Last week the ECJ has taken a decision on a Polish case concerning VAT on bad debts. As a result of the judgment, the Hungarian regulations, which entered into force as of 1 January 2020, may also be amended.
Our related detailed article can be found on Adózóna website, and below we briefly summarised the background, findings and Hungarian aspects of the judgment.
What case did the ECJ investigate?
The ECJ investigated a bad debt case in connection with a supply of services provided by a Polish taxable person (creditor). In the specific case, the customer (debtor) was wound up after the expiry of the payment deadline, and as a result the creditor was not entitled to recover VAT on the bad debt under Polish law. The Court examined whether or not the Polish rule related to the exact case and other related Polish provisions are in line with EU law.
What are the findings of the ruling?
In the case at hand, the Court has confirmed that national legislation which makes the reduction of the VAT on bad debt subject to the condition that, on the day of delivery of the goods or provision of the services and on the day preceding the date of filing of the adjusted tax return, the debtor is registered as a taxable person for VAT purposes and is not the subject of insolvency or winding-up proceedings, is against EU law.
The Court has also pointed out that national legislation which makes the reduction of the VAT on bad debt subject to the condition 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 VAT purposes, is not in line with EU law.
What impact can the judgment have on Hungarian legislation?
It is not directly regulated in the Hungarian Act on VAT, but the reduction of the VAT on bad debts is currently subject to the condition that the debtor is registered as a taxable person for VAT purposes. Based on the referred ECJ ruling, this condition is contrary to EU law.
However, based on the amendments to the tax law submitted by the Hungarian government last week, this requirement is expected to change in a positive direction. In practice that means that the amendments would allow the reduction of the VAT on bad debt even if the debtor is not registered as a taxable person for VAT purposes.
According to the provisions of the Hungarian Act on VAT in force, one of the conditions for the subsequent reduction of the taxable amount with regard to bad debt is that the debtor is not subject to bankruptcy, liquidation or forced cancellation proceedings at the time of delivery of the goods or provision of the services.
Based on the ECJ ruling on the Polish case, this Hungarian provision is also contrary to EU law. However, there are no amendments to this rule in the bill yet, so further modifications are likely to be expected in this regard in the Hungarian legislation.