Exporting from Hungary

jumper77 wrote:

Links to companies offering to set the corporations up have prices starting at ~€1200+VAT. If possible, I would like to have her set the corporation up herself.

She can't do it herself. Company formation must be done by a lawyer. 1200 Euro is the expat price. If she speaks Hungarian, she can go to most any Hungarian lawyer and they can do it for her, usually for less.

jumper77 wrote:

I believe an accountant is mandatory.

Yes, they are, especially for your turnover.

jumper77 wrote:

Must I have employees?  Can I make her a partner so that her compensation is in the form of dividends?

You can not usually* pay out in dividends only if she actually works for the company, which she seems she will be doing. The tax authority will almost always want any work done in Hungary to at least be compensated to at least a basic income level and in a form that can be taxed for social and individual income taxes. She can setup a single owner company, which has different rules, but then how you would get paid yourself might be a problem.  You can of course setup a base salary and then pay her out further in dividends, depending on the type of company you create.

*But this is a question best for the accountant -- part time work under some threshold may be except --- I am just throwing that out, I really don't know if Hungary has such an allowance or not.

jumper77 wrote:

Since it is only one customer for now, the risk is minimal for me and it would seem that avoiding payrolls would avoid a great deal of headaches and paperwork.

Your accountant would handle the payroll anyway, so no extra work for you, but maybe a bit more fees to the accountant.

jumper77 wrote:

Can anyone give me pointers on pitfalls that would preclude us reclaiming the VAT.

What VAT do you want to reclaim?

Normally goods exported from the EU are not taxed with VAT. And company VAT payments are invoice taxed in Hungary, so a company is stuck with that VAT until they resell the product + VAT, and only then they pay the difference between that VAT they paid for a product, and the VAT charged the customer.

Exports from the EU are almost always not charged EU VAT, unless there is some EU agreement with the country your customer lives in. Some call this an immediate VAT refund -- but does not affect all the VAT you paid in Hungary on the product and you usually get no refund on that VAT paid in Hungary to buy a product, when you export it for sale.

But, your customer may be liable for VAT in their country, and how the customer pays that VAT is another issue -- you may need to setup some system to collect that VAT from the customer and pay it into his country's treasury. You have to expend business income to do it as the unpaid tax collector for that country.

So, how to consolidate the VAT systems between the EU and a exported country, and to see what options you have regarding possibly reclaiming such extra-EU VAT costs get complicated fast, and is up to the accountant to handle.

klsallee wrote:

What VAT do you want to reclaim?

Thanks klsallee.  I pretty much figured you would answer :-)

Perhaps I should have clarified.  The particular item that we will be exporting can only be purchased "retail". They will issue VAT invoices, but I don't believe they will zero rate.

The bulk of our profit margin is the 21% of the purchase price we can reclaim (1/1.27).

As such, we will have to reclaim the VAT from the authorities once we provide proof of export.  I guess an additional question should be, is that an accountant's area of expertise in Hungary or a lawyer's? Can you recommend one?  As I said, I have a local person who is very capable of leaning what is needed to deal with a local accountant in the local language.

jumper77 wrote:

Perhaps I should have clarified.  The particular item that we will be exporting can only be purchased "retail". They will issue VAT invoices, but I don't believe they will zero rate.

If your company is doing the exporting, you would be asking for the export exemption with a right to deduct. See this for more information:

https://ec.europa.eu/taxation_customs/b … xportation

If the buyer is a tourist, or a business buying in Hungary and exporting themselves, then they need to pay VAT and they need to ask for the refund.

This is a complicated process, and you need to talk to an accountant. I can not recommend an accountant in Budapest, since I don't live there (nor does my accountant).

I consulted an International tax attorney when I first arrived.... at $400 an hour. Great info. But a competent accountant with international experience should be fine.

I am not sure I understand what you mean by export exemption. 

