In recent years, domestic tax law practice has undergone significant changes at several points. European Union law and resulting judicial decisions have demanded increased diligence both from tax authorities and taxpayers in the fields of tax inspections and budgetary fraud.

Special emphasis is placed on situations where an investigation originally did not reveal any tax discrepancies (thus apparently closing “without findings”), yet criminal proceedings still commence against the involved company or its executive. Surprisingly, the two processes can result in opposite outcomes as they employ different evidence-gathering tools, methods, and procedural rules.

We will explain in detail the circumstances that can lead to sanctions for budgetary fraud following a tax authority audit, why the evidentiary procedures differ so greatly between the two areas, and how businesses can best protect themselves with professional legal assistance. Additionally, we will discuss the role and services of Molnár & Márk Law Association, which can provide solutions in both civil and criminal law aspects.

VAT Inspection and Practical Experiences

VAT inspection is one of the key areas within the tax authority (NAV) examination spectrum, as value-added tax represents one of the largest revenue sources for the Hungarian budget. Consequently, NAV pays special attention to invoice verification and the detection of potential irregularities.

The Concept of Retrospective VAT Inspection

We speak of retrospective VAT inspection when NAV compares our previously submitted VAT returns (or returns covering multiple periods) with actual invoices, bank transactions, and contracts. Common examination points include:

Auditors examine the circumstances of invoice issuance, accounting records, and compare them with actual market conditions. If they detect any irregularities or suspicions, they conduct a deeper and more detailed inspection.

”Without Findings” Closed Inspection

It’s a common misconception that if an inspection closes “without findings,” the taxpayer has no further cause for concern. It may happen that NAV does not find sufficient evidence to determine a tax difference, but a complaint can still be filed afterward if the auditors, in the background and without objective evidence, deem the transactions suspicious.

In such cases, the criminal case moves to a different organizational unit where investigators work with broader powers: witness hearings, possible phone taps, house searches, and other investigative tools can aid evidence collection. Therefore, even if a simple tax administration procedure concludes without results, a criminal proceeding may still reveal circumstances that could lead to severe legal consequences.

Budgetary Fraud and the Stakes of Criminal Liability

Budgetary fraud is one of the most severe economic crimes in the Criminal Code (Btk.), characterized by someone intentionally gaining undue advantage at the expense of the budget or reducing the budget’s income.

Definition and Elements of Budgetary Fraud

According to the Btk., someone commits budgetary fraud if they:

  1. Mislead authorities by providing false information or omitting real data.
  2. Use documents that lack a real performance or economic event.
  3. Specifically aim to benefit from the budget unlawfully (e.g., tax relief, VAT refund claims).

The act can take many forms, but essentially includes any behavior detrimental to the central budget, local government resources, or the European Union’s budget.

Impact of European Court Judgments

Several decisions by the European Court have clarified that mere “negligent” receipt of an invoice or “lack of due diligence” does not necessarily lead to the denial of VAT deduction rights. Instead, authorities must objectively prove fictitious invoicing and that the taxpayer knew or should have known about the irregularities by the invoice issuer.

Previously, it was common for NAV to claim that proper verification had not occurred (e.g., the real headquarters, assets, or employees of the company issuing the invoice). Today’s judicial practice more strictly requires the actual presence of evidence, and if these are lacking, it does not allow the denial of accepted VAT deductions based solely on the lack of “due diligence.” This change, however, does not prevent criminal proceedings, which proceed under different rules.

Tax Authority Investigation: Objective Circumstances and Evidence

During a tax authority investigation, numerous documents and receipts must be presented, potentially covering several years. The authority tries to map out whether real economic events underlie the invoices from these documents.

Importance of Objective Circumstances

The so-called objective circumstances essentially refer to factual elements that clearly indicate that there is no real performance behind the invoices or that the parties should have known about irregular operations. For example: the company receiving the invoice did not maintain contact with the representative of the invoice issuer, nor did it verify their representation rights.

The Problem of Differing Levels of Proof

In tax administration proceedings, the authority must prove that the taxpayer knew or should have known about the fictitious nature of the transactions. If these objective proofs are missing, then the court will not support NAV’s findings. Therefore, it may happen that the revision does not establish any tax difference or penalty, yet suspicious circumstances are forwarded to the criminal authorities by complaint.

