5 Tips for Interpreting Tax Legislation

When a tax-related question arises in connection with a business transaction, finding the correct answer in the relevant legislation can be a real challenge. There is a specific process for understanding and interpreting the rules, and ignoring this process may lead to incorrect conclusions and, consequently, tax risks. In this article, we outline five key considerations that help ensure successful research.

I. Always Start from a Clean Source

When we want to look up the tax rules applicable to a particular situation or transaction, the first question is where to search. Most people would undoubtedly type their query into Google or Copilot, and they would indeed receive countless results. This approach is not wrong, but it is important to emphasize that online posts, articles, and comments cannot be regarded as clean sources — more precisely, they are not legal sources.

What is a legal source?

A legal source is, on the one hand, the set of bodies and institutions authorized to create laws — the lawmakers. On the other hand, legal sources are the documents that establish general, binding rules of conduct and are created through the state’s official legislative procedure — such as acts, decrees, or uniformity decisions.

Professional articles are not considered legal sources, although they undoubtedly play an important role in supporting legal interpretation. However, it is essential to keep in mind that someone else’s opinion, another expert’s advice, or another company’s practice does not qualify as a legal source and cannot be cited in a potential legal dispute or during a tax authority audit.

So how should we begin the search for an answer?

Gradual progression is key. If we are not professionals working with legislation, we should start from a distance — but the ultimate goal must always be to reach the actual text of the law. There is nothing wrong with beginning the search by browsing the internet, reading blogs, or studying articles. These can help us grasp the issue and form an initial assumption about the answer. However, the final step must always be to verify the assumed or suggested answer in the clear, original text of the legislation.

Legislation is available through several platforms, such as the National Legislation Database – MKIFK Hungarian Official Gazette Publisher and Judicial Translation Centre Ltd. or the Collection of Effective Legislation – Wolters Kluwer.

II. What Is What?

Unfortunately, Hungarian law does not yet have a unified glossary that could be applied and referenced across all pieces of legislation. This makes it particularly important to verify the definitions relevant to the issue at hand within the specific law being examined. Most statutes contain definitions, usually collected in a section titled “Interpretative Provisions.” It is advisable to start with this part so that the foundations are clear before searching for the answer. It is pointless to spend hours exploring detailed rules if, in the end, it turns out that we were looking at the wrong taxable object altogether. For example, the definition of a passenger car differs between the Personal Income Tax Act and the Motor Vehicle Tax Act — and in this case, the

difference is quite subtle.

It may also happen that a statute does not contain its own definition for a particular item or event, but instead refers to another law that does include a statutory definition. A good example is the Local Taxes Act, which does not define net sales revenue or material costs itself, but refers to the definitions in the Accounting Act.

The most difficult situation arises when neither a definition nor a reference can be found in the relevant statute. In such cases, there are two options. First, one must examine whether another applicable law contains a definition that can be relied upon. In the field of taxation, the Civil Code often fills conceptual gaps in tax legislation, so when a definition is missing, the Civil Code is usually the first place to look.

There are also cases where the necessary definition must be drawn not from Hungarian law but from international legislation. Surprisingly, for example, the VAT Act does not define immovable property. However, a definition exists in the Implementing Regulation (EU) No 282/2011, which supplements the EU VAT Directive — and since this regulation is directly applicable in Hungary, it is an entirely appropriate source to consult.

If no other applicable legislation can be found, the term must be interpreted

according to its ordinary meaning — that is, what is generally accepted under similar

circumstances.

III. What Did the Author Mean?

We all know the courtroom scenes from American movies where everyone understands who the culprit is and what they did, yet through a clever legal twist or a crafty misinterpretation of statutory wording, the “devil’s advocate” manages to get the defendant off the hook. Viewers often feel: everyone knows what the rule is meant to cover — how can the judge just shrug?

Indeed, such extremes exist only in films. In reality, the purpose and motivation behind the creation of a law play a significant role in its interpretation. This is known as the legislative intent. There is no doubt that the primary purpose of tax laws is to secure revenue for the state budget. However, a secondary purpose is that taxation can serve as an indirect governmental tool: by modifying tax rules, certain sectors, activities, or taxpayer groups can be encouraged or supported, while others may be discouraged through less favourable provisions. Understanding this secondary function requires not only reading the statutory text but also understanding why it was created and what objective it aims to achieve.

In this regard, the explanatory memorandum attached to a bill can be extremely helpful. It is an inseparable part of the legislative proposal and serves as an official explanation of the final statutory text. The person submitting the bill uses the memorandum to justify why a particular rule or amendment is proposed and what effect is expected from it. Unfortunately, decrees do not come with explanatory memoranda, so this step cannot be applied when interpreting them. Official communications (e.g., from the Ministry of National Economy or the Tax Authority)

may also assist in interpretation.

