Bad debt relief: the company will recover VAT even when the debtor goes into liquidation


One of the institutions described in the VAT Act is the bad debt relief, the structure of which is based on the possibility of recovering the paid output tax in a situation where the debtor has not paid the debt. The possibility of applying the relief is subject to several conditions which, in the recent opinion of the Advocate General of the CJEU, were found to be contrary to the EU directive.

Bad debt relief - legal basis and mechanism of action

Bad debt relief is regulated in Art. 89a of the VAT Act. Pursuant to this provision, the taxpayer may adjust the tax base and the tax due on the supply of goods or services in the territory of the country in the case of claims which are proven irrecoverable. The irrecoverability of receivables is considered probable if the receivable has not been settled or disposed of in any form within 90 days from the date of its payment deadline specified in the contract or on the invoice.

Analyzing the issue from the practical side, it should be pointed out that for the seller of goods or services, the tax obligation arises basically on the date of the service or the release of the goods. As a result, the seller is obliged to pay the VAT due in the settlement for this period. Subject to statutory exceptions, the time of receipt of payment for goods or services sold is irrelevant.

Such a construction means that the seller has to pay VAT from his own resources and only in the long run waits for payment from the debtor. In order to eliminate this unfavorable situation, a bad debt relief mechanism has been introduced, which allows to correct the previously paid output tax, if we are dealing with the credibility of the debt.

The aforementioned probability takes place if the debtor does not pay the amount due within 90 days from the payment date specified in the contract or invoice.

On the basis of VAT, the bad debt relief allows the seller to make adjustments to the tax paid due to the sale of goods and services, for which the debtor has not paid the amount due under the invoice or contract.

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Relief for bad debts - application conditions

Moving on, it should be pointed out that the possibility of applying the bad debt relief is conditioned by the fulfillment of certain conditions. As we can read in Art. 89a paragraph. 2 of the VAT Act, bad debt relief is applied if the following conditions are met:

  • the delivery of goods or the provision of services is made to the taxpayer referred to in art. 15 sec. 1, registered as an active VAT taxpayer, not in the process of restructuring, bankruptcy or liquidation;

  • on the day preceding the date of submission of the tax declaration, in which the correction referred to in paragraph 1 is made 1:

    • the creditor and the debtor are taxpayers registered as active VAT payers,

    • the debtor is not in the course of restructuring proceedings within the meaning of the Act of May 15, 2015 - Restructuring Law, bankruptcy proceedings or in the process of liquidation;

  • 2 years have not elapsed from the date of issuing the invoice documenting the claim, counting from the end of the year in which it was issued.

As can be seen, one of the conditions for the application of the bad debt relief is that both the creditor and the debtor should not remain in the process of restructuring, bankruptcy or liquidation.

Opinion of the Advocate General of the CJEU

It was this condition that was examined by the CJEU in case C-335/19. Well, in the decision of 6 December 2018, I FSK 2261/15, the Supreme Administrative Court referred a question to the Court of Justice of the European Union for a preliminary ruling: Do the provisions of the VAT Directive allow domestic law to limit the possibility of reducing the tax base in the event of partial or complete failure to pay due to the specific tax status of the debtor and the creditor?

It should be pointed out that pursuant to Art. 90 of the VAT Directive, in the event of cancellation, termination, termination, total or partial default on payment or in the event of a price reduction after delivery, the taxable amount is reduced accordingly under the conditions laid down by the Member States. Therefore, as can be seen, the wording of the provisions of the Directive does not imply a condition as to the status of a party to the transaction and possible being subject to bankruptcy, restructuring or liquidation proceedings.

Although we will still have to wait for the CJEU judgment in this case, the Advocate General's opinion in this case is now available. He stated that the establishment by the Polish legislator of an additional condition for applying bad debt relief, which is not being subject to the above-mentioned proceedings, is contrary to the principle of VAT neutrality resulting from the VAT Directive. The spokesman pointed out that Art. 90 of the Directive does not allow the exclusion of the possibility of a VAT correction on the sole ground that, at the time of the sale or the correction, the debtor is already in the process of bankruptcy or liquidation.

As a consequence, the establishment of this condition in the Polish VAT Act, in the opinion of the Ombudsman, constitutes an illegal interpretation extending to the provisions of the EU directive, which should be implemented into the Polish legal system.

At this point, it is worth pointing out that the CJEU in a similar case issued a judgment consistent with the opinion of the Advocate General and at the same time favorable to the taxpayers themselves. In the judgment of 8 May 2019 in case C-127/18, the CJEU noted that Art.90 of the VAT Directive precludes national provisions, such as those at issue in the main proceedings, which provide that a taxable person may not adjust the tax base for value added tax (VAT) in the event of a total or partial default by the debtor of the amount due for the transaction. subject to that tax, if that debtor is no longer a VAT payer.

According to the spokesperson of the CJEU, the condition set out in the Polish VAT Act regarding the status of a debtor and a creditor who cannot be undergoing restructuring, bankruptcy or liquidation proceedings is contrary to the provisions of the EU directive.

The impact of the ombudsman's opinion on the situation of Polish creditors

First of all, it should be noted that the opinion itself is not binding on the CJEU. There is no doubt, however, that in the overwhelming majority of cases, the CJEU judgment is consistent with the previous opinion of the Advocate General.

When transposing the above into Polish law, it should be emphasized that the content of the opinion itself is not binding on taxpayers or state authorities. However, the situation is different when we are dealing with a final judgment of the CJEU.

According to Art. 240 § 1 point 11 of the Tax Ordinance, in a case concluded with a final decision, the proceedings shall be resumed if the judgment of the Court of Justice of the European Union affects the content of the decision issued. However, as indicated in Art. 241 of the Ordinance, in such a case, the proceedings are resumed only at the request of the party brought within one month from the date of publication of the operative part of the judgment of the Court of Justice of the European Union in the Official Journal of the European Union.

As a consequence, the ruling of the CJEU in this case, favorable for taxpayers, opens the door to the resumption of tax proceedings and the possibility of correcting the tax due in the event of a bad debt not paid by a debtor who was in the process of liquidation, bankruptcy or restructuring.

At this stage, we are dealing with the opinion of the Advocate General of the CJEU, which, although positive for taxpayers, has no binding force. Only the judgment of the CJEU may result in the resumption of tax proceedings concluded with a final decision.

Moving on to the summary of our today's article, we can point out that if the CJEU in case C-335/19 shares the position of the Advocate General, taxpayers who have been refused the right to correct the VAT due due to the status of the debtor will be able to reopen the proceedings. Once again, it may also turn out that the Polish legislator will face the necessity to amend provisions that are inconsistent with the content of the VAT Directive.