If my company is VAT registered and purchased goods of €127,000, then we paid VAT of €27,000.

We subsequently sell €128,000 worth of goods to a customer in Asia and ship via air freight, so we must not charge them any VAT.  As such, our VAT obligation to the regime is -€27,000, or, we are entitled to a refund of this amount.

Our corporate profits will be €28,000 (less expenses) which will then be taxable as corporate income ...

I don't believe this is an exemption case, but fairly a straight forward negative VAT reclaim situation (at least this is the case in other EU countries where we source our goods).  I know that when exporting from Switzerland the key is to make sure the custom's declaration is done correctly ...

jumper77 wrote:

I am not sure I understand what you mean by export exemption.

EU VAT is confusing. And details vary between countries. There are even online e-courses to "help" explain it:

https://ec.europa.eu/taxation_customs/n … o%20deduct


In short:

All EU based businesses must charge VAT on all transactions.

Unless they are entitled to not charge VAT due to an exemption.

One exception is being below the VAT income threshold.

Another exception to exporting the product out of the EU.

jumper77 wrote:

If my company is VAT registered and purchased goods of €127,000, then we paid VAT of €27,000.

We subsequently sell €128,000 worth of goods to a customer in Asia and ship via air freight, so we must not charge them any VAT.  As such, our VAT obligation to the regime is -€27,000, or, we are entitled to a refund of this amount.

Our corporate profits will be €28,000 (less expenses) which will then be taxable as corporate income

That is not really how VAT works with exports. You are not entitled to a full €27,000 refund unless your business is with an "Approved body (e.g. charity)" (see Case 3 in the link I provided above). But you may be entitled to deductions (in part or whole -- it depends).

jumper77 wrote:

I don't believe this is an exemption case, but fairly a straight forward negative VAT reclaim situation (at least this is the case in other EU countries where we source our goods).

You may be confusing an EU business exporting versus a Non-EU business (such as a Swiss company) buying a product in the EU. Different rules apply in each case.

In the later, if a Swiss business buys from an EU business, the Swiss business can claim a full VAT refund on the EU VAT and pay then only Swiss VAT.

For an EU business exporting, how much one can clam back can vary. This is defined in the link I posted above. A full VAT rebate is only typically available to certain "approved bodies". A partial VAT refund my be possible (talk to an accountant and may depend on what you export). Normally, the EU company simply does not charge VAT on the export and recoups their VAT expense in the export price.

Examples of "normal" VAT if a Hungarian company buys a product in Hungary for 100 HUF before VAT added:

Buys in Hungary, sells in Hungary:

buy at 100 HUF + 27% VAT = 127 HUF cost.  -> Sells 150 HUF + 27% VAT retail price. = 190.5. Profit 23 HUF

Buys in Hungary, Sells in Germany:

buy at 100 HUF + 27% VAT = 127 HUF cost.  -> Sells 150 HUF + 20% VAT retail price = 180. Profit 23 HUF

Exports out of EU:

buy at 100 HUF + 27% VAT = 127 HUF cost.  -> Exports at 150 HUF retail price = 150 HUF. Profit 23 HUF

Not normally allowed except under special conditions:

100 HUF + 27% VAT = 127 HUF cost.  -> Exports at 150 HUF retail price, demands VAT rebate of 27 HUF. Profit 50 HUF

That is, in normal VAT, there is rarely a extra profit from using or not using VAT for the reseller if selling in or outside the EU. VAT rules are designed to prevent price inflation or alterations in all markets (in theory -- because there may be some deductions (which are different from exceptions and refunds) your accountant may alert you to). Thus, there is really no easy or simple way to "beat" the EU tax man on VAT by picking Hungary as a retail shipping source --- unless you can buy the same item for less in Hungary before VAT (i.e. pay 90 HUF rather than 100 HUF).

jumper77 wrote:

I know that when exporting from Switzerland the key is to make sure the custom's declaration is done correctly ...

