrency exchanges. Examples of currency tokens include Ether (ETH), which is used to power the Ethereum blockchain, and XRP, which is used to facilitate transactions on the Ripple network.
Equity tokens, on the other hand, represent ownership in a company or other real-world asset. They are similar to traditional stocks or shares, but are issued and traded using blockchain technology. Equity tokens can offer investors the opportunity to invest in early-stage startups or other high-potential ventures, and can also provide greater liquidity compared to traditional investments.
Security tokens represent an ownership stake in an asset, typically a company (virtual shares) or a credit relationship (related to virtual shares or debt instruments), and give its holders a share of the expected resulting income. Security tokens are digital assets that represent ownership in a real-world asset, such as stocks, bonds, or real estate. They are similar to traditional securities, but are issued and traded using blockchain technology.
Asset tokens, on the other hand, represent ownership in a digital or physical asset. These assets can include things like cryptocurrencies, commodities, or even intellectual property. Unlike security tokens, asset tokens typically do not represent ownership in a traditional security and are not subject to the same regulations. However, asset tokens can still have significant value and may be used as a means of exchange within a particular ecosystem or platform. Examples of asset tokens include Tether (USDT), which is a stablecoin that is pegged to the US dollar, and DigixDAO (DGD), which is a token that represents ownership in physical gold.
Utility tokens are tokens that are designed to provide users with access to a particular product or service. They are often used as a means of exchange within a specific ecosystem or platform, and they can be used to pay for goods or services, access premium features, or participate in governance processes. Utility tokens typically have no intrinsic value, but their value is derived from their ability to provide access to a particular set of goods or services. Some popular examples of utility tokens include BAT (Basic Attention Token), GNT (Golem Network Token), and REP (Augur).
Non-fungible tokens (NFTs) are unique digital assets that are indivisible and cannot be exchanged for an equal unit of value. Unlike fungible tokens such as cryptocurrencies, which are interchangeable with each other, each NFT has a distinct value and cannot be replicated. This makes them ideal for representing things like digital art or collectibles, where uniqueness and authenticity are important. NFTs are typically created using blockchain technology, which allows for secure and transparent ownership and transfer of the asset. These can be profitable transactions, as can be observed with the set of 101 NFTs from the “Bored Ape Yacht Club” collection, which was sold for $24.4 million However, the potential uses for NFTs extend far beyond digital collectibles, with applications in gaming, art, real estate, ticketing, and more.
VAT Treatment of tokens
Already in 2015 the CJEU has ruled that the services of a Bitcoin exchange in exchanging Bitcoin for a traditional currency is exempt from VAT on the basis of the ‘currency’ exemption (Skatteverket v David Hedqvist Case C-264/14). Since then new classes of crypto assets have grown immensely.
If a start-up company only issues a crypto token when it is still not known for which products and services the token could be exchanged in the future, the condition of direct connection between the performed service and received counter-value is not fulfilled yet and the transaction of token issuance is not subject to VAT. When the crypto token is used to pay for individual products and services, these transactions will be subject to VAT (considering the nature of the supply of goods or services, transactions will be taxed at the prescribed tax rate or VAT exempt).
If a certain functionality is already installed in issued tokens – meaning that by purchasing the tokens, supporters acquire the option to use a product or service (in the initial phase, supporters receive them at a lower price than users who buy them later) or they can be considered as a security that generates some kind of yield for investors (payment of dividends or distribution of profit from operations), or they can even have a hybrid character (the functionality and character of a security) – and in such a context, a direct connection between the performed service and received payment can be determined, then the token transaction is subject to VAT, whereby the taxation depends on the character of an individual token and is assessed on a case-by-case basis.
Utility tokens resemble vouchers in that they can be redeemed for goods and services within a limited network, but redemption is not their only purpose and information on the goods and services supplied or the supplier’s identity may be lacking. NFTs, on the other hand, are neither (fully) fungible, nor do they serve (mainly) as a means of payment, contrary to the crypto currencies addressed in the Hedqvist Case.
In short, not only are these classes assets different, but they are in many cases of a hybrid and impermanent nature, which only adds to their complexity. It must be stressed that even tokens that mainly aspire to serve as a utility token typically will have an investment component as tokens can be traded at token exchanges (secondary markets) subsequent to the initial offering.
Security tokens, which are related to virtual shares and debt instrument, should generally have a similar VAT treatment as instruments in traditional capital markets.
