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Fictitious invoices

Fictitious invoices / deny of VAT deduction right according to the practice of the Hungarian Supreme Court

Recently we saw a lot of cases during our practice, where a harmless target audit (audit regarding the fulfillment of certain tax obligations) is followed by a criminal investigation initiated by the auditors. In other cases, the target audit is especially initiated by the tax authority to collect evidence for a future criminal procedure. The formerly typical case where after a tax audit a criminal procedure is initiated can still be seen, but not so often.


In this present article we try to give a big picture about the practice of the supreme court regarding fictitious invoices.

  1. Cases of fictitious invoices, 5/2016. (IX.26.) supreme court opinion


Regarding the authenticity of received invoices, the analysis of the invoice receiver’s mind (knew/should have known) can be made in different manners. During the analysis, three different separate statement of facts occur:


  1. The economic event (transaction) indicated in the invoice did not happen.


  1. The economic event (transaction) happened, but not among the parties indicated in the invoice.


  1. The economic event (transaction) happened among the parties indicated in the invoice, but the invoice issuer (or the issuer of the invoice which he received) acted in a fraudulent manner.


1.) The sale of goods/provision of services indicated in the invoice did not happen in reality, only the invoice itself exists without a real economic event behind it. It’s aim is to generate deductible VAT in a fraudulent manner. The parties indicated in the invoice are aware of the absence of the real economic event. Therefore, it is not necessary to examine, whether the recipient of the invoice was aware of or should have been aware of the tax fraud. He knew it, as he was a participant.


2.) The sale of goods/provision of services indicated in the invoice happened (i.e. the delivered goods became possession of the invoice recipient, the house was raised up), but the tax authority proved that not the invoice issuer carried it out. The taxpayer exercising his VAT deduction right often refers to the fact that he was deceived, he knew that the invoice issuer fulfils the contract. In this case it must be considered that Vat deduction right is connected to fulfilled transactions (Mahagében/Dávid case point 38.), and on the other hand only such tax may be deducted, which was devolved by one taxpayer to another taxpayer (Vat act chapter 120. point a) VAT directive chapter 168. point a). In this case the doubted economic event happened, but the invoice issuer is not equivalent with the taxpayer devolving VAT (the invoice issuer did not devolve VAT in fact). The two conjunctive criteria are not fulfilled, hence the dispute is whether the invoice recipient was aware of that.


In this case we must refer to the practice of EU member state courts (summarized by the Hungarian Supreme Court in an opinion). According to the opinion, “bona fide” (acting in good faith) may only be examined if the economic event took place in fact. If the economic event happened in fact and tax fraud is connected to it, the question of bona fide occurs only in this case.


The caselaw of the EUC does not make a difference between the case when the taxpayer itself commits tax fraud/evasion, or the case when the taxpayer knew or should have known that with the acquisition of goods he participates in a VAT fraud transaction. Due to the Directive such taxpayers are participants of VAT fraud, irrespective of the fact whether they realized profit with the further sale of such acquired goods or the use of taken services. (C–18/13 Maks Pen case point 48.)


To prove this taxpayers behavior (content of mind) is the task of the tax authority, but the taxpayer has to cooperate as in some cases only the recipient of the invoices has such information, which can serve as evidence. Compared to the first case, in case of tax authority resolutions which are based on “objective circumstances”, the examination of the taxpayer’s mind (did he know or should he have known about tax fraud) is irrespective of the statement of facts necessary to make a lawful decision.


Based on the statement of facts, we can make a difference between active and passive tax fraud depending on the performed behavior of the taxpayer. The difference is whether the invoice recipient taxpayer had an active or a passive role during the performance of the fraudulent behavior.


The behavior is active, if the taxpayer actively participated in the gain of the unjustified tax benefit, i.e. he created the artificial transaction. In this case the mind content (knew or should have known about tax fraud) of the taxpayer does not have to be examined, solely it has to be proved, that he was the primary creator of the transaction or chain. 


The behavior is passive, if the taxpayer accepts the conditions, circumstances offered by another taxpayer, he does not examine them during the performance of the transaction. In this case the mind content of the invoice recipient has to be examined, as it has to be proved, that he knew or should have known about the fact, that the transaction or their chain was created actively by others to realize unjustified tax benefit.


As in the first case the taxpayer is the creator of the transaction(s), in the second case the invoice recipient must suffer the consequences. In the second case, if he knew or if he should have known that with the transaction, he will be a participant of tax fraud, he may not deduct VAT. In case of chain transactions, at least one active fraudster must be, except if somebody who was not a participant (contracting party) organized everything from the background.

Hence, it is necessary for the tax authority to clear which taxpayer realized the unjustified tax benefit where the VAT deduction right may be denied.  


3.) In this case the conjunctive circumstances are fulfilled: the sale of goods/provision of services happened and it was done by the invoice issuer. The tax authority must prove that the taxpayer or somebody in the transaction chain previously acted with fraudulent behavior. It is a question whether the VAT deduction right of a taxpayer can be dependent on the behavior of other taxpayers.


In respect of this question, it has to be taken into account that the fight against tax fraud/tax evasion is a nominated goal in the VAT Directive, the taxpayers may not misuse EU laws (Mahagében/Dávid case point 41. and other verdicts referred there).


Hence, the mind content of the taxpayer must be examined and the task of the tax authority is to prove with objective circumstances that the taxpayer knew or that he should have known that with the transaction he commits tax fraud/evasion (Mahagében/Dávid case point 49.).


If you have problematic suppliers or sub-contractors, we can help you to analyze whether the tax authority would establish a tax difference in connection with the invoices issued by them. If you have an ongoing target audit where you still have the right to take out the problematic invoices, we can give you advise to make the best decision. If you have an ongoing audit and no right to file a self-revision, we can help you to reduce the payable fine or reach a payment of the tax debt, late payment interest and tax fine in instalments. If the tax authority has already completed an audit at your company, we can help you with the work out.


All of our colleagues have worked for long years for the tax authority in audit fields and in the field of anti-tax fraud and are highly qualified.



Dr. Roland Márk / Dr. Árpád Molnár

Professionalism and reliability

attorney at law, tax expert, economist

Head of Molnár and Partners Law Association

attorney at law, tax advisor

Founder of Molnár and Partners Law Association

Roland Márk
attorney at law

Founder of Molnár and Partners Law Association