Neither creditor nor debtor have to be VAT registered at the time of correcting tax base

Polish company E. provided tax advisory services to an entity, which gave rise to a receivable. The debtor failed to settle the receivable and later entered winding-up proceedings. E. believed that they had the right to correct the taxable amount of the receivable. However, the Polish tax administrator disagreed, as the Polish VAT Act stipulates that both the creditor and the debtor must be VAT registered both at the time of providing the supply and at the time of correcting the tax base. At the same time, the debtor must not be in insolvency or winding-up proceedings.

The CJEU held that under the VAT Directive, member states may derogate from the stipulated rules in the event of total or partial non-payment of the price of the supply, while such a derogation’s purpose is to take account of the uncertainty as to whether the non-payment is definitive. The CJEU also noted that the derogation shall not completely exclude any possibility of the VAT taxable amount’s reduction in the event of non-payment (see C-127/18 A-PACK CZ).

In the CJEU’s opinion, the condition that the debtor be registered as a taxable person for VAT purposes on the day of delivery of the goods or provision of the services cannot be justified by the need to take account of the uncertainty whether non-payment is definitive. Whether or not the debtor is subject to VAT on the day of the supply does not in itself allow to conclude that the debt is at risk of not being recovered. The CJEU also referred to the European Commission’s written observations stating that goods and services may also be supplied to persons who are not subject to VAT, such as entities exempt from VAT or consumers, without that affecting the creditor’s obligation to collect VAT and their right to later adjust the taxable amount.

The additional condition that the debtor be registered as a taxable person for VAT purposes at the time when the taxable amount is being corrected, is not compatible with the VAT Directive, as previously adjudicated in the A-PACK CZ case (C 127/18). The condition that the creditor be VAT registered at the time of the tax base correction cannot be justified by the need to take account of the uncertainty whether non-payment is definitive: whether or not the creditor continues to be a taxable person has no effect on the existence of the debt and the debtor’s obligation to pay it, and does not present the risk that the debt may not be recovered.

The last condition that the debtor not be subject to winding-up proceedings at the time of providing the supply or correcting the tax base, does in fact take account of the uncertainty whether non-payment is definitive. However, should the creditor provide sufficient evidence before the winding up proceedings are closed that the receivable will remain unrecovered, it should be possible for them to reduce the taxable amount. If the receivable is subsequently recovered, the taxable amount will be increased again. This is compatible with the objectives pursued by the VAT Directive, while being less onerous for the creditors (see also C-246/16 Di Maura).