In professional practice, a fictitious invoice means that there is either no real economic event behind the invoice, or it is issued in the name of a “straw” company instead of the actual performer. This poses a significant risk on both sides: for both the invoice issuer and the recipient.

Types of Fictitious Invoices

  1. Completely fictitious: The service or product sale specified in the contract did not occur at all.
  2. Real service, but not in the name of the real entrepreneur: It may happen that the actual work is done by “Company A,” but the invoice is issued by “Company B.”
  3. Over-invoicing: A real economic event occurred, but it is billed at an unreasonably high amount, far exceeding actual market prices.

Comparison of Old and Current Perceptions

The older practice was sufficient to argue that the invoice recipient did not act with “due diligence.” However, today, the tax authority must prove that the invoice recipient was involved or aware of the fictitious nature. In this regard, the judgments of the European Court have reinforced that NAV cannot deny VAT deduction rights based solely on suspicious circumstances, but rather it is their task to prove actual knowledge or cooperation.

NAV criminal proceedings typically refer to the investigative phase conducted by the criminal administration, separate from the audit activity, but often following a tax inspection if the auditors deem there is a suspicion of budgetary fraud or another crime.

Advantages of Criminal Proceedings for the Authority

Investigative bodies have a broader toolkit than administrative auditors. Beyond interrogating witnesses, they can employ coercive measures, have the ability to tap phones, conduct secret surveillance, execute house searches, and seize items. These methods can bring to light evidence that is extremely difficult or impossible to gather during a tax inspection.

It is often observed in practice that witnesses may testify differently in a criminal case than during an audit. This psychological pressure is also influential: sensing the seriousness of the criminal proceedings and potential sanctions, many see it as “better” to disclose the real (or perceived) facts.

Criminal Proceedings in Tax Matters: Defense Options

Criminal proceedings in tax matters (especially in cases of budgetary fraud or fictitious invoices) present unique challenges, as the prosecution must prove intent or necessary awareness. Therefore, businesses and executives need to be well-prepared from the very beginning.

Proving Real Performance

The best defense is to thoroughly document real performance:

If a company can prove that real work or services underlie the invoices, it will be much more difficult for the authority to prove fictitious invoicing or budgetary fraud.

The Impact of Witnesses and Psychological Effects

Statements by witnesses can often be decisive, especially if there is a contradiction with the company documents. It may occur that during a tax inspection, a witness still testifies favorably for the company, then gives a different statement during the criminal case, which may be due to the seriousness of the criminal proceedings itself, but often just because the investigating officers “put into the mouth” of a witness the sentences favorable to them. Therefore, legal support for witnesses can also be crucial.

How Can Molnár & Márk Help?

Molnár & Márk Law Association offers a wide range of services to its clients, covering both the civil and criminal aspects of tax matters. The firm’s activities include legal representation in proceedings before NAV, defense in criminal cases, and comprehensive legal support for businesses.

Tax Law Advice and Planning

The experts at Molnár & Márk assist businesses in fully complying with tax law requirements, thus preventing potential tax authority proceedings or criminal proceedings. This includes:

Representation During Tax Inspection and Criminal Proceedings

If a tax authority investigation or NAV criminal proceedings have already started, it is crucial to have experienced lawyers help. This involves:

Molnár & Márk operates not only as a classic law association but also has extensive professional connections (accountants, tax advisors, experts, etc.), thus offering an integrated service to clients. Within this framework:

Conclusion

With the development of Hungarian tax and criminal law systems, tax inspections and criminal cases increasingly scrutinize VAT deductions, the economic events behind invoices, and the real activities of businesses. Although today’s regulations require the presentation of objective evidence to establish budgetary fraud or fictitious invoices, it is still possible that a seemingly clean transaction might be subject to subsequent review.

It can be particularly surprising when a VAT inspection ends “without findings,” yet a criminal proceeding in tax matters begins, ultimately leading to a condemning verdict. This process highlights the completely different rules and tools employed by the auditor and investigative authorities. For businesses and their leaders, it is most crucial to prevent problems. This requires the deliberate design of internal processes (invoicing, contracting, partner vetting, accounting), and taking expert legal help at even the slightest signs of suspicion. Molnár & Márk Law Association can be a reliable partner in consultation, representation, and strategy formulation in this highly complex legal environment.

(The information read here is not considered official legal advice; consultation with the appropriate professionals is recommended for each specific case.)