A chain transaction occurs when a product is sold through more than two parties and the goods are transported from the first seller to the final buyer. In such a chain transaction, VAT exemption can only apply to one of the sales—specifically, the one linked to the transport.
Chain transactions, particularly those involving cross-border supplies within the EU, can present several legal and practical challenges, especially regarding VAT treatment. Key problems include:
1. Determining the Correct VAT-Free Sale
Only one sale in the chain can be VAT-exempt (connected to the intra-Community transport), and identifying this transaction requires clear evidence of who arranged the transport.
2. Incorrect Allocation of Transport
If the wrong party is considered to have organized the transport, the VAT exemption might be wrongly applied, leading to tax liabilities, penalties, or the need for correction.
3. Inconsistent Documentation
Contracts, delivery notes, and invoices must consistently reflect the structure of the transaction. Any inconsistency may raise red flags in audits and cause the rejection of VAT exemption.
4. Tax Authority Scrutiny
Due to the complexity and risk of VAT fraud, chain transactions are frequently audited. Businesses involved need to maintain meticulous records and justify the application of VAT exemptions.
5. Need for VAT Registration
Intermediary companies might need to register for VAT in multiple countries, depending on the place of supply and local tax rules.
6. Language and Legal Differences
Variations in VAT laws and interpretations across EU member states can complicate compliance and lead to misunderstandings between parties.
Examples:
If company “A” (a Hungarian company) sells to company “B” (a German company), which in turn sells the same goods to company “C” (a Dutch enterprise), and it is “A” who arranges the transport—as evidenced in the contract—then “A” can invoice “B” exempt from VAT, as “A” is the seller responsible for the transport. The place of supply for “B”’s sale will be in the destination country, the Netherlands.
If in the same sales chain it is company “C” (the Dutch company) that arranges the transport, then the sale invoiced by “B” to “C” will be the transport-related supply, which may be invoiced VAT-exempt, provided the conditions are met. The place of supply for “B”’s sale will be in Hungary—hence “B” must register with the tax authority—because the transport originates from Hungary. In this case, however, company “A” must invoice “B” (the German company) with VAT applied, as the supply takes place from Hungary.
If the intermediary seller, “B” (a German company), is the one who commissions the transport or personally transports the goods, and the presumption established in the VAT Act is not rebutted, then the place of supply for each product sale must be determined as if the first seller (A) had arranged the transport. Therefore, the Hungarian taxpayer may invoice VAT-exempt.
Legal backgroud:
The referenced presumption is included in Section 27 (2) of the VAT Act of Hungary: If in a supply chain there is a purchaser who, at the same time as a seller, arranges for the dispatch or transport of the goods—either themselves or through someone acting on their behalf—they are deemed to perform the dispatch or transport in their capacity as purchaser. An exception is made if they can prove that they carried out the dispatch or transport in their capacity as seller. This must be reflected in the contract.
According to Section 27 (1) of the VAT Act of Hungary, if a product is sold multiple times in such a way that it is dispatched or transported directly from the first seller in the chain to the final purchaser with delivery intended for the latter, the provision of Section 26 may only apply to one of the product sales. This means that the place of supply for the sale of the product is the place where the product is located at the time of dispatch or the start of transportation, with the destination in the name of the purchaser.
This applies regardless of whether the dispatch or transport is carried out by the seller, the purchaser, or someone acting on behalf of either party. It is worth noting that if the place of supply of the product sale is within Hungary, the rules of the Hungarian VAT Act apply.