ECJ case C-335/19 (E. Spzoo) – Judgment – No conditions on customer position can be imposed on the VAT Adjustment on Bad debts

On Oct 15, 2020, the ECJ issued his decision on ECJ case C-335/19 (E. Spzoo) related to Bad debts; Principles of fiscal neutrality and proportionality

For our previous coverage about this case, please click HERE.

Articles in the EU VAT Directive

Article 90, 185(2) of Council Directive 2006/112/EC

Article 90 (Taxable amount)
1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.
2. In the case of total or partial non-payment, Member States may derogate from paragraph 1.

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

This is a case where the Polish court asked if Poland is allowed to 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?

Question

Do the provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ¹ — and in particular Article 90(2) thereof — having regard to the principles of fiscal neutrality and proportionality, permit the introduction into national law of a restriction on the ability to reduce the taxable amount in the event of partial or total non-payment by reason of the specific tax status of the debtor and the creditor?

In particular, does EU law not preclude the introduction of a rule in national legislation which provides for the option of taking advantage of ‘bad debt relief’ only on condition that 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 in order to benefit from this relief:

the debtor is not subject to insolvency or liquidation proceedings?

the creditor and debtor are both registered as active VAT taxpayers?

AG Opinion

Advocate General Kokott writes in her opinion:

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.

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.

Article 90 of Council Directive 2006/112/EC 28 November 2006 on the common system of value added tax does not allow Member States to exclude the adjustment of the tax liability of the taxable supplier because the recipient of the supply is already subject to insolvency proceedings or in liquidation at the time of the supply or the time of the adjustment. However, in the case of transactions remaining partially unpaid, Article 185(2) of that directive does allow Member States to require that the input tax deduction be adjusted in the next tax period.

Decision

Article 90 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as precluding national legislation which makes the reduction of the taxable amount for the purposes value added tax (VAT) subject to the condition that, on the day of delivery of the goods or provision of the services and on the day preceding that on which the adjusted tax return seeking that reduction is filed, the debtor is registered as a taxable person for the purposes of VAT and is not the subject of insolvency or winding-up proceedings, and that, on the day preceding the date of filing of the adjusted tax return, the creditor is itself still registered as a taxable person for the purposes of VAT.

Source

Curia

Personal comments/VATupdate

ECJ stated the incompatibility with EU VAT Directive of some provisions of polish VAT law regulating the “bad debt relief”.
The polish VAT law indicated two conditions to apply the reduction of the taxable amount for the purpose of VAT:
1. the debtor must be registered as a VAT taxpayer on the day of delivery of the goods or services and on the day preceding that day on which the submitted correction of the VAT return seeking that reduction is filed.
2. the creditor was still registered as VAT payer on the day preceeding the date on which was submitted the correction of the VAT return.
Both conditions are judged contrary to the EU VAT Directive.
The regulation of the “bad debt” relief is not harmonize in the EU zone.

Reference to the case in the EU Member States