15 October 2020 the Court of Justice of the European Union (CJEU) has passed an important sentence (ref. C-335/19), concerning the possibility of applying relief for bad debts and the incompatibility of Polish VAT regulations with EU law in this area.
Outline of the case
The proceeding in the CJEU concerned a litigation between a Polish company ant the Minister of Finance concerning the right to correct the tax base and the tax due to an invoice which wasn’t paid by the debtor. A Supreme Administrative Court (NSA) decided to submit a question to the CJEU for a preliminary ruling, questioning the compatibility of national VAT regulations with EU law, i.e. the need to meet strict conditions entitling to reduce the tax base and output tax due to connection with the non-payment of issued invoices.
The current regulations of VAT Act entitles taxpayers to relief for bad debts provided that the following conditions are met:
- the supply of goods or the provision of services was made to an active VAT taxpayer who is not subject of restructuring proceedings, insolvency proceedings or winding-up proceedings;
- both the creditor and the debtor on the day preceding the date of submission of the tax return in which the adjustment is made are active VAT taxpayers and there are no pending restructuring, insolvency or winding-up proceedings against the debtor,
- two years have not elapsed since the date of issuing the invoice documenting the claim, counting from the end of the year in which the invoice was issued.
The CJEU ruled that the restrictions resulting from the VAT regulations in Poland are too restrictive. Making the right of correction dependent of meeting conditions such as registration as VAT taxpayer or not being in the process of restructuring, insolvency or winding-up proceedings is incompatible with EU regulations. The formalities allowing the relief for bad debts should be limited only to proving that the creditor has not received part of all of the payment after the transaction.
Legal results of the sentence on taxpayers
Taxpayers have the opportunity to apply relief for bad debts in VAT to a greater extent than before. The court sentence also gives rise to the recovery of VAT by taxpayers whose debtors are in restructuring, insolvency or winding-up proceedings. Taxpayers can rely directly on EU law, without respecting national regulations of VAT Act.
The court sentence should also open up the possibility of applying relief for bad debts in other cases, including transactions with taxpayers who are exempt from VAT or natural persons who not carry out economic activity.
If you thing whether you can recover VAT from invoices which was not paid by your contractors, please contact our tax department.
Aleksandra Philips, LL.B., VAT Specialist