On October 15, 2020, the Court of Justice of the EU (CJEU) issued a judgment favorable to taxpayers concerning bad debt relief (Art. 89a of the VAT Act). By declaring that the Polish provision is incompatible with EU law, the CJEU has opened the way for some taxpayers to correct their VAT settlements in their favor.

In accordance with the provisions of the VAT Act, the condition for using the bad debt relief is, among others, the fact that on the day preceding the day of submitting the tax return in which the correction is made:

  • the creditor and the debtor are taxpayers registered as active VAT payers;
  • the debtor is not in the process of restructuring, bankruptcy or liquidation.

Requirements to take advantage of the so-called bad debt relief, so that the debtor and the creditor are active VAT taxpayers and the debtor is not in bankruptcy or liquidation proceedings, have been recognized by the CJEU as inconsistent with the provisions of European Union law. The Tribunal, among others pointed out that the second of the above-mentioned conditions is unacceptable due to the lack of the risk of “abuse” on the part of taxpayers.

The CJEU judgment requires the legislator to amend the provisions of the VAT Act. Nevertheless, taxpayers can already apply the provisions on bad debt relief in their settlements, disregarding conditions that are inconsistent with EU law, although not without the risk of disputes with tax authorities. It is worth noting that, according to the ruling of the CJEU, national courts are obliged to ignore the conditions inconsistent with Art. 90 sec. 1 of Directive 2006/112: “It follows that, where a taxable person such as E. does not satisfy the conditions laid down by national legislation, which do not comply with Article 90(1) of Directive 2006/112, it may rely on that provision before the national courts against the State in order to obtain a reduction in the taxable amount (see, to that effect, judgment of 15 May 2014, Almos Agrárkülkereskedelmi, C‑337/13, EU:C:2014:328, paragraph 35), it being for the national court before which proceedings have been brought to set aside those conditions which do not comply with Article 90(1) of Directive 2006/112. The fact that, in so doing, other provisions of national law are affected is irrelevant, otherwise the obligation, for national courts to disapply a provision of national law which is contrary to a provision of EU law which has direct effect would be rendered meaningless, thereby undermining the primacy of EU law”.

Judgment of the CJEU of October 15, 2020, file ref. C-335/19