Reverse charge mechanism in the case of insolvency proceedings

One of our clients, registered in Germany but VAT‑registered in Hungary, has become subject to insolvency proceedings in Germany. The company sold its Hungarian assets to a Hungarian taxable person, and

during the transaction the question arose whether the domestic reverse charge mechanism should be applied in Hungary.

Reverse charge mechanism

Under the reverse charge mechanism, the VAT is not paid by the supplier but by the customer. The invoice is issued without VAT, at net value, and the purchaser may reduce its output tax by exercising its right to deduct input VAT.

The person receiving the service or acquiring the goods is liable to pay the tax.

The supplier issues the invoice without indicating a VAT rate, with 0% VAT content, and includes a reference to the application of the reverse charge mechanism.

Advantages of the reverse charge mechanism

It is beneficial for the state

because it is an effective tool against fictitious invoicing and unlawful VAT refund claims, as no charged and reclaimable VAT arises.

It is beneficial for the seller

because they do not have to pre-finance the VAT if the customer pays late.

It is beneficial for the buyer

because they do not have to pay the gross amount, meaning the VAT amount does not burden their cash flow. If the buyer is entitled to deduct VAT, they may deduct the VAT they self‑assess, making the mechanism tax‑neutral.

The key question in our case was whether the German insolvency proceedings qualify, also under Hungarian law, as proceedings that establish insolvency with final effect, which is one of the fundamental conditions for applying the reverse charge mechanism. This is particularly relevant because Hungary is authorised to apply the reverse charge mechanism to transactions carried out by taxable persons subject to insolvency proceedings only until 31 December 2026.

According to our reasoning, the VAT Act does not restrict the application of the rule exclusively to insolvency proceedings conducted under the Hungarian Bankruptcy Act. Moreover, under an EU regulation, Member States are required to recognize each other’s insolvency proceedings, meaning that the legal effects of the German proceedings also apply in Hungary. Accordingly, the company’s Hungarian supplies should fall under the reverse charge mechanism, provided that the personal conditions for its application are also met.

At our request, the tax authority confirmed that the reverse charge mechanism applies where the supplier is subject to insolvency proceedings that establish insolvency with final effect. The tax authority also referred to the EU Insolvency Regulation, which provides that insolvency proceedings may be opened by the Member State in which the debtor’s centre of main interests is located, and that such proceedings must be automatically recognised by the other Member States without any further formal requirements. Consequently, the insolvency proceedings opened in Germany against the German company are also regarded as insolvency‑establishing proceedings in Hungary.

Accordingly, if the company sells its tangible assets located in Hungary or any other goods or services with a value exceeding HUF 100,000, the reverse charge mechanism must be applied to the transaction.