The CJEU’s breakthrough judgment on the bad-debt relief in VAT
The Court of Justice of the European Union (CJEU) in its judgement of 15 October 2020 (case no. C-335/19) gave its opinion on the compliance of Polish regulations on the so-called bad-debt relief in VAT with EU law. In the CJEU’s opinion, the conditions set out in Polish VAT Act are too stringent and, in consequence, at variance with the VAT Directive.
The case concerned a Polish limited liability company, which issued a VAT invoice to one of its customers in respect of tax consultancy services. At the time of the supply of the services, the customer was registered as a taxable person for VAT purposes and was not subject to any insolvency or winding-up proceedings. Within 150 days of the payment due date (i.e. during the period after which the relief could be applied on the basis of the regulations in force at that time), the contractor entered into liquidation, remaining registered as a taxable person for VAT purposes. Due to the fact that the company did not receive payment for the services provided, it applied for a tax ruling on the possibility of taking advantage of the so-called bad-debt relief despite the contractor entering into liquidation after the services were provided.
The Ministry of Finance in its ruling issued a negative answer, indicating that, among other things, Art. 90 of the VAT Directive confers the right to reduce the taxable base for VAT only on the conditions determined by each Member State, which Poland has set out in Art. 89a of the VAT Act. Therefore, if one condition indicated in this article is not fulfilled, the taxpayer is not entitled to quote the right to reduce under EU law itself.
The issue was finally referred to the Supreme Administrative Court, which sought a preliminary ruling from the CJEU concerning the assessment whether the regulations of VAT Directive allow for the introduction in the national law restrictions on the possibility to reduce the taxable base in case of partial or total default in payments due to a certain tax status of the debtor and creditor. The subject of consideration was, in particular, the issue, whether or not the EU law precludes the adoption of a regulation in the national law allowing for the possibility of taking advantage of bad-debt relief, provided that on the date of performance of the service (supply of goods) and on the day preceding the date of submission of the correction of the tax return (i) the debtor is not subject to insolvency or liquidation proceedings, (ii) the creditor and debtor are both registered as active VAT taxpayers.
The CJEU judgement
The Court ruled that the provisions of the Polish VAT Act are inconsistent with EU regulations to the extent that they make the reduction of the VAT taxable base subject to the condition that, on the day of delivery of goods or provisions of the services as well as on the day preceding the day of submission of the corrected tax return to benefit from this reduction, the debtor was registered as a VAT taxpayer and was not subject to insolvency or winding-up proceedings, while the creditor was still registered as a VAT taxpayer on the day preceding the day of submission of the corrected tax return.
Implications of the ruling to taxpayers
The CJEU judgement is undoubtedly good news for taxpayers. They become eligible for a bad-debt relief, under the principles resulting from the UE law alone, disregarding any conditions that are inconsistent with the Directive. The ruling may also serve as the basis for reopening the tax proceedings in cases which have ended with final decisions on which the judgement may have impact. However, it should be remembered that the resumption of such proceedings takes place at the request of the party filed within one month of the date of publication of the operative part of the CJEU ruling in the Official Journal of the EU. On the other hand, in the case of taxpayers whose cases ended with a judgment of an administrative court, the deadline for filing for the resumption of administrative court proceedings is 3 months.
It should be mentioned that the Tax Code provides for a preferential way of calculating interest on overpayments resulting from a CJEU judgement. The interest is due for the period from the date of the overpayment (i.e. the period in which a taxpayer could have benefited from the bad-debt relief) to the date of its being refunded, if an application for the overpayment is filed within 30 days of the publication of the CJEU ruling. However, if the application is submitted after that date, the interest will be payable from the date of the overpayment until the 30th day after the publication of the ruling.
Anna Skórska, Tax Consultant, ATA Tax Sp. z o.o.
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