The European Court of Justice (ECJ) found Hungary to be in breach of EU law by applying the reverse charge mechanism retroactively to staff supplies.

According to the VAT directive, Member States may provide that the recipient of staff supply is liable for the payment of VAT. This constitutes a derogation from the general rule which holds the supplier liable for payment. Therefore, its application by a Member State is subject to the authorization of the Council granted on the initiative of that Member State.

Since 1 January 2015, staff supplies in Hungary are subject to the reverse charge mechanism. Hungary requested authorization from the Council to apply this derogation with a retroactive date. The respective decision of the Council was notified to the Hungarian Government on 11 December 2015. The ECJ (C-434/17) had to deal with the question whether EU law prohibits the retroactive application of the reverse charge system.

The ECJ pointed out that the entry into force of decisions which designate an addressee take effect by notification to their addressees. The ECJ also added that the principle of legal certainty – as a general principle of EU law – requires that rules of law be clear, precise and predictable in their effects. In light of these requirements, as a main rule, EU measures may not take effect before their publication or notification. As the Hungarian Government was notified on 11 December 2015, Hungary was not entitled to apply the reverse charge mechanism to staff supplies prior to this date. The ECJ further recalled that whenever the provisions of a directive appear to be unconditional and sufficiently precise, they may be relied on before the national courts by individuals against the State if the State has transposed them incorrectly. In the present case, the ECJ held that the general rule of the VAT Directive – determining the supplier as the person liable for the payment of VAT – can be relied on instead of applying the reverse charge mechanism.