New opportunity for Czech taxpayers to decrease VAT on unpaid receivables?
At the end of last year, the Court of Justice of the European Union issued a judgment in the Italian Enzo Di Maura case (C 246/16), which involved a VAT refund relating to unpaid receivables from debtors subject to bankruptcy or insolvency proceedings. Is Czech VAT legislation compliant with the EU directive by not allowing for a reduction of VAT on receivables unpaid by end consumers who are not VAT payers?
With this particular case, the Court of Justice of the EU (CJEU) answered the question whether Italian law complied with Directive No. 2006/112/EC, on the common system of value added tax, when it made a refund of VAT on unpaid receivables conditional upon the provision of evidence of prior unsuccessful insolvency proceedings. The average insolvency proceedings in Italy often take more than ten years. The Italian court’s opinion, as opposed to the view of the Syracuse province’s tax committee, was that the restriction of a right to reduce the tax base set by Italian law is disproportionate since the directive links the restriction with non-payment and not with insolvency proceedings with a demonstrably unsuccessful outcome.
The CJEU confirmed that a member state may not make the reduction of the VAT base conditional upon the failure of insolvency proceedings, if such proceedings can last more than ten years.
Even though we cannot find much inspiration for Czech taxpayers in the rulings on these prejudicial questions, we can see a certain potential in the CJEU’s views that preceded the actual judgment. The CJEU emphasised that, pursuant to the directive, member states are not authorised to entirely deprive VAT payers of the possibility to correct VAT relating to unpaid receivables, simultaneously referring to the principle of proportionality, according to which means used to achieve goals set by the directive may not exceed the level of what is necessary to achieve them.
Czech legislation completely excludes the possibility of correcting VAT on unpaid receivables arising from transactions with entities that are not VAT payers (B2C). In the light of the above, we may ask whether Czech VAT legislation is actually compliant with the EU VAT Directive.
Another question is whether Czech legislative requirements for the correction of VAT on unpaid receivables from debtors in insolvency are proportional as required by the CJEU. Taking into account the above judgment, we believe that there might be a corrective potential for Czech VAT payers who have to deal with their customers’ insolvency in the future.