CJEU: Poland’s conditions for bad debt relief are too strict

What were the previous conditions for bad debt relief?

The mechanism known as ‘bad debt relief’ allows the taxpayer (creditor) to adjust the VAT taxable amount and the VAT due. To do so, the business must satisfy the conditions set out in Article 89a of the VAT Act, as follows:

1. The sale must be made to a taxpayer registered as an active VAT taxpayer.
2. At the time of sale, the purchaser must not be undergoing restructuring, bankruptcy or liquidation proceedings.
3. On the day before relief is claimed, both creditor and debtor must be registered as active VAT taxpayers.
4. On the day before relief is claimed, the debtor must not be undergoing restructuring, bankruptcy or liquidation proceedings.
5. Two years have not yet elapsed since the end of the year in which the invoice documenting the receivable was issued.
6. By the date the return claiming relief is filed, the receivable has neither been paid nor transferred in any form.

More on bad debt relief here: https://blog.dgp.legal/hard-stuff/ulga-na-zle-dlugi/  

Controversial eligibility conditions

For years, this provision had caused controversy among businesses transacting with entities undergoing restructuring, bankruptcy or liquidation. An even greater problem arose where business partners encountered financial difficulties or decided to liquidate after a transaction, or ceased to be active VAT taxpayers. This entirely prevented compliant taxpayers from obtaining relief.

Earlier CJEU case law, such as the 2019 Czech judgment in C-127/18, indicated that Article 90 of Council Directive 2006/112/EC of 28 November 2006 does not permit adjustment to be excluded because the debtor is no longer a VAT taxpayer. However, that ruling concerned Czech provisions’ compatibility with EU law. Despite the similarities, it could not automatically be applied to the Polish VAT Act. Nevertheless, there were grounds to expect a similar outcome following a preliminary reference concerning the Polish provisions.

The Polish judgment: E. sp. z o.o. sp.k. v Ministry of Finance (C-335/19)

On 15 October 2020, the CJEU delivered judgment in the Polish case C-335/19. It arose from proceedings initiated by E. sp. z o.o. sp.k., a tax advisory business. The company had repeatedly sought tax rulings on whether it could claim bad debt relief without meeting all the conditions in Article 89a of the VAT Act. The tax authorities answered negatively each time. Ultimately, the Supreme Administrative Court referred two questions to the CJEU under Article 267 TFEU, to establish whether Article 89a’s requirements were compatible with the EU Directive.

Article 90 of Directive 2006/112/EC requires EU Member States to reduce the taxable amount and VAT payable where, following a transaction, the taxpayer has not received all or part of the consideration. This reflects the principle that the taxable amount is the consideration actually received. The Directive does not specify conditions for this mechanism, leaving Member States discretion to set detailed requirements, but only to the extent genuinely necessary. National conditions and restrictions must justify the conclusion that the creditor will not receive all or part of the consideration.

The CJEU ultimately held that the following conditions imposed by the Polish VAT Act for bad debt relief were insufficiently justified and therefore contrary to EU law:

1. the debtor must be a VAT taxpayer on the date the goods are supplied or services provided;
2. both creditor and debtor must remain registered as VAT taxpayers on the day before the amended return is filed;
3. the debtor must not be in bankruptcy or liquidation on the date of supply or on the day before the amended return is filed.

What the CJEU judgment means for businesses

CJEU judgments on preliminary references do not have universally binding effect (erga omnes). They are binding only in the particular case and do not directly repeal national provisions incompatible with EU law.

Does this mean the judgment is irrelevant to the many businesses previously unable to claim bad debt relief because they did not meet all the criteria in Article 89a of the VAT Act? Certainly not. Taxpayers may rely directly on Article 90(1) of Council Directive 2006/112 before national courts. The administrative court hearing the case must then disapply conditions in Article 89a that conflict with the Directive. This obligation follows from the principle that EU law takes precedence over conflicting national law, repeatedly emphasised in CJEU case law and accepted by Member States.

The judgment has even wider significance: it creates opportunities to claim bad debt relief where Polish VAT provisions would exclude it because of the debtor’s tax status, particularly where the debtor is a person or entity not registered as an active VAT taxpayer, such as a consumer.

Time limits

The right to apply for recognition and repayment of an overpayment expires when the tax liability becomes time-barred: generally five years from the end of the calendar year in which payment was due. However, a decision on an application submitted before the limitation period expired may also be issued after that date.