VAT on receivables assigned to debtors in insolvency

We would like to inform about a very interesting judgement of the Supreme Administrative Court (the SAC) no. Afs 170/2014 - 42. The Court has concluded that the Financial Administration has incorrectly interpreted the rules for VAT correction on receivables assigned to debtors in insolvency. The SAC's decision states that the correction can be made only if the receivables are created in a shorter period than six months before a court decides about the insolvency (and other general conditions of Sec. 44 of the VAT Act must be fulfilled).

The Financial Administration's view published in the past on their web pages states the opposite. According to this view, the receivables to which the VAT correction applies must be created in a period longer than six months before a court decides about the insolvency. The SAC compared the wording of documents related to preparation of the relevant amendment of the VAT Act, which enabled the possibility to make the tax corrections and concluded convincingly that the interpretation declared by the Financial Administration is faulty.

After publication of the SAC's decision in the given case, the Financial Administration's view cannot pass. The published decision should change the current practice used in real cases of VAT corrections on receivables assigned to debtors in insolvency. Our view is that the VAT corrections made in the past on irrecoverable receivables assigned to debtors in insolvency that originated in a period longer than six months before a court decided about the insolvency will not be questioned by the tax administrator.

If you record irrecoverable receivables in your portfolio that originated in a period shorter than six months before a court decides about the insolvency, you should investigate the possibility of correcting the VAT. If you do not do so, you could lose a substantial sum.