Whenever we search statutory text for an answer or for confirmation of our interpretation, we should ask ourselves: What might the author have meant? In other words, what was the legislative intent? Misinterpreting a poorly or imprecisely drafted provision may create the illusion of an advantage that does not actually exist, or suggest a risk where there is none. If the legislative intent remains unclear, it is possible to request an official position from the Tax Authority or even directly from the Ministry of National Economy.

IV. Who Has the Stronger Position?

There is a hierarchy within the family of legal norms. Not all pieces of legislation carry the same weight. Some laws may amend others, some may only supplement them, and some can even override statutes without formally modifying them. It is therefore essential to understand where exactly the provision we are reading stands within this hierarchy.

The hierarchy of domestic Hungarian legislation is as follows:

1. Fundamental Law (Constitution): Together with its amendments, it is the source of the entire Hungarian legal system and stands at the top of the hierarchy.

2. Acts of Parliament: These occupy the second level. We encounter them most frequently when examining tax rules. As noted earlier, acts are accompanied by explanatory memoranda, which help clarify the purpose and intent behind the legislation.

3. Government Decrees: These typically provide further detailed rules within the framework established by acts. They are usually implementing regulations.

4. Ministerial Decrees: These contain the implementing rules of higherlevel norms.

5. Municipal Decrees: Local governments regulate areas not covered by acts through their own decrees.

The most important point is that dominance flows from top to bottom. If a provision in an act and a government decree contradict one another, the act is the “stronger” norm, meaning the rules contained in the act must be applied. However, lowerlevel legislation often contains detailed rules, so in any given matter the act should be reviewed first — but we must not forget to check whether any type of decree is also relevant to the topic.

Another important aspect is that the list above reflects only the domestic Hungarian hierarchy. We must not forget that international legislation or treaties may override domestic rules. A typical example is double tax treaties. Hungary has concluded agreements with more than 80 countries to avoid double taxation. These treaties take precedence over Hungarian tax laws, so their provisions must always be examined when determining the taxation of a particular type of income. EU regulations operate similarly: they are directly applicable in all EU Member States without any further domestic legislative action. Therefore, for example, when researching a question related to social security within the EU, the EU Social Security Regulation must be

reviewed alongside the Hungarian Social Security Act.

V. Tax Advantage Is Not an Economic Purpose

A company must pay or otherwise settle its tax liabilities. In accounting, tax burdens are recorded as expenses. Any business owner might reasonably assume that tax can be treated like any other cost related to production. If it is possible — indeed, commercially necessary — to keep production costs as low as possible, why should tax burdens be treated differently? If production costs can be reduced by changing processes, suppliers, locations, or workforce, why shouldn’t a lower tax burden justify restructuring within a corporate group?

Businesses must approach this with caution. The key question that must be considered before any business step with tax implications is: Is there an underlying economic purpose?

During tax audits, when assessing the genuineness of transactions, inspectors primarily examine whether there is an economic purpose behind the transaction and, if so, what that purpose is. It is important to note that tax burden itself cannot be treated as such an underlying economic purpose, because tax laws do not consider themselves to be businessdriving factors. Therefore, a taxindependent economic purpose must appear as the primary motivation.

If there is a genuine economic purpose (e.g., separating functions into different entities to localize responsibilities, relocating an R&D center to another country due to a better supply of skilled labor, etc.), then tax differences may enter the decisionmaking process as secondary factors. If a business can choose between two types of transactions, no law requires it to select the one with the higher tax burden.

Everyone has the right to choose the leasttaxed form of conducting economic activity, provided that each alternative route is supported by genuine, taxindependent economic reasons and interests.

Even artificial structures may pass scrutiny, but if the conditions set out in the relevant tax laws are met only formally, without real economic substance, or if the primary purpose of the transaction is to obtain a tax advantage, there is a high risk that the tax authority will classify the arrangement as an abuse of law during an audit.

Hungarian legislation goes even further. Among the principles set out in Section 1 of the Corporate Tax Act, the law states that “if, based on a legal transaction (or series of transactions), it can be established that its main purpose or one of its main purposes is a tax advantage for one or more parties that is contrary to the object or purpose of the applicable tax legislation, then the cost or expense accounted for on the basis of the transaction (or series of transactions) shall not qualify as incurred in the interest of the business, and the tax advantage shall not be recognized.” This means that companies subject to Hungarian corporate tax must be so cautious

that tax advantage cannot appear even among their main objectives.

Summary

The five most important factors to consider when assessing a tax question are:

1. Use clean, authoritative sources.

2. Pay attention to the definitions in the relevant legislation.

3. Remember the hierarchy of legal norms.

4. Understand the legislative intent behind the rule.

5. Identify the genuine economic purpose behind the business decision.

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