Debt collection in Hungary: the full picture
When doing business, you expect your partners to pay for your services, or provide the products you have paid for on time. However, sometimes life happens, and your company ends up with debts owed to it. Learn the techniques to mitigate risks and advance debt collection – or reduce the damage caused by irrecoverable claims. Get a full overview, complete with bad debts’ effects on taxation.
Securities make your life easier
It is best if you can avoid a situation when your company must resort to debt collection strategies. For that, you can demand guarantees that your partner will pay (or deliver).
- Prepayment: with some services, it makes sense to ask for an advance payment from your buyer.
- If you do business that is worth more than HUF 200,000 (ca. EUR 555), you are required by law to make a contract about each party’s obligations. However, having a contract can always help your claim get recognized in court if you have to sue for your dues.
- It can happen that your partner does intend to pay, but they cannot do so at the given moment. If you are willing to agree on a postponement of payment or payment in instalments, it is still a good idea to make the debtor sign an acknowledgement of debt in front of a notary, because it can become enforceable without suing your debtor.
In either case, there should also be an invoice created connected to the delivery, which can be the basis of any procedure.
Legal options for debt collection
There are several reasons why your debtor might not be paying you. They might be running short on cash, or they might be prioritizing other payments before yours. At most small or middle-sized Hungarian companies, debt collection is handled by either the managing director or a financial assistant. However, to save company resources, the task can also be assigned to providers specializing in debt collection (usually for a success fee).
You can also ask for legal assistance, which will have various steps – one after the other.
- Formal notice for payment: this is more like a letter in which your lawyer summarizes the state of affairs, and formally requests your debtor to pay.
- If the debt is under HUF 3,000,000 (or ca. EUR 8,300), for a fee of 3% of the debt, a notary can issue an order for payment, which can become enforceable even without a court order, so you do not have to sue your debtor.
- Alternatively, if the debtor is a company and the debt is above HUF 200,000 (ca. EUR 555), your lawyer can also initiate after the liquidation of the debtor company. If the company wishes to avoid forced liquidation, they will pay up if they can.
Outstanding claims and taxation
A claim that cannot be collected causes damage to your company in more than one way. For one, the revenue is not realized. Moreover, after you have created an invoice, your tax base increases. If the invoice contained VAT, you also have to pay the VAT to the tax authority – even if you have not received the payment from your buyer.
If you are still expecting your invoice to be paid, there is not much to do about this. You just have to pay your taxes, and watch out for your liquidity while you are waiting for the revenue to come in.
However, if your claim turns out to be irrecoverable, meaning that it becomes sure that it will not be paid, you can deduct the net sum from your tax base, and you can request a refund of its VAT content. After all, it would not be fair for you to be expected to pay taxes after income that was never realized. In that case, your accountant can file the appropriate reports and refund requests.
When does a debt become irrecoverable?
There are several options for a debt to become irrecoverable. The most obvious is its term of limitation to expire, which happens in 5 years after the due date of the invoice. However, you do not want to wait for that, especially because after that time you will not be able to get a VAT refund or a tax base reduction.
Other than that, a debt usually also becomes irrecoverable when it is officially determined that the debtor cannot pay. These cases may include the following:
- While enforcing payment, it turns out that the debtor does not have sufficient funds.
- When the debtor company is liquidated, it turns out that the debtor does not have sufficient funds.
- During liquidation, you as the creditor decide to waive the debt.
Debt collection and accounting
Outstanding invoices are visible to your accountant, so in order to remain compliant to regulations, it is best to keep them updated about what is happening to those claims. While there are some methods to lower the risk on non-payment or to enforce the payment of debts, sometimes debts do become irrecoverable, in which case your accountant can mitigate damages to your company by requesting a tax base reduction and a tax refund.
The team of Helpers Finance has extensive experience in providing accounting and bookkeeping to foreign-owned small and medium-sized businesses in Hungary, which includes accounting related to outstanding and irrecoverable claims.
Got you interested? Contact us today! Call our office on +36 (1) 215 0712, or send us an email to info@helpersfinance.hu.
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