Bucharest Tower Center, etaj 22 B-dul Ion Mihalache
nr. 15-17 011171 Bucuresti, sector 1, Romania
+40 21 402 4000

CJEU Decision in case C-146/19 - SCT d.d., in bankruptcy

In this issue:

CJEU Decision in case C-146/19 - SCT d.d., in bankruptcy

Adjustment of the VAT taxable base where the taxable person did not declare his claim during the bankruptcy proceedings initiated against the debtor

 

The case analyses the possibility of performing an adjustment of the VAT taxable base by a taxable person, when the latter failed to declare the receivable against its debtor during the bankruptcy proceedings.

 

Facts of the case and Court decision

SCT, a company from Slovenia, decided to perform an adjustment of the output VAT in relation with certain unpaid receivables which it held against two companies for which the bankruptcy proceedings had been completed.

The tax authorities decided to refuse this adjustment since SCT failed to be recorded in due time as a creditor during the bankruptcy proceedings, being of the view that the conditions necessary for the reduction of the VAT taxable base had thus not been fulfilled. In addition, the tax authorities acknowledged that SCT had not participated to a tax fraud or a tax evasion, however the latter had not provided proof of necessary diligence for the purpose of recovering its receivable and to ensure the payment of the VAT due to the state.

 

The questions addressed to the Court concern the application of art. 90 of the VAT Directive. Thus, the referring court requests clarification in respect of:

-        the possibility to refuse the right to reduce the VAT taxable base in the case of a definitive non-payment of the receivable where the non-payment is due to the fact that the taxable person omitted to declare its receivable during the bankruptcy proceedings against its debtor, in particular in a situation where there are practical reasons for such an omission, as well as in a situation where the receivable would not have been recovered, even in the absence of the omission;

-        the direct effect of art. 90 para. (1) of the VAT Directive.

 

The Court of Justice of the European Union (‘CJEU’) mentions the fact that art. 90 para. (1) of the VAT Directive, providing the possibility to reduce the VAT taxable base in the event of total / partial non-payment, expresses a fundamental principle of the VAT Directive, according to which the taxable base represents the remuneration actually received by the supplier. Thus, tax authorities cannot cash-in as VAT a higher amount than the one collected by the supplier.

In the situation when a member state does not apply the derogation provided under art. 90 para. (2) of the VAT Directive, it should allow the reduction of the VAT taxable base if the taxable person can prove that the receivable it owns against its debtors is definitively irrecoverable. Member States can take the necessary measures to combat tax fraud and evasion, as well as to reduce the risk of loss of tax revenue, but such measures should affect as little as possible the objectives and principles of the VAT Directive

In the Court's view, when a taxable person proves that the receivable cold not have been recovered, even in the situation where it would have been declared during the bankruptcy proceedings, the refusal of the tax authorities to allow the reduction of the VAT taxable base and imposing at the level of the taxable person a VAT amount which was not charged during its economic activities exceeds the necessary limits in achieving the objective of eliminating the risk of loss of tax revenue. Moreover, such a refusal is contrary to the fundamental principle of VAT neutrality.

In addition, the Court mentions that, even though member states are the ones to establish the conditions for reducing the VAT taxable base in case of non-payment, this fact does not affect the precise and unconditional character of the obligation to consider the reduction of the VAT taxable base in the cases provided under the relevant article of the VAT Directive. Thus, the CJEU was of the view that art. 90 para. (1) of the VAT Directive fulfills the conditions in order to have a direct effect.

 

The CJEU considered the refusal of the tax authorities to allow the reduction of the VAT taxable base, in the case at issue, to be contrary to the EU VAT legislation.

Based on the decision of the Court, the adjustment of the VAT taxable base in case of non-payment cold be allowed even in a situation where not all the formalities for the recovery of the receivable, during the bankruptcy proceedings, were fulfilled, such as declaring the respective receivable.

Thus, companies that record unpaid receivable, whose recovery is no longer possible, either in full or partially, should be able to reduce the taxable base related to the goods / services supplied and, consequently, to reduce the collected VAT.

For further details, as well as for specific assistance regarding the practical applicability of the Court decision, you are welcomed to contact us.

 
Prepared by:
Cătălina Cambei – Manager, Indirect Taxes
 
For additional information, please contact:
Alex Milcev – Partner, Tax & Law Leader Romania
 
Ernst & Young SRL
Bucharest Tower Center Building,
22nd Floor, 15-17 Ion Mihalache Blvd.,
Sector 1, 011171, Bucharest, Romania
Tel: (40-21) 402 4000, Fax: (40-21) 310 7124
Email: office@ro.ey.com
Abonează-te la noutățile EY România și fii la curent cu ultimele studii și articole, evenimente și comunicate de presă lansate de experții noștri.
Abonează-te