On 4 June 2020 the Advocate General of the European Court of Justice gave its opinion is case C-335/19 (E. Sp. z o.o. Sp. k.) regarding the Polish rules on VAT recovery on bad debts.
Unofficial translation/summary
Facts (simplified):
- E is registered for VAT and provides tax advisory services in Poland
- E has issued a VAT invoice that has not yet been paid.
- The debtor was registered for VAT on the date the service was provided and was not yet involved in insolvency proceedings at the time.
- The debtor is currently in liquidation.
- E. asked the Minister of Finance/Courts whether it is possible to adjust the taxable amount and the tax due under these circumstances.
- The verdicts so far say that one of the conditions for the right laid down in Article 89a of the Polish VAT Act to adjust the taxable amount and the tax due is not met and that failure to comply with one of the basic conditions would not allow the taxable person to derive the ‘irrecoverable claims’ scheme directly from Union law. Only the cumulative fulfilment of all the conditions of Article 89a (2) of the Polish Law on VAT offers the possibility to adjust the tax due, which was not the case in the present case.
The Polish court asked the following questions to the ECJ:
- Can a EU country use the tax status of a debtor and creditor as an argument to restrict the possibility of lowering the taxable amount in the event of partial or total non-payment?
- More specifically: Is it allowed to use the conditions that the on the date of the service / delivery of the goods and on the day before the submission of the adjustment – the debtor is not engaged in insolvency proceedings or is in liquidation? – the creditor and the debtor are registered as actively liable for VAT?
See our previous post about this case HERE.
The Polish court wishes to find out if Poland may set the following conditions to its VAT bad debt rules:
- on the date on which the service or goods are supplied and on the day preceding the date on which the tax return adjustment is filed
- the debtor is not subject to insolvency or liquidation proceedings
- the creditor and debtor are both trading and VAT registered?
Or does this breach the principles of fiscal neutrality and proportionality?
Advocate General Kokott has released her view today (4 June 2020). In her opinion, she writes the following:
Under what conditions can a taxable person revise his tax liability if he has not received payment from his contractual partner? This is ultimately a question that has been brought up to the Court over and over. It is essentially a problem that affects the foundations of an indirect tax system, especially when two companies appear on the scene. The revision of the tax debt of the supplier or service provider corresponds to the revision of a deduction of input tax already applied by the customer. However, this regularly goes wrong when the customer is involved in insolvency proceedings or has now been wound up. The state then fishes behind the net.
The Polish legislator excludes this risk to tax revenue by allowing the revision of the tax liability of the supplier or service provider only if the customer is not yet in insolvency or liquidation proceedings at the time of the revision. As a result, the company that performed the service runs the risk of having to pay a tax debt for which it could not collect anything at all. It is for the Court to decide whether this is compatible with its function as a ‘tax collector on behalf of the State’.
However , the legitimate interest of the Republic of Poland and the Union to prevent the loss of VAT revenue can also be taken into account in another way. Therefore, the Court should take advantage of this request for a preliminary ruling to also rule on the timing of the adjustment of the input tax deduction on the customer, if he has so far not paid the consideration and therefore has no VAT burden.
Opinion:
The opinion of the AG is as follows:
Member States are not allowed to exclude the revision of the tax liability of the taxable person providing the services on the grounds that the customer is already in insolvency proceedings or in liquidation at the time of the performance of the performance or at the time of the revision. However, Article 185 (2) of the VAT Directive allows Member States to request a revision of input tax deductions in the event of incomplete payment already in the following tax period.
Source: Curia (Dutch version, English version not yet available)
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