How the EU and Switzerland handle VAT on exports may differ.

klsallee wrote:

Exports out of EU:

buy at 100 HUF + 27% VAT = 127 HUF cost.  -> Exports at 150 HUF retail price = 150 HUF. Profit 23 HUF

Not normally allowed except under special conditions:

100 HUF + 27% VAT = 127 HUF cost.  -> Exports at 150 HUF retail price, demands VAT rebate of 27 HUF. Profit 50 HUF

This is exactly or scenario.  Where I am confused is, why would I NOT be able to get the 27 HUF rebated?  VAT is ostensibly for intra-EU sales and all exports are eligible for VAT refunds.  I shop in France and Germany and routinely receive my VAT refunded.

klsallee wrote:

That is, in normal VAT, there is rarely a extra profit from using or not using VAT for the reseller if selling in or outside the EU. VAT rules are designed to prevent price inflation or alterations in all markets (in theory -- because there may be some deductions (which are different from exceptions and refunds) your accountant may alert you to). Thus, there is really no easy or simple way to "beat" the EU tax man on VAT by picking Hungary as a retail shipping source --- unless you can buy the same item for less in Hungary before VAT (i.e. pay 90 HUF rather than 100 HUF).

That is the point here!
As an example, Item A retails in Germany for €78.  The VAT in this case is 7.5%.  As such, VAT-free price in Germany is €72.56.  Item A retails in Hungary for 24000 HUF, VAT rate is 27%.  VAT-free price is HUF 18,898 or ~€58.78.

Therein lies the reason we want to source in Hungary ...

jumper77 wrote:

klsallee wrote:

Exports out of EU:

buy at 100 HUF + 27% VAT = 127 HUF cost.  -> Exports at 150 HUF retail price = 150 HUF. Profit 23 HUF

Not normally allowed except under special conditions:

100 HUF + 27% VAT = 127 HUF cost.  -> Exports at 150 HUF retail price, demands VAT rebate of 27 HUF. Profit 50 HUF

This is exactly or scenario.  Where I am confused is, why would I NOT be able to get the 27 HUF rebated?  VAT is ostensibly for intra-EU sales and all exports are eligible for VAT refunds.  I shop in France and Germany and routinely receive my VAT refunded.

Because the rules are different for retail buyers not based in the EU, versus businesses based in the EU.

Like I already said, it is complicated. I will try to simplify it (at the risk of loosing a bit of the real accounting facts).

First, there is a difference between a "refund" and "deduction". Think of a refund as money back no matter what you do with that product (buy a product, and put it on your desk). Then think of a deduction as money back only on income (such as resell a product).

So, as a Swiss resident, buying in the EU, let us say you buy a 100 HUF pencil in Germany (with 20% VAT):

1 Euro + 20% VAT = retail price 1.20 Euro

But since you are not an EU citizen, you have the right to request a full VAT refund. So the pencil only costs you 1 Euro. But, if when imported in to Switzerland, you then are suppose to pay Swiss VAT (about 7%), so the final cost is 1.07 Euro.

However... from the EU side the company is VAT neutral because they got their VAT costs back by deduction. That is the company that sold you the pencil bought it for 0.5 Euro and paid  0.1 Euro in VAT. So their total expense for that pencil was 0.6 Euro. Then when they sell it for 1.0 Euro, they get paid the total 1.2 price (their markup of 0.4 Euro, plus 0.2 Euro VAT = sum of 0.6 Euro). So they now have in their pocket 0.6 Euro. But, they do not get to keep all of that, since some of that is VAT. But... a VAT registered company can deduct their VAT purchase costs (0.1 Euro), so they only send to the German tax office the "value added tax" difference between the VAT they spent (0.1 Euro) and the VAT they collected (0.2). The difference they then send to the tax office is 0.1 Euro. So they have in the end, 0.5 Euro in their pocket (0.1 Euro they got back by VAT deduction (which is a neutral expense since the company spent it, but got it back when they sold the pencil) plus 0.4 Euro profit).

