Judgment of the Court of Justice of the European Union (TEU) of 15 October 2020 points out that the Polish rules on the correction of the tax base in the tax on goods and services are incompatible with EU regulations.
The Supreme Administrative Court asked the TEU for a preliminary ruling on the interpretation of the VAT Directive in the context of the conditions under which a taxable person may adjust his tax liability if he has not received payment from a counterparty. We're talking about the so-called relief for bad debts.
According to the regulations of the Polish Act of 11 March 2004 on tax on goods and services (Journal of Laws of 2020, item 106 t.j.
of day 23 January 2020, Further: the VAT Act) the creditor who has supplied the goods or performed the service, but has not received payment for it, may adjust the tax base and tax due after 90 the date of payment specified in the contract or invoice.
It should be stressed, however, that the Polish VAT Act does not allow the taxpayer to make such a correction and benefit from the relief for bad debts when his debtor is in restructuring, bankruptcy or liquidation proceedings. He talks about it. Article 89a(2) the above Act.
Namely, a number of conditions must be fulfilled for the creditor to benefit from the relief for bad debts:
the supply of goods or services has been made to the taxable person defined in Article 15(1) established laws which are registered as an active VAT taxable person, not in restructuring, bankruptcy or liquidation proceedings,
on the day preceding the date of submission of the tax return on which the correction is made:
- the creditor and debtor are taxable persons registered as active VAT payers,
- the debtor is not in restructuring, bankruptcy or liquidation proceedings;
- the date of issue of the invoice documenting the claim has not expired 2 years since the end of the year in which it was exhibited.
For the application of the relief for bad debts, all these conditions must be met together. Thus, if the debtor is subject to e.g. insolvency proceedings, according to the provisions of the VAT Act, there will be no basis for the creditor to benefit from the relief for bad debts and the possibility of adjusting the VAT due.
The question was asked in the light of the situation of the Polish company providing tax advisory services, which, after the deadline specified on the invoice, did not receive payment from one of its counterparties, which has been liquidated.
The company requested an individual interpretation of tax law in order to determine whether, despite the liquidation of its counterparty, it could benefit from a reduction in the VAT base due to the default of the counterparty from the payment resulting from the invoice.
In its application, the company indicated that all the other conditions for benefiting from the relief for bad debts set out in the VAT Act were met.
The Minister of Finance indicated that the VAT Directive confers on taxable persons the right to reduce the VAT base only under the conditions laid down by the Member State in national regulations. If therefore one the conditions provided for in the Polish VAT Act are not met, the taxpayer cannot lower the tax base.
The above case finally went to the Supreme Administrative Court, which had doubts as to whether in determining the conditions for the application of the relief for bad debts the Polish legislature had gone beyond the limits of the legislative freedom laid down in Article 90 Directive 2006/112 Council of 28 November 2006 on the common system of value added tax (VAT Directive) which provides that:
In the event of cancellation, termination, termination, total or partial default or a reduction in the price after delivery, the taxable amount shall be reduced accordingly under the conditions laid down by the Member States.
In the event of a total or partial default of payments, Member States may waive application section 1.
In view of the above, the CJEU ruled that the Polish rules are contrary to Union law, which make the reduction of the VAT base subject to the condition that on the date of delivery of the goods or services and on the day before the date of submission of the correction of the tax return to benefit from this reduction the debtor should be registered as a VAT taxable person and not in insolvency proceedings or in liquidation, and that the creditor was still registered as a VAT taxable person on the day before the correction of the tax return.
In the assessment of the TEU, the condition that the VAT base is reduced on whether the debtor has not been in insolvency proceedings or in liquidation on the date of delivery of the goods or services or on the day before the date of submission of the correction of the tax return deprives the creditor of his right to benefit from the relief for bad debts, as the ultimately irreparable nature of the claim cannot be established before the completion of the insolvency or liquidation proceedings.
According to the TEU, the creditor should demonstrate before the insolvency or winding-up proceedings the legitimate likelihood that the debt will not be settled, provided that the tax base is increased if, however, payment is made.
The TEU stressed that such a mode would be even more effective to achieve the objective pursued, and at the same time less burdensome for the taxpayer.
In conclusion, the CJEU concluded that if the taxpayer, in order to obtain a reduction in the tax base and to benefit from the relief for bad debts, does not fulfil the conditions laid down in national legislation which are not compatible with the rules Article 90(1) The VAT Directive may, in order to obtain a reduction in the tax base, rely on this non-compliance before national courts. The national court examining the dispute will ultimately be required to disregard national provisions which are incompatible with the Directive.
Judgment of the Court of Justice of 15 October 2020 on C-335/19
Author: Paweł Boś
Junior Tax Consultant, associated with Russell Bedford Poland from 2018. Author of numerous articles on legal and tax matters, published in the industry press. Law student at Leon Kozminski Academy in Warsaw