Ongoing discussion at EU level
The discussions regarding the VAT treatment of cryptocurrencies are ongoing in the EU. EU VAT Committee published working paper on non-fungible tokens in March 2023. The working paper considers NFTs to be mainly services. If NFTs are used to acquire a tangible good, the transfer of the NFT should qualify as a supply of the said good, according to the working paper. The working paper provides an analysis of the nature of NFTs as well as the way NFTs are created, traded and sold. It considers NFTs with property titles, vouchers, composite supplies and electronically supplied services. It also addresses whether certain payments (e.g., gas fees) could qualify as consideration for a supply from a VAT perspective, and how to determine the taxable amount.
Conclusion
Transactions with tokens raise intricate questions concerning their classification under VAT rules. While existing VAT rules can be used to determine the VAT treatment, it is up to tax administrations and courts to provide legal certainty in the VAT treatment of crypto tokens.
ECJ allows proportional VAT fines
Earlier this week, the European Court of Justice (ECJ C-418/22, Cezam) rendered its decision on the conformity of proportional (percentage-based) fines in Belgium with the tenets of EU law today. The case investigated whether proportional fines for underpaid VAT might be assessed without requiring tax authorities to take deductible VAT into account. A short overview of the verdict is provided hereafter.
Facts
The case involves a taxpayer who, over an extended period of time, neglected to file periodic VAT returns in Belgium. Without taking into account deductible VAT, the Belgian Administration assessed fines proportionate to the amount of unpaid VAT. According to the applicable Belgian VAT law, the penalties were calculated as 20% of the turnover.
The taxpayer challenges these fines, citing the fundamental principles of EU law. In order to account for deductible VAT within the relevant time period, it is argued that the penalties should only be calculated on the net amount of the tax. The taxpayer bases this argument on the judgements Salomie and Oltean (C-183/14 of 09/07/2023) and EN.SA (C-712/17 of 08/05/2019), and specifically contends that the principle of proportionality forbids EU Member States from imposing fines on the deductible VAT.
Preliminary question
The Belgian court asked the European Court of Justice (hereinafter: ‘ECJ’) for advice on whether the proportional fines system in Belgium adheres to the fundamentals of EU law. The ECJ specifically questioned whether applicable EU regulations, combined with the proportionality and neutrality principles, forbid a system that assesses fines based on the gross VAT amount, without taking input VAT deduction into account.
Decision of the ECJ
The ECJ starts off by emphasizing that EU Member States must put in place the necessary safeguards to secure the collection of overdue VAT and to prevent fraud. The Member States may decide (within its jurisdiction) what fines to impose, but they must follow Union law and general principles, particularly the principles of fiscal neutrality and proportionality.
Penalties should not be increased above what is required to meet the objectives of tax collection and fraud prevention, according to the proportionality principle. The type and seriousness of the violation, as well as the process used to calculate the punishment amount, must all be taken into account when assessing whether a penalty is proportionate. The ECJ indicates that the infractions for which CEZAM is being punished were both persistent and purposeful, albeit it is up to the referring court to determine whether the fines in this case are fair. In fact, despite numerous attempts by the Belgian Administration, CEZAM consistently failed to disclose or pay the required VAT over a lengthy period of time. The ECJ states that the CEZAM case is not comparable to earlier ECJ decisions, given that the exact facts and infractions in this instance are different from those in past rulings. Hence the same principle and rules do not hold true and are not applicable.
Regarding the fiscal neutrality principle, the ECJ claims that this principle necessitates the deduction of input tax if the substantive requirements are fulfilled, even if formal requirements have not been met. Notwithstanding this, the case file at hand however does not indicate of how the national legislation or the sanctions in this instance affect the ability to deduct input tax.
The Court finds no evidence to support the taxpayer’s inability to rely on this entitlement and concludes that Article 273 of Directive 2006/112 and the principles of proportionality and fiscal neutrality do not conflict with a national regulation that sanctions non-compliance with the duty to submit and pay VAT with a flat-rate fine equal to 20% of the VAT amount that would have been due before deducting deductible VAT. The referring Belgian court must still confirm the fairness of the penalty levied, though.
Comments
The Member States have the right to impose fines in the absence of harmonization of EU law regarding penalty practices. Nevertheless, Member States must execute their authority in accordance with EU legislation despite the lack of uniformity. As a result, their flexibility is constrained, yet this decision shows that Member States still have a lot of latitude.
The duty to remit VAT and the right to deduct VAT are typically handled differently by tax authorities. The deduction is considered as a right that may only be exercised if the relevant circumstances are met, whereas the remittance is seen as an obligation. Based on the CEZAM decision, it can be concluded that proportional penalties can be imposed in cases of underpaid VAT without considering deductible VAT.