So, when you as a consumer, ask for a VAT refund of 0.2 Euro on the pencil,  the EU tax office actually only "loses" the final retail VAT income (0.1) which the retailer send to the tax office, when a product is exported in this way.

Which is why most exports, from the link I provided above, are stated to be VAT "exempt but with the right to deduct". They are not normally "exempt but refundable". An important accounting difference. In the end, you get your VAT costs back, so as a company you are VAT neutral and you incur no VAT costs (except administration costs of having to deal with VAT), but you don't get to 'profit' from VAT deductions or differences in the EU (in theory -- because (1) country rules differ and you can maybe fine option in each country, but that would depend on what you do and only an accountant -- which I am not -- can help you with such details (2) it may be possible to recoup all VAT from all stages, but this really requires an accountant to handle and only in specific cases).

So, even if a product is sold at the exact same price in Germany and Hungary with VAT, since a company is VAT neutral, you don't (normally) get any special benefit by trying to pick a tax jurisdiction (at least one is not suppose to -- but see the "Dutch Sandwich").

Germany at 20% VAT

1 Euro base price + 20% VAT = 1.2 Euro total expense. Export at 1.5 Euro (VAT exempt) of total income. For the tax man: Deductions: 1.0 Euro price, and 0.2 Euro VAT. Equals 0.3 Euro profit.

Hungary at 27% VAT

0.95 Euro base price + 27% VAT = 1.2 Euro. Euro total expense. Export at 1.5 Euro  (VAT exempt) of total income. For the tax man: Deductions: 0.95 Euro price, and 0.25 Euro VAT. Equals 0.3 Euro profit.


If this is still confusing.... Best to talk to an accountant in Hungary (or even a German or Austrian accountant, for consultations purposes as they can give the same general "EU" level advice, even if specific country advice may vary), and they can give you a spreadsheet of what you real, actual VAT and income scenarios will be. A spreadsheet may be more clear than trying to "explain" it in English.

And the accountant, as I said, may know a trick or two (all legal of course) that may save you money that may be exclusive and dependent on what you want to do (details matter and what I say is generic, and your business plan may have special conditions I am not aware of). So they are the ones really to contact, and so to clarify your real income potential, before you commit to a business in Hungary.

In your scenario, the vendor purchases for .50, sells for 1.0 and collects VAT on behalf of the government of .20; having already "advanced" .10, he now is only liable to forward .10 (the difference).  But what if he sold to directly to a customer in China, from whom the government is not entitles to collect VAT?  He then files his monthly VAT return that shows that not only has he not collected any VAT on their behalf, but that he also "advanced" .10 that does not belong to the government.  Apparently, by Hungarian law, the authorities must refund this "advance" within 90 days of the business filing.

jumper77 wrote:

In your scenario, the vendor purchases for .50, sells for 1.0 and collects VAT on behalf of the government of .20; having already "advanced" .10, he now is only liable to forward .10 (the difference).  But what if he sold to directly to a customer in China, from whom the government is not entitles to collect VAT.

If you sell directly to the customer in China, you do not collect VAT, as exports are VAT exempt.

All other between vendor VAT is exempt under the rules as I already stated,, but mostly only under terms of "value added".

Trust me, the Tax Man has figured out all the legal angles. You can not outsmart them (legally) except where there are loopholes (such as the Dutch Sandwich). But unless you are a large multinational, such loopholes will not help you.

Again, please contact an accountant or international tax attorney who can help you clarify your confusion and otherwise help you maximize your profits -- there may be options other than VAT that may help you that only a competent accountant can suggest. Upon arriving in Hungary, I contacted an International tax attorney (at $400 an hour), and that was one of my best investments.

In other words, don't go cheap by asking for free advice at a forum given your expected income. Get some real professional advise.