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ECJ judgment - Reduction of VAT Rules for bad debts

On June 11, 2020, the Court of Justice of the European Union (CJEU) adopted a decision in Case C-146/19 (SCT) concerning the right of a taxpayer to recover the paid VAT for a bad debt if an individual creditor’s claim has not been lodged against the debtor in the insolvency procedure.

In the SCT case, the Slovenian company SCT adjusted the VAT for bad debts in relation to claims against two companies in respect of which insolvency proceedings had been concluded. The SCT had not registered its creditor claims during these procedures. The SCT claimed that it would not have been able to recover the debt even if it had lodged a claim.

The Slovenian tax administration refused the right to adjust the VAT to the SCT.

The CJEU has ruled that EU Member States should not refuse a taxable person rights to reduce the taxable base of the VAT related to a irrecoverable debt where the taxable person has failed to lodge that claim in insolvency proceedings commenced against the debtor.

We believe that this CJEU case is a good development for the Latvian taxpayers, as the conditions for adjustment of the paid VAT on bad debts have become simpler.  

Namely, the Law on the Value Added Tax lays down several conditions (for example, the debt was incurred during the last three years, the bad debt is written off from accruals or directly included in the loss, transactions with the debtor have been discontinued, and measures have been taken to recover the debt) that the taxpayer should meet to have a right to adjust the paid VAT considering the bad debt. In addition, the taxpayer should be in the possession of a court judgment concerning the recovery of the debt from the recipient of goods or services and a statement from a bailiff confirming impossibility of such recovery. According to the above decision of the CJEU, this requirement is unjustified.

Currently, the State Revenue Service (SRS) has not provided comments/explanations concerning the effect of this decision in the SCT case on the rights of the Latvian taxable person to adjust the paid VAT for debtors’ debts. Thus, it would be advisable for taxable person who faces this challenge to ask the SRS for an explanation.
Should you require any assistance or have questions with regards to debtors’ debts, please contact Leinonen’s tax advisors.

Information prepared by: Leinonen Latvia, Tax & Legal advisory department

23.11.20


Author:   

Inga Jomanta

Senior Tax Advisor

Mobile: +37123995382

Email: inga.jomanta(at)leinonen.lv

Līga Treilone

Senior Tax Advisor

Mobile: +37123995387

Email: liga.treilone(at)leinonen.lv

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