The Hungarian Tax Authority (NAV) recently published an official opinion, which elaborates on the VAT consequences related to hotel room cancellations and guest no-shows, thereby providing guidance to accommodation providers and stakeholders in the hotel industry.

Anyone who frequently books accommodation at hotels or guesthouses may have experienced that providers apply different conditions for cancellations. Depending on the type of accommodation, the booking period, and any discounts granted for early bookings, the provider may, for business reasons, require the guest to secure the reservation with a deposit, which may be partly or entirely forfeited if the booking is cancelled. At the same time, to attract less certain guests, some providers allow the purchase of a cancellation right in advance, or they may offer that the deposit retained can later be utilised for another booking.

Before the publication of the official opinion, it was far from clear how to treat certain payment obligations related to room cancellations for VAT purposes. According to earlier Hungarian practice, it was necessary to examine whether the payment qualified as indemnity or as compensation in civil law terms. Indemnities, by their economic substance and under the express provision of Section 259(6) of the Hungarian VAT Act, are outside the scope of VAT. For compensation, it had to be assessed whether any service—possibly expressed in tolerance—was provided in return, in which case the payment could either fall outside VAT or be subject to the standard VAT rate. The fundamental distinction between indemnity and compensation was whether the payment was made in connection with unlawful (contract-breaching) or lawful harm. However, the Court of Justice of the European Union (CJEU) has stated in several judgments that, within the EU VAT system, VAT consequences must be determined uniformly by focusing on the true economic substance of the transaction, regardless of national civil law provisions. While the Hungarian tax authority’s practice gradually adopted this interpretation in individual rulings, NAV has now published its clear position on the matter.

Reflecting the CJEU case law, the new Taxation Issue analyses three main cases:

1. Cancellation with deposit retained, no service in return

If the guest explicitly cancels the booking and the accommodation provider retains the deposit without offering any further service in return, the deposit loses its nature as an advance payment and qualifies as indemnity under the VAT system. Accordingly, the advance invoice must be cancelled, and the retention of the deposit falls outside VAT. However, if the provider allows the guest to use the retained deposit for future services, it is treated as a voucher, and the VAT treatment must follow the special rules on vouchers (single or multi-purpose vouchers).

2. Guest no-show without prior notice

In this case, VAT treatment depends on whether the accommodation provider reserved the room for the entire booking period. If so, the service is considered rendered, and 5% VAT must be charged on the amount payable by the guest. (In Hungary, hotel and accommodation services are subject to a reduced VAT rate of 5%.)  If, however, the provider is free to let the vacant room to another guest, the amount paid by the no-show guest loses its character as an advance and qualifies as VAT-exempt “indemnity.” To decide, the hotel’s business rules and general terms and conditions must be examined, not whether the room was eventually re-let in the specific case.

3. Payment of an extra fee for cancellation rights

If the guest pays a separate fee for the right to cancel or to cancel under more favourable conditions, the tax authority points out that this is not a commitment by the provider to tolerate a situation but rather the granting of an option right in return for consideration. This constitutes a service subject to the standard 27% VAT rate. The supply is considered completed if the extra fee is non-refundable even if the guest shows up, and the fee is not credited against the accommodation price.

For any further questions, please do not hesitate to contact our advisors!