EU Court Provides Clarity for Taxpayers on VAT Bad Debt Relief

The European Court of Justice held in its Feb. 29 judgment in Remi that EU member states are obliged to provide value-added tax payers with the option of taking advantage of bad debt relief, and that an entitlement to a reduction in the taxable amount for VAT in case of non-payments has direct effect.

The ECJ judgment is a significant development in member states that didn’t implement bad debt relief properly, such as Bulgaria. There is an opportunity to obtain a bad debt relief for VAT payers to whom tax authorities have previously denied the relief because the provisions haven’t been fully or correctly implemented in national laws.

The ECJ decision has less relevance in member states that have implemented the bad debt relief provisions fully, such as the Netherlands.

VAT Issues

VAT becomes payable when a seller issues an invoice to its buyer mentioning VAT. This means that the VAT may become payable before the buyer pays the invoice. However, it sometimes happens that the buyer doesn’t pay the invoice.

The VAT principle of neutrality requires that businesses only need to pay to the state the VAT they receive from their customers. This is particularly relevant in an economic downturn when businesses and individuals have difficulties in paying their bills. Nonpayment also occurs when companies go bankrupt and don’t meet their payment obligations.

The issue is also wider than customers not meeting their financial obligations. A seller may not receive the full price for its products for other reasons, such as because bonuses are granted to customers based on the volume of their purchases or discounts are granted for early payment.

Article 90 of the EU VAT Directive provides that the seller is entitled to a refund of VAT where the price remains unpaid. This possibility to adjust and recover VAT due to non-payment is called bad debt relief.

However, several EU member states haven’t implemented the EU VAT rules for bad debts fully or correctly. This means that member states either apply nonproportional conditions to bad debt relief or don’t allow VAT reduction in all cases where it should be possible.

If member states don’t have EU-compliant local rules in place for non-payment then VAT payers can now rely on the direct effect of the EU VAT Directive.

Impact of Judgment

The ECJ’s decision has major consequences for EU countries that didn’t fully or correctly implement the EU VAT rules which provide that the taxable amount must be reduced in the case of non-payment.

VAT payers may rely on this decision in their disputes involving bad debt relief and in other cases where no VAT refund has been provided by the tax authorities in cases of non-payment.

Suppliers that haven’t received a full payment from their customers should consider whether they have a claim against their member state’s tax authority based on the ECJ judgment—if so, they could file applications or appeals.

The decision also shows that appeals against the tax authorities may pay off where the member state’s policies or practices are contrary to EU law.

Facts of Case

Remi, a Bulgarian taxpayer, supplied construction services. Between 2006 and 2012, it issued VAT invoices and paid the VAT on its sales. In 2020, it claimed overpayment of the VAT, plus interest, because the purchasers hadn’t paid its invoices, and thus it was entitled to adjust the tax base and VAT. It claimed bad debt relief for the period from 2006 to 2012.

Between 2012 and 2020, insolvency procedures were started for the buyers and their liquidation began. The tax authority denied the correction and a refund of overpaid VAT. In its view the application had been filed after the expiry of the five-year limitation period (from 2006 to 2012). Remi also was found not to have corrected invoices or communicated beforehand to its debtor the intention to cancel the VAT.

In Bulgaria at that time, the provisions on bad debt relief weren’t implemented in national legislation. Remi relied in its application on the direct effect of Article 90(1) of the VAT Directive.

Court’s Ruling

The ECJ answered the questions referred to it by the Bulgarian Supreme Administrative Court as follows.

Is a member state allowed to derogate from Article 90(1) by not allowing adjustment of VAT in case of non-payment? A member state must allow VAT reduction in case of a non-payment. If not implemented, Article 90 (1) of the VAT Directive has a direct effect.

Can a limitation period be applied in case of bad debt? A member state can establish a time limit for filing a claim for a bad debt relief. However, it is important that this time limit doesn’t make the exercise of this right impossible or excessively difficult and complies with the EU principle of equivalence.

The starting point of the limitation period for the exercise of the right to a reduction of the taxable amount, under Article 90(1) of the VAT Directive, must have a sufficient link with the date from which the taxable person, acting diligently, may avail itself of that right.

The principles of proportionality and legal certainty require that the starting point for such limitation period can be identified by the taxable person with a reasonable degree of probability.

That limitation period only begins to run from the date on which that taxable person was able, without showing a lack of diligence, to assert its right to a reduction.

Does the bad debt relief entitle the taxpayer to interest and if so from when? Interest is due to a taxpayer if a tax refund (including resulting from bad debt relief) isn’t paid within a reasonable time.

In the absence of rules in a member state’s legislation for applying any interest due, the date from which the taxable person asserts its right to that reduction in the VAT return relating to the ongoing tax period is the starting point for the calculation of interest.

The case is Consortium Remi Group AD v Director of the Varna ‘Tax and Social Security Appeals and Practice Board’ of the National Public Revenue Agency, Bulgaria, Feb. 29 Judgment of the Court (Tenth Chamber) in case
C-314/22.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Aiki Kuldkepp is senior manager, tax, with Grant Thornton Netherlands.

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