Bad debt relief: creditor entitled to interest

In its judgment of 29 February 2024[1], the CJEU ruled that Member States may impose time limits on a creditor’s application for bad debt relief in cases of debtor default.

Additionally, if the tax authority fails to reimburse the VAT amount claimed under bad debt relief within a reasonable time, the creditor is entitled to request that the reimbursement amount be increased by the interest due.

The facts of the case

The case before the CJEU concerned a Bulgarian company engaged in the construction of buildings and installations. This company invoiced and paid VAT between 2006 and 2010 and in 2012. In 2019, the company was removed from the VAT register. In 2020. The company became insolvent and was placed into insolvency proceedings. In 2020, the Company applied for an overpayment of VAT with interest due to it as a result of the default of its debtors. However, the Bulgarian tax authorities dismissed the claim, arguing it was submitted after the expiration of the 5-year limitation period set by Bulgarian law. Notably, at the time, Bulgarian legislation on bad debt relief did not allow for VAT correction or recovery due to debtor non-payment.

Preliminary questions

The case finally went to the CJEU, which ruled, among other things, on:

• Can Member States impose a time limit on creditors applying for bad debt relief in cases of debtor default?
• Are Member States entitled to introduce additional conditions for claiming bad debt relief, such as correcting the original invoice or notifying the debtor?
• Is a taxpayer claiming bad debt relief entitled to interest if the VAT refund is delayed?

CJEU reasoning

Limitation in time of the creditor’s application of bad debt relief

The CJEU emphasized that, as a general principle, creditors are entitled to reduce the taxable amount and VAT in cases of debtor non-payment.

As the CJEU pointed out, the provisions of the VAT Directive grant Member States the right to derogate from the obligation to reduce the taxable amount and VAT in the event of the debtor’s default. However, this exception cannot be applied arbitrarily and its use must be justified. The introduction of the above exception must be considered justified when the debtor’s non-payment is temporary (rather than definitive).

The court upheld that Member States may impose time limits on creditors applying for bad debt relief, provided such limits adhere to the principles of legal certainty, equivalence, and effectiveness. Specifically:

• time limits must ensure legal certainty for taxpayers regarding their obligations.
• they must be consistent with limits applied to other taxes under national law (principle of equivalence).
• they must be long enough to allow taxpayers a reasonable opportunity to exercise their rights (principle of effectiveness).

Additional conditions for a creditor to benefit from bad debt relief

The CJEU also ruled that national laws may impose formal requirements for bad debt relief, such as correcting the original invoice or notifying the debtor. However, these requirements must:

• Be proportionate and not excessively burdensome.
• Respect the principle of VAT neutrality.

For instance, if a taxpayer cannot comply with certain requirements (e.g., correcting an invoice because they were deregistered from the VAT system), they must still be allowed to substantiate their claim by alternative means. Similarly, if notifying the debtor is unfeasible, the taxpayer should not be denied relief solely on that basis.

Creditor’s entitlement to interest in bad debt relief

The CJEU has indicated that interest is due to the taxpayer if the VAT refund (including that resulting from bad debt relief) is not made within a reasonable time.

Interest should generally accrue from the date the taxpayer invokes their right to an adjustment. Delays beyond a reasonable timeframe warrant compensation through interest payments.

Summary

A key takeaway from the CJEU judgment is the confirmation of taxpayers’ rights to interest when VAT refunds are delayed. This includes refunds arising from bad debt relief claims.

The ruling also highlights the importance of balancing formal requirements with taxpayers’ rights. Member States must ensure that any conditions for claiming bad debt relief are reasonable and do not impede taxpayers’ ability to exercise their rights.

In such cases, taxpayers must substantiate their claims adequately to justify the reimbursement and any interest due.

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[1] In Case: C-314/22 Consortium Remi Group.