On 15 October 2020, the Court of Justice of the European Union issued a judgment in the case of a Polish company against the Minister of Finance (reference number C-335/19), concerning the compliance of Polish regulations on bad debt relief in VAT with EU regulations.
This ruling is welcomed by lawyers at Graś i Wspólnicy. It creates an opportunity for many entrepreneurs to recover VAT, particularly in situations where debtors fail to settle their accounts and are in bankruptcy or liquidation.
Under Polish VAT law, a taxpayer can take advantage of bad debt relief (correct their output tax on sales). However, these regulations exclude this possibility if the buyer was not registered as an active VAT payer or is undergoing restructuring, bankruptcy, or liquidation. According to the EU Court of Justice, Polish regulations that make VAT refunds conditional on the invoice recipient, for example, being a still-operating entity, are inconsistent with EU regulations. They exclude the possibility of recovering funds in the event of a contractor's bankruptcy or termination of its business. The Court of Justice of the European Union endorsed the position of the Advocate General of the Court of Justice of the European Union of 4 June 2020.
The fact that the recipient of the benefit is undergoing bankruptcy proceedings is a circumstance that may confirm that the failure to pay is final. The same applies to the fact that the recipient of the benefit is in liquidation. Therefore, limiting the admissibility of making an adjustment to the tax base in cases where it is almost certain that the failure to pay the agreed consideration is final is neither possible nor proportionate.
The CJEU, following the Advocate General, indicated that Article 90 of Directive 2006/112/EC on the common system of value added tax does not allow Member States to exclude the possibility of making an adjustment to the tax liability of a taxpayer providing a service on the basis that, at the time of performance of the service or at the time of making the adjustment, the recipient of the service is already undergoing bankruptcy or liquidation proceedings.
Consequences for taxpayers
The CJEU ruling allows taxpayers whose contractors have gone bankrupt or are in liquidation to recover VAT under bad debt relief. The ruling also creates an opportunity to apply bad debt relief even in cases where Polish law makes such an option dependent on the debtor's status.
We would like to remind you that until the end of 2020 you can submit corrections to declarations and overpayment applications dating back to December 2014.
