5 questions and answers about the VAT rate increasing from the new year

From January 1, 2024, the VAT rate increased by two percent, from the previous 20% to 22%. However, if certain conditions are met, it is allowed to apply a 20% VAT rate until December 31, 2025. In the following, we provide an overview of the impact of the VAT increase on previously concluded contracts.  

1. When will the new VAT rate apply? 
Determining the value added tax rate must be based on when the turnover occurs. In general, turnover occurs on the day when 1) the goods are sent or made available to the buyer, or the service is provided, or 2) partial or full payment is received for the goods or services, partial or full payment upon receiving the service. Therefore, the VAT rate depends on when the operations mentioned in the previous points are performed, i.e. the turnover occurs. 

For example, if the company issued an advance invoice for the entire cost of the goods in December 2023, which the buyer also paid in December 2023, and the goods were handed over to the buyer in January 2024, then the transaction will be taxed at 20% VAT rate, because the turnover occurred in 2023. However, if the invoice is issued in 2023 and the goods are delivered and the invoice is paid in January 2024, so if both the delivery of the goods and the receipt of payment are in 2024, then the transaction will be taxed at 22%. 

2. Are there exceptions to the law? 
The law provides for a distinction in terms of cash-based accounting. If the buyer was invoiced and the goods were dispatched or made available or the service was provided before January 1, 2024, a 20% VAT rate may apply until December 31, 2025. 

For example, if a cash-based VAT taxable person provided a service and issued invoice for it in December 2023, but the buyer paid for the service in January 2024, in such case, according to the exception provided in the VAT Act, the service is taxed at 20% VAT rate, even though according to the receipt of money the turnover of the cash-based VAT taxable person occurs in January 2024. 

In addition, a distinction has been made for contracts concluded before May 1, 2023. Until December 31, 2025, it is allowed to apply a 20% VAT rate based on a written contract concluded before May 1, 2023, if the relevant contract stipulates that the price of goods or services includes VAT or 20% VAT is added to the price, and the contract does not provide for a price change resulting from a possible change in the VAT rate. 

For example, if the written contract was concluded before 01.05.2023, the contract states that 20% VAT is added to the price, the contract does not provide for an increase in the price of the goods in the event of an increase in the VAT rate, and the goods are handed over after 01.01.2024, but before 31.12.2025, then when the item is transferred, VAT rate of 20% can be used. If the parties have concluded an agreement for the provision of a service in August 2023, the price of the service and the VAT rate of 20% are stated in the agreement, and the agreement does not provide the possibility to increase the price of the service due to the increase of the VAT rate, then in this case it is not allowed to use the 20% VAT rate, because the agreement was concluded after May 1. When this contract was concluded, it was known that the VAT rate would change, and from 01.01.2024, based on that agreement, the service will be taxed with 22% VAT. 

3. Do I have to change the long-term contracts due to the new VAT rate?
When the increase in the VAT rate comes into effect, the entrepreneur must review the concluded long-term contracts that include VAT. The VAT Act does not regulate exactly how the price is formed in the contract concluded between the seller and the buyer of goods or services. This means that the price of the contract can be both with and without VAT. When the VAT rate increases by 2%, it should be checked that the contracts are in line with the new rate and, if necessary, the contracts must be brought into line with the amendment to the law. 

Situation 1: Price plus VAT
If the price is stipulated in the contract and it is stated that VAT is added to it or VAT is added to it according to the rate provided by law, then the contract does not need changes and in such case the higher tax rate applies automatically.   

Situation 2: Price plus 20% VAT
A contract that states the price and adds that VAT of 20% is added to it, the contract provision must be interpreted based on the principle of good faith. The VAT rate comes from the law, and the parties cannot agree on the VAT rate themselves, so the parties should interpret the VAT rate as a variable amount based on the principle of good faith. In addition, it is possible to change the contract and change the VAT rate by agreement of the parties. It is important to note here that the VAT Act provides an exception for contracts concluded before May 1, 2023. Until December 31, 2025, it is allowed to apply a 20% VAT rate based on a written contract concluded before May 1, 2023, if the relevant contract stipulates that the price of the goods or services includes VAT or a 20% VAT is added to the price, and the contract does not provide for a price change resulting from a possible change in the VAT rate. 

Situation 3: The price includes VAT
It is also possible that only the price is stated in the contract and there is no reference to VAT or that the price includes VAT. This is a situation where the parties have agreed on a specific fixed price and it is not possible to change it unilaterally. If the VAT rate increases, the seller or service provider runs the risk of having to bear the difference in the VAT rate increase. In the latter case, it is also possible to change the contract in order to bring the price of the contract into line with the increase in the VAT rate. The seller or service provider may have the unilateral right to change the contract, but in this case the contract must contain a specific provision that allows the price to be increased if the law is changed. Another option is to change the contract by agreement of the parties, and in this case, the consent of the other party is also required to adjust the price. The third option is the orderly cancellation of the contract. 

4. What is the right way to stipulate VAT in the contract? 
We recommend all contracts to be formalized and worded in such way that the price of the goods and services is clearly stated in the contract and that VAT is added to the price, or that VAT is added to the price in accordance with the rate stipulated by law. In this case, if there should be changes in the VAT rate, the contract always includes the new VAT rate, and the entrepreneur does not have to worry about changes to the contract or because he/she has to pay the VAT increase by himself/herself. For example, the price can be added to the contract as follows: "The price is 10 euros plus VAT at the rate provided by law" or "The price is 10 euros plus VAT".

5. Will the VAT declaration form also change? 
Due to the change in the VAT rate at the beginning of 2024, the VAT declaration forms will also change. The new VAT declaration form has been created because as an exception it is possible to apply a 20% VAT rate in certain cases until December 31, 2025, so two general VAT rates will be used in parallel until the end of 2025. Forms valid from January 1, 2024 apply to tax periods starting from January 1, 2024.