SDEU zvysuje sanci ziskat zpet DPH u nedobytnych pohledavek

CJEU increases the chances of recovering VAT on bad debts

CJEU judgment C-314/22 dealt with the issue of the time limit for recovering VAT in the case of bad debts.

The Company's business was the construction of buildings and equipment. In 2020 the Company became insolvent and insolvency proceedings were opened. At the same time, it faced historic VAT arrears.

Although Bulgarian law did not provide for the possibility of recovering VAT on bad debts (similar to the Czech Section 46 of the VAT Act), the Company applied for a VAT refund on invoices issued between 2006 and 2010 which had not yet been paid by its customers. The Company wanted to offset this claim against its debt to the tax authorities.

The application was rejected by the tax authorities, in particular on the basis of the expiry of the limitation period for correcting the VAT and the failure to provide sufficient evidence of non-payment of the claims.

Judgment

The CJEU reaffirmed that EU countries must allow taxpayers to recover VAT paid on bad debts. This applies even in cases where local legislation does not allow for a VAT correction if the conditions under EU law are met.

In this context, the Advocate General's reasoning, although not repeated by the CJEU, seems very interesting. She recommends that States should set a reasonable time interval for non-payment, for example, as early as 30 days after the debtor has received the invoice or 14 days after the creditor has sent a reminder.

The CJEU also stressed that the limitation period for VAT refund claims should only start from the date on which the taxable person could claim the tax reduction, i.e. not from the date of the VAT refund. The Czech legislation does not meet this condition and (not sufficiently) tries to replace it by interrupting the limitation period in the case of formal proceedings - for example, enforcement, insolvency or court proceedings.

On the contrary, the CJEU considers the creditor's obligation to notify the debtor of the VAT correction to be reasonable in normal circumstances.

Practical implications

Although the forthcoming amendment to the VAT Act for 2025 partially expands the scope of bad debts where VAT can be recovered, in light of the CJEU's decision-making practice, we still consider this new regulation to be insufficient. 

Taxpayers who are unable to meet the conditions of Section 46 of the VAT Act for their bad debts are therefore advised to consider using the direct effect of EU law, which tax administrators and Czech courts are obliged to apply.

If you have any questions, please contact the authors of this article or members of the EY team with whom you usually work.

Authors:

David Kužela

Anna Běhounková