Currently, cash payments are gradually receding into the background among both businesses and individuals. From a tax perspective, the limitation on cash payments primarily aims to prevent money laundering and the financing of terrorism, as well as to ensure the effective collection and control of tax revenues.
Despite the strengthening trend toward digital payments, there are still business sectors in the Hungarian economy that frequently use cash payments in business-to-business (B2B) transactions. Examples include micro and small businesses in construction, hospitality, and wholesale markets, where cash flow is significant. Street vendors or businesses participating in markets where customers often pay with cash, as well as on-site payments to suppliers, are also common. The latter often arises from mutual distrust between business partners, especially when there is no established business relationship. To avoid penalties imposed by the tax authorities, it’s important to understand some fundamental rules.
Who is affected by the cash payment limitation?
It’s important to understand that tax regulations regarding cash transactions only apply to taxpayers who are obligated to open a payment account. For example, these include legal entities and VAT-registered individual entrepreneurs.
According to the basic regulation, every Hungarian legal entity and natural person who pays value-added tax (including individual entrepreneurs) must have at least one domestic payment account. These taxpayers are required to keep their business funds in the payment account and process inter-business transactions through this account.
Domestic or foreign payment account?
The question often arises whether it’s possible to open a payment account in neighboring countries (or other EU member states), whether it needs to be reported, or if it’s acceptable for Hungarian businesses to use foreign payment accounts for their inter-business transactions. First, let’s clarify what constitutes a payment account. Such an account is a payment account opened by the account holder for the purpose of conducting financial transactions in the course of economic activity, as prescribed by the relevant law. According to the Act on the Rules of Taxation, Hungarian taxpayers are required to have at least one domestic account, but they are allowed to hold their funds in a foreign payment account and carry out transactions through it.
What does the cash payment limitation mean?
The cash payment limitation, as stipulated by the law, restricts taxpayers obligated to open a payment account to make cash payments of up to one and a half million Hungarian forints per contract per month.
If this cash payment limitation is breached, the tax authority imposes a penalty on both the payer and the payee, equivalent to 20% of the amount exceeding one and a half million Hungarian forints. The penalty must be applied in cases of exceeding the cash payment limitation, and the tax authority has no discretion in this matter. However, it’s worth noting that since only cash payments between related businesses need to be reported, the violation is typically revealed during the audit of one of the parties.
When does the VAT apply to the one and a half million forint limit or only to the net amount?
If VAT is included in the total amount, the gross amount is considered when determining whether cash payments exceed the one and a half million forint limit. So, if the cash payment exceeds the limit due to VAT, it is still considered a violation.
Partial payments or multiple contracts, how to apply the cash payment limitation?
If taxpayers agree on partial payments for the financial performance of a transaction and the amount paid in one month does not exceed one and a half million forints, the transaction does not violate the law and is not subject to penalties.
However, taxpayers sometimes try to bypass the cash payment limitation by recording obligations in multiple separate contracts, even though they are essentially related to a single transaction. The rules for the cash payment limitation address this scenario. If it is clear that the transaction was recorded in multiple separate contracts due to improper exercise of rights and the payments were made by the same taxpayer between the same taxpayers, the payments must be aggregated. For example, if multiple contracts and invoices are issued for the sale of a single product between the same taxpayers, and the delivery dates are different, it is possible to identify the abusive exercise of rights. These cases need to be assessed on a case-by-case basis.
Repayment of loans – how is the cash payment limitation applied?
It is possible that one business provides a loan to another, or a taxpayer repays a membership fee to an in-house savings fund, whether in cash or through the in-house savings fund. Considering that the cash payment limitation specifically applies to the payment of consideration, it is not necessary to apply the restrictive rules for cash payments when repaying loans (except in the case of interest payments).
What if the taxpayer obligated to pay the consideration deposits the payment in cash into the account of the other taxpayer?
According to the legislation on credit institutions and financial enterprises, cash payment refers to payment that takes place directly between the payer and the payee without intermediation, using banknotes and coins (cash). This means that if at least one of the parties has account-based credit or debit, it cannot be considered a cash payment, and thus the cash payment limitation is not violated.