On 1 June 2005 the Polish legislator introduced a possibility to decrease output VAT in case of overdue receivables. It is called “bad debt relief”…
On 1 June 2005 the Polish legislator introduced a possibility to decrease output VAT in case of overdue receivables. It is called “bad debt relief”.
Since 2013, the regulation has remained almost unchanged. The Legislator lifted the prohibition to apply for such a relief if the debtor and creditor were related parties. Similarly, aiming to even out the tax position of both parties to the transaction, the wording of Article 89b of the Polish VAT Act was changed in a way that allows a debtor in insolvency or liquidation with an unsettled liability not to decrease its input VAT any more. By the date the amendment was enacted (1 July 2015) a creditor whose debtor declared liquidation or insolvency was not allowed to benefit from bad debt relief. Conversely, the debtor in liquidation or insolvency was obliged to decrease its input VAT when overdue.
The subsequent amendments to this regulation seem to justify the opinion that the Polish legislator forgot that the Polish VAT Act should first and foremost be harmonized with provisions set forth in Council Directive 2006/112/EC of 28 November 2006 “The EU’s common system of value added tax (VAT)”. The relation between both acts, in the context of bad debt relief was outlined by the Administrative Court in Wrocław in the verdict of 22 April 2015 (file I Sa/Wr 2484/14).
The Court stated that the 2 year time limit set forth in Article 89a of the Polish VAT Act is not in line with Article 90 sec. 1 of the Council Directive 2006/112/EC.
In the Court’s opinion, Member States were free to decide whether to implement bad debt relief. If a Member State decides to take advantage of the benefit, it must follow the Directive’s provisions.
Basing on the verdicts issued by the Court of Justice of EU, among others C-588/10 Ministry of Finance of Poland v. Kraft Foods Polska S.A., the Polish Court stated that a Member State may introduce only the conditions which aim to secure the proper collection of VAT and prevent VAT frauds.
In the Court’s opinion, the 2 years’ period stipulated in the Polish VAT Act goes beyond the scope of formalities necessary to prove the lack of payment, as well as means necessary to prevent VAT frauds.
The verdict of the Administrative Court in Wrocław, as well as other verdicts of CJEU may justify the opinion that a vast majority of conditions allowing to benefit from bad debt relief set forth in the Polish VAT Act go far beyond the means necessary to prevent VAT frauds.
As a result, in case of overdue payments, where:
- The debtor was not, and is still not a VAT payer – e.g. in case of B2C transactions;
- The debtor was or is currently in insolvency or liquidation;
- 2 years have passed from the end of the year when the invoice was issued;
- The creditor has assigned the receivables
The creditor is entitled to apply for bad debt relief. However, a dispute in court is inevitable.
Daniel Więckowski
KR Group
