On 1 January 2024, the new system for the recollection of beverage packages, the so-called Deposit and Return System (DRS), entered into force in Hungary, and in connection with this, certain rules applicable to value added tax (VAT) were also changed effective from 1 January 2024. In this newsletter we briefly describe the key features of the DRS and the related VAT changes.

DRS rules in a nutshell

The Hungarian background legislation on DRS can be found partly in Act CLXXXV of 2012 on Waste, with more specific provisions laid down in Government Decree 450/2023 (X. 4.) on the detailed rules for the establishment and application of the deposit return system and the distribution of products subject to the deposit return system (hereinafter “Government Decree”).

Although the rules provided for compulsory registration as of 15 November, the system only went live from 1 January. As can be seen from the above-mentioned legislative background, like the Extended Producer Responsibility (EPR) system (which we have discussed in several newsletters (here, here and here), DRS is also a waste management regulation. They are also similar in that both are transpositions of EU regulations into domestic law and, in addition, the same company, MOHU MOL Hulladékgazdálkodási Zrt. (MOHU) is responsible for the operation of both systems.

The Government Decree distinguishes between producers, the concession company (MOHU), distributors (shops) and end-users (consumers) in relation to the DRS.

What are product subject to mandatory DRS?

Under the Government Decree, products subject to mandatory DRS are defined as beverage products (ready-to-drink or concentrate) in containers of 1 decilitre (0.1 litre) or more, up to a maximum of 3 litres, distributed directly to consumers in the form of a bottle or can (regardless of reusability; although, as we will see, reusability is also relevant), in plastic, metal or glass containers. The definition of a beverage product is not included in the Government Decree, and therefore, according to the common “interpretation” of the category, products sold in liquid form and typically consumed by drinking are considered to be such products.

As is usually the case, there are exceptions, to which the DRS does not apply: one such exception is the category of milk and milk-based beverage products. In addition, the Government Decree also sets a lower quantitative limit: if a manufacturer’s sales of the products in question subject to the DRS do not exceed 5,000 units (small quantities) in a reference year, the economic operator concerned is not subject to the DRS. Furthermore, the DRS does not apply to bottles that cannot be returned by way of the reverse vending machines due to their special shapes and sizes.

In certain cases, the DRS can be applied in a flexible way.

The system is certainly flexible in that it recognises the concept of products voluntarily subject to the DRS, where a manufacturer may, at its own discretion, request the application of the system to a product (even for non-beverage packaging!) that is not otherwise subject to the DRS.

Reusability plays a role in that the deposit fee on non-reusable products subject to DRS (e.g. metal cans) is a uniform amount of HUF 50 per unit (regardless of volume and material), whereas the deposit for reusable products (e.g. glass) is set by the producer, as is also the deposit for products voluntarily subject to the DRS.

The deposit fee is already included in the price of the beverage product purchased by the consumer that is a product subject to the DRS. The fact that a consumer is buying a product subject to DRS is apparent from the external marking on the packaging of the beverage product, as the Government Decree explicitly states what marking must be on the beverage product (its packaging). If the consumer returns the packaging of a beverage product subject to the DRS to the distributor, the deposit is refunded.

Obligations of the distributor in relation to DRS

Distributors are obliged to take back returned packaging during their opening hours. In stores selling food products with a sales area of more than 400 m2 are obliged to operate reverse vending machines. In case there is no store of such size on a settlement with a population of at least 1,000, the creation of a reverse vending point is obligatory, but stores with a sales area of less than 400 m2 can also join the DRS system voluntarily.

Manufacturers pay the deposit fees to MOHU on a monthly basis: each manufacturer pays an amount calculated on the basis of the non-reusable products subject to DRS that they put on the market in a given month. Since MOHU receives the deposit fee from the manufacturer for the purpose of reimbursing the consumer when the packaging is returned, the amount of the deposit fee (as a financial assets recorded as cash accounting entry) is not included in the taxable amount of the services that MOHU would otherwise provide to manufacturers.

DRS and EPR

The DRS affects the EPR rules to the extent that no EPR fee is payable by the manufacturer with respect to such products subject to mandatory DRS for which there is an obligation to pay the deposit fee. This means that already in the very first quarter of 2024 (but at the latest when the data for this period is reported, i.e. in April), there will be a significant question as to who is subject to both the DRS and the EPR. Generally speaking, although the DRS will affect significantly fewer economic operators than the EPR, it will also involve considerably more administration and preparation in advance.

The impact of the DRS on VAT

For the purposes of Act CXXVII of 2007 on Value Added Tax (“VAT Act”), a non-reusable products subject to DRS are those non-reusable product subject to DRS according to the definition in the Government Decree that have been placed on the market as such. This is important because the VAT Act does not lay down specific rules for products placed on the market before the entry into force of the Government Decree.

Under the amendment to the VAT Act in force since 1 January 2024, the HUF 50 deposit fee is not part of the taxable amount of the supply, i.e. no VAT liability arises on it. The Government Decree stipulates that the deposit fee must be shown separately from the consideration for the beverage product (as an item outside the scope of VAT) on the invoice or receipt issued for the supply of the product.

In line with the above, the deposit fee cannot be deducted from the taxable amount when the packaging of such a beverage product is returned and the deposit fee is refunded. If, however, the packaging of a product is not returned, such a case is classified as a supply of goods under the VAT Act: the difference between the total quantity of non-reusable products subject to the DRS placed on the market in a given calendar year and the total quantity returned in that calendar year gives rise to a tax liability, which tax is paid by MOHU.

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Although the introduction of the DRS system is basically intended to make the environment cleaner, it is nevertheless another very heavy administrative burden for many businesses. If you are uncertain about how you or your company will be affected by the DRS, or if you have any questions about the detailed rules, our tax experts are at your disposal.

This newsletter is based on the information available at the date of its publication and is written for general information purposes only; therefore, it does not constitute or replace personalised tax advice in any respect.