It is crucial to keep in mind that the ECJ affirmed the rule that fines should not be imposed in excess of what is required to guarantee proper VAT collection. The seriousness of the offense should be considered while deciding on the punishment. The question of whether the customary policy of enforcing 20% penalties is justified arises, particularly when there is no risk of a loss of VAT revenue (as in the case of reverse charge). However, this instance is a useful reminder that penalties for failing to comply with VAT regulations can be severe, especially when expressed as a percentage of the transaction. Every company transaction, whether a buy or a sale, contains a potential risk related to the VAT, and if penalties are proportional (i.e., based on a percentage of the transaction), the amounts can add up quickly.
The General Block Exemption Regulation has been amended
The amendment to the General Block Exemption Regulation has entered into force. The Community legislation lays down the ground rules for several state aid schemes, such as the development and energy efficiency tax allowances, the tax allowance available for SME investments and the so-called VIP cash grant (aid granted based on individual government decisions).
A comprehensive amendment to a cornerstone of Community state aid rules, the General Block Exemption Regulation (GBER) has entered into force. The GBER will remain effective until 31 December 2026.
Why is the amendment important?
The GBER is a key tool for Member States for launching aid schemes without any prior notification obligation to the European Commission. A significant number of grants and tax incentives available in Hungary are also covered by the GBER and its relief scheme. The current amendment may provide additional flexibility and further possibilities for granting aid in the fields of environmental protection and energy. Member States will have six months to adapt their existing aid schemes to the amendment of GBER. Hence the amendment of the relevant provisions of the Act on Corporate Income Tax and Dividend Tax is also expected soon.
What are the novelties related to regional investment aid?
The development tax allowance and a part of VIP cash grants are both considered as regional investment aid.
Special rules apply to large investments of €50 million (at present value) and above. The regulation stipulates that for the purposes of eligible costs, further investments may be considered as one (i.e. a single investment project). In line with the rules of the Regional Aid Guidelines, these cumulation rules have also been modified. Previously, all investments started and provided aid within three years in the same county among the same group of companies had to be counted together. The amendment requires counting together only those investments that are related to the same or similar activities(i.e. that fall under the same 4-digit NACE Rev. code).
As an example, let’s take a large enterprise investor that has set up an electronic component factory (NACE Rev. 26.11) in a municipality in Pest County and has also expanded its existing lifting and handling machinery manufacturing activity (NACE Rev. 28.22) in the same or another municipality in Pest County within three years, receiving regional investment aid for both. The two projects will be considered as different investments for the purpose of determining the maximum aid. In other words, both investments may qualify for the theoretical maximum aid intensity of up to 50%.
The amendment also increases the maximum aid amount not subject to prior notification of the European Commission by a general 10%. This means that in a region with a 50% aid intensity (such as Pest County, among others), the maximum aid amount that can be granted without the prior approval of the European Commission is increased from EUR 37.5 million to EUR 41.25 million (at present value).
What is expected with regard to aid granted to energy efficiency measures?
The GBER clarifies the scope of eligible costs of energy efficiency measures. These provisions of the GBER serve as the legal grounds for the energy efficiency tax allowancein the corporate income tax regime in Hungary. The new provision fills some gaps, as the methodology of determining the eligible costs had raised several practical questions, as well as those related to interpretation. Recent developments of the market and technological advancements also encouraged the change.
There are still two methods for determining eligible costs. Where the cost of an energy efficiency investment can be identified as a separate investment within the total cost of the investment, the scope of the eligible costs is determined as the total investment cost of this separate investment (i.e. the investment value of the energy efficiency investment, refurbishment). In practice, investments that qualified for this method were mainly targeted at insulation for buildings.
Otherwise, the eligible costs shall be determined as the difference between the investment costs necessary to achieve a higher level of energy efficiency (an investment with higher costs) compared to an investment of lower energy efficiency and lower investment costs (the so-called differential method). As per the prior interpretation of the legislation, the extra investment cost was to be determined based on less energy efficient equipment available on the market that has the same functionality, and not based on the equipment that was to be replaced as part of the investment.
The new amendment of the GBER provides additional options for the differential method. The eligible costs shall be determined by comparing the costs of the investment to a counterfactual scenario that would occur in the absence of the aid, as follows:
- Where the counterfactual scenario consists in carrying out the same investment at a later point in time: the eligible costs shall consist of the difference between the costs of the investment for which the aid is granted and the net present value of the costs of the later investment;
- Where the counterfactual scenario consists in maintaining the existing installations and equipment in operation: the eligible costs shall consist of the difference between the costs of the investment for which aid is granted and the net present value of the investment in the maintenance, repair and modernisation of the existing installation and equipment;
- In case of an equipment subject to leasing agreements: the eligible costs shall consist of the difference in the net present value between the leasing of the equipment for which aid is granted and the leasing of the less energy efficient equipment that would be leased in the absence of aid.
