Changes in "VAT refunds” in the case of irrecoverable debts

29. 10. 2019
Changes in "VAT refunds” in the case of irrecoverable debts

The situation in which a creditor is unable to enforce the payment of a claim against a debtor is unfortunately not uncommon. And if the creditor also has to pay VAT although the invoice has not yet been paid, the situation becomes even more unpleasant.


The European Union is making efforts to deal with this problem, within the bounds of its moves towards harmonisation. The requirements of European legislation were therefore implemented in an amendment to the Act on Value Added Tax with effect from April 1, 2019, this amendment broadening the circle of claims which are deemed to be uncollectible receivables (bad debts) and in relation to which the tax base may be corrected. In addition to claims against debtors undergoing bankruptcy procedure, the new regulation now also takes in, for example, claims against debtors undergoing debt relief or enforcement procedure or against debtors following their death.

For a creditor to be able to use the opportunity to correct the tax base, however, a number of conditions must be met and in some regards these conditions are stricter and less favourable for creditors than in previous legislation. Among these is the condition that it is not possible to correct the value added tax base when the debtor has ceased to be a VAT payer, although the good news here is that this controversial condition is likely to disappear from the law.

After all, the European Court of Justice stated in Case A-PACK CZ, C‑127/18, that this condition is contrary to the legislation of the European Union and the fact that a debtor has ceased to be a VAT payer is more likely a sign of the low chance of recovering a debt. Legislators should therefore move forward with changing the legislation at issue in the near future.

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