New developments in VAT – a VAT correction / reduction for claims arising six or less months before insolvency

The recent judgment of the Supreme Administrative Court, published under File No. 9 Afs 170/2014, has provided a completely new perspective on claims against insolvent debtors. For such claims, a VAT correction (and hence reduction) can be claimed by providers of supplies they did not get paid for and would therefore be required to pay VAT themselves.   One of the statutory requirements for claiming the correction is that the claim “must occur no later than six months before the declaration of insolvency by the court”. The tax administration, led by the General Financial Directorate and the Ministry of Finance, has applied an interpretation for a long time under which the VAT correction may only be made in respect of claims that arose at least six months before the declaration of insolvency by the court. This interpretation has also been confirmed by the General Financial Directorate’s notification published on its website, and the tax administration has defended the interpretation by referring to the established administrative practice. In such a case, a VAT payer applied a correction to claims arising in the 1^st to 6^th month before the declaration of insolvency. This was contested by the tax administration, arguing that the intent of the legislature was to exclude claims that arose immediately before the declaration of insolvency from being corrected. However, the Supreme Administrative Court took a completely different view on such arguments and reasoned that the tax administration’s interpretation was in conflict with the meaning and purpose of the regulation. According to the Supreme Administrative Court, the objective was to allow correcting VAT for real “pre-insolvency” claims, that is, those arising no more than six months before the declaration of insolvency (i.e. one to six months before insolvency). Those VAT payers who applied a correction to their claims arising in the 7^th to 36^th month before insolvency have now an opportunity to apply the correction to claims arising one to six months before insolvency. Nevertheless, applying a correction to claims arising in the 7^th to 36^th month by referring to the established administrative practice is very risky after the judgment has been published, although the tax administration has taken no stance on the interpretation provided by the SAC. Please do not hesitate to contact our tax specialists if you have any questions regarding VAT corrections of claims in insolvency.