VATupdate

Flashback on ECJ Cases – C-396/16 (T – 2) – Bad debts, VAT deduction upon homologation preventive agreement

On February 22, 2018, teh ECJ issued its decision in the case C-396/16 (T – 2). This case relates to the Revision of the deduction of input tax – Concept of “transactions that have remained wholly or partly unpaid” – Consequences of a decision to confirm a preventive agreement that has acquired res judicata


Article in the EU VAT Directive

Article 185 of Council Directive 2006/112/EC

Article 185 (Adjustment of deductions)
1. Adjustment shall, in particular, be made where, after the VAT return is made, some change  occurs in the factors used to determine the amount to be deducted, for example where purchases are cancelled or price reductions are obtained.
2. By way of derogation from paragraph 1, no adjustment shall be made in the case of transactions remaining totally or partially unpaid or in the case of destruction, loss or theft of property duly proved or confirmed, or in the case of goods reserved for the purpose of making gifts of small value or of giving samples, as referred to in Article 16.

However, in the case of transactions remaining totally or partially unpaid or in the case of theft, Member States may require adjustment to be made.


Facts

  • By decision of 28 November 2011, the Okrožno sodišče v Mariboru (Regional Court, Maribor, Slovenia) approved an arrangement with creditors whereby T‑2, a Slovenian undertaking in the electronic communications sector, would be liable to pay only 44% of its debts within a period of nine years. That decision acquired the force of res judicata on 24 February 2012.
  • On that basis, the Davčni urad Ljubljana (tax directorate for Ljubljana, Slovenia) took the view that T‑2 had to adjust the VAT deductions, pursuant to Article 68 of the ZDDV‑1, and by decision of 27 May 2013, asked T‑2 to pay the sum of EUR 7 362 080.27 in VAT for the period from 1 to 29 February 2012.
  • The appeal against that decision brought by T‑2 before the Ministry of Finance was dismissed. The action brought before the Upravno sodišče Republike Slovenije (Administrative Court of the Republic of Slovenia) was also dismissed by judgment of 18 November 2014. That judgment was appealed on a point of law before the Vrhovno sodišče Republike Slovenije (Supreme Court of the Republic of Slovenia).
  • In that action, T‑2 disputes the adjustment of the deductions of the input VAT paid. It claims that the approval of an arrangement with creditors, having the force of res judicata, does not amount to a change in the factors used to determine the amount to be deducted, for the purposes of Article 68 of the ZDDV‑1, but is a specific case not covered by that law.

Questions

Should the reduction of the obligations on the basis of an arrangement with creditors, as in the main proceedings, which has been approved by judicial decree and has acquired the force of res judicata be treated as a change in the factors used to determine the amount of input VAT to be deducted, within the meaning of Article 185(1) of the VAT Directive, 1 or should it be treated as a different situation, in which the deduction is higher or lower than that to which the taxable person was entitled, within the meaning of Article 184 of the VAT Directive?

Should the reduction of the obligations on the basis of an arrangement with creditors, as in the main proceedings, which has been approved by judicial decree and has acquired the force of res judicata be regarded as a (partial) non-payment of a transaction, within the meaning of the first subparagraph of Article 185(2) of the VAT Directive?

Must a Member State, taking into account the requirements of clarity and certainty in legal situations imposed by the EU legislature and having regard for Article 186 of the VAT Directive, lay down, for the purpose of requiring adjustment of the deduction in the event of failure to make complete or partial payment, as permitted by the second subparagraph of Article 185(2) of that directive, detailed rules, in national law, to cover cases of non-payment, or may it include, in those rules, an arrangement with creditors approved by judicial decree which has acquired the force of res judicata (should this come within the concept of non-payment)?


AG Opinion

(1)      Article 185(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax is to be interpreted as meaning that a reduction in the liabilities of an insolvent debtor resulting from a procedure for reaching an arrangement with creditors, such as that at issue in the main proceedings, constitutes a ‘change … in the factors used to determine the amount to be deducted’, within the meaning of that provision if and to the extent that it leads to a reduction in the taxable amount under the national provisions transposing Article 90 of that directive.

(2)      Article 185(2) of Directive 2006/112 is to be interpreted as meaning that a reduction in the liabilities of an insolvent debtor resulting from a procedure for reaching an arrangement with creditors, such as that mentioned in the main proceedings, gives rise to ‘transactions remaining totally or partially unpaid’, within the meaning of that provision, provided that such a reduction falls within the scope of Article 185(1) of the directive.

(3)      The second subparagraph of Article 185(2) of Directive 2006/112 is to be interpreted as meaning that Member States may implement the option provided for in that provision without making express provision for an adjustment obligation in the case of ‘transactions remaining totally or partially unpaid’ and merely omitting that case from the list of derogations transposing the first subparagraph of Article 185(2) of the directive.


Decision

1.      Article 185(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted to the effect that the reduction of a debtor’s obligations resulting from the final approval of an arrangement with creditors constitutes a change in the factors used to determine the amount to be deducted, for the purposes of that provision.

2.      The first subparagraph of Article 185(2) of Directive 2006/112 must be interpreted to the effect that the reduction of a debtor’s obligations resulting from the final approval of an arrangement with creditors does not constitute a case of a transaction remaining totally or partially unpaid that does not give rise to an adjustment of the initial deduction, where that reduction is definitive, although that is a matter for the referring court to determine.

3.      The second subparagraph of Article 185(2) of Directive 2006/112 must be interpreted to the effect that, in order to implement the option provided for in that provision, a Member State is not required to make express provision for an obligation to adjust the deductions in the case of transactions remaining totally or partially unpaid.


 

Source


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