CJEU  judgement, relief for bad debts, Polish regulations

Polish regulations on the relief for bad debts are incompatible with EU law

Adam Sękowski, Tax Manager
CJEU  judgement, relief for bad debts, Polish regulations
On the 15th of October 2020 The Court of Justice of the European Union (hereinafter: "CJEU") issued a judgment on the compliance of the Polish VAT regulations on the relief for bad debts with EU regulations (Case C-335/19). The CJEU concluded that the provisions of the VAT Act providing for numerous exemptions from the possibility of applying this relief are incompatible with EU law.

Bad debt relief allows taxpayers to reduce the originally reported amount of tax due on a supply of goods or services if the purchaser fails to pay the amount due and the irrecoverability of the debt is likely to occur. However, under Polish law, the possibility to take advantage of the indicated relief depends, inter alia, on whether, on the date of sale and on the day preceding the date of submission of the declaration adjustment:

  • the debtor has not been undergoing restructuring, bankruptcy or liquidation proceedings;
  • both the creditor and the debtor have been registered as active VAT payers (in relation to the creditor, this condition must be met on the day preceding the submission of the adjustment to the declaration).

Relief for bad debts - CJEU judgment

In the judgment delivered on 15 October 2020 the CJEU stated that the above conditions for debt relief are too strict and at the same time contrary to EU law.

The CJEU has indicated that the provisions on bad debt relief are directly linked to the provisions imposing an obligation on the debtor to correct deducted VAT if the debtor does not pay his debts. In the CJEU's opinion, the right to correct the VAT taxable amount and the obligation to correct the amount of deductible VAT should not depend on whether the creditor or debtor maintains the status of a taxpayer.

The Court also stated that the Polish VAT regulations contain sufficient measures to prevent abuse of the relief, i.e. they require an increase in the amount of tax to be paid by the creditor upon receiving the amount due and they impose an adjustment of the tax charged by the debtor who has not settled the payment. The requirements for registration and the fact of no ongoing restructuring proceedings (bankruptcy, liquidation) are, however, too far-reaching and they infringe the principle of proportionality.

The CJEU judgment may constitute a basis for recovering VAT under the relief for bad debts, inter alia, by the taxpayers whose contractors have found themselves in bankruptcy or liquidation. The judgment may result in a request to reopen completed proceedings in which taxpayers were refused the right to apply the relief. Regardless of the above, Poland should amend the provisions of the VAT Act in order to remove the inconsistency with EU law.

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Agata Nieżychowska
Agata Nieżychowska
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