The GBER clarifies that for the purposes of determining the eligible costs, an alternative investment that has a capacity and lifetime similar to the aided investment may be considered.
Favourable changes to subsidies provided within the VIP cash subsidy system
The Hungarian government published the expected modifications of the VIP Cash subsidy system: Projects with EUR 3 million of investment volume will also be eligible in a significant part of Hungary; the obligation of providing collateral will be mitigated as described below; and a new, special subsidy category, which is available in Budapest will facilitate the green transition.
According to the expected amendment to Government Decree No. 210/2014 (VIII.27.) on the Appropriation of the Chapter Earmarked for Investment Promotion (VIP Cash Decree), which is the legal basis of the individual government decision-based VIP cash subsidy, the main changes are the following.
Easing of the eligibility criteria
The most important modification is – compared to the previous entry thresholds of EUR 5 million and EUR 10 million – that in a large part of Hungary, application for VIP cash subsidy can be submitted to the Hungarian Investment Promotion Agency (HIPA) with EUR 3 million of investment volume.
Eligible cost (EUR million) | City |
10 | Győr, Székesfehérvár, Tatabányán, Szekszárd, Kecskemét, Szombathely, Veszprém, Zalaegerszeg, Debrecen, Szeged, Eger |
5 | Salgótarján, Miskolc, Nyíregyháza, Békéscsabán, Pécsett, Kaposváron, Szolnokon or any other district centre cities („járásszékhely”)* |
3 | In all cities that do not fall into the above mentioned two categories |
– | Regional investment aid still cannot be granted in Budapest. |
* If a district centre city (“járásszékhely”) qualifies also as a greater centre city (“megyeszékhely”), the higher eligible cost determined in the VIP Cash Decree shall be taken into account as an eligibility criterion.
Introduction of a new subsidy category
Recently eased EU rules allow for more favourable conditions for granting subsidies in sectors that are strategic for the transition to a net-zero emissions economy. This possibility is now being taken up by the VIP Cash subsidy system.
Investors who would, in the absence of the subsidy, carry out their productive investment in a sector of strategic importance for the transition to a net-zero emission economy in a non-European Economic Area (EEA) country, will be eligible for subsidy throughout the whole territory of Hungary (including Budapest).
The following activities will be eligible:
- the production of batteries, solar panels, wind turbines, heat pumps, electrolysers, and equipment for carbon capture, utilisation and storage (CCUS);
- the production of key components designed and primarily used as direct input to produce the equipment defined under the previous point;
- the production or recovery of related critical raw materials necessary to produce the equipment and key components defined above.
The eligibility criteria of the new category are similar to those for regional investment aid. As the main rule, the costs of assets of Article 47 to 51 of the Accounting Act, including costs directly linked to the production and storage of renewable energy, may be eligible.
The maximum amount and aid intensity is defined as follows:
When granting the subsidy is not subject to the approval of the European Commission | |
Budapest | 15% of the eligible cost*up to EUR 150 million equivalent in forint (by company group) |
Outside of Budapest | 35% of the eligible cost*up to EUR 350 million equivalent in forint (by company group) |
* The maximum aid intensity may be increased by a further 20% for small enterprises and by a further 10% for medium-sized enterprises.
If granting the subsidy is subject to approval by the Commission due to exceeding the nationally admissible investment volume, the subsidy can only be granted outside of Budapest. The amount of subsidy cannot exceed the amount that the investor could demonstrably receive for an equivalent investment in a third jurisdiction outside the EEA and cannot exceed the so-called financing gap.
The grant agreement must be concluded by 31 December 2025, therefore the deadline for submitting the grant application is much shorter. It is important to ensure that the grant application is submitted on time, as an individual government resolution needs to be approved for concluding the grant agreement.
Technical amendments
The draft amendment to the VIP Cash Decree foresees the modification of several technical rules.
It introduces, for example, the possibility to reduce the amount of collateral. Some investors may commit to maintain their investment for a longer monitoring period than the ‘minimum’ set under EU law (at least 5 years for large companies and at least 3 years for SMEs) and commit to increase their turnover and/or wages for a longer monitoring period as well. The amendment will allow these investors to apply for a reduction of the amount of collateral provided or to be provided compared to 100% of the subsidy amount.
In the case of an R&D subsidy, the eligible cost range of researchers and developers will be stricter but also clearer. After the entry into force of the amendment, it is expected that only that part of the personal expenses of the researchers and developers will be eligible that covers time spent directly on the supported project. Annual holidays and periods of sick leave are therefore not considered eligible.
This restriction shall be applied to cases pending when the amendment to the VIP Cash Decree enters into force, as well as to grant agreements that have already been concluded, including agreements where the disbursement period has not yet ended.
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