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Tax News: ECJ judgment on the VAT bad debt relief

Tax News

The sixth issue of KPMG’s Tax News in 2017 discusses the judgment of the Court of Justice of the European Union in the Enzo Di Maura case, C-246/16 regarding the VAT aspects of bad debt relief.


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The Bulgarian VAT legislation does not provide for a mechanism for reduction of the VAT base in cases where a part or all of the taxpayer’s consideration remains unpaid. Thus, a supplier who has pre-financed the VAT due cannot decrease their VAT liability even where the client’s debt is definitely unrecoverable, let alone when there is still a chance, albeit a theoretical one, that the debt will be honored. However, the reasoning of the Court of Justice of the European Union (“ECJ” or “the Court”) in the Enzo Di Maura case, C-246/16, call into question the compatibility of these Bulgarian rules with the EU VAT law. Businesses having uncollected trade receivables should analyze the possibilities for decreasing their VAT liabilities related to outstanding clients’ debts.


The case referred before the ECJ concerns the right of an Italian taxable person, Mr. Di Maura (“the supplier”), to reduce his VAT taxable amount in relation to a trade receivable that has remained unpaid. The supplier made a VAT adjustment decreasing his VAT liabilities as one of his clients was declared insolvent and did not pay for certain supplies performed by Mr. Di Maura.

By virtue of the Italian VAT rules in force at the time, the Italian tax authorities rejected the reduction of the VAT base claiming that such an adjustment could be performed under the Italian law only if the insolvency proceedings were unsuccessful, i.e. once it is established that the debt would remain unpaid.

The supplier appealed the decision of the tax authorities before the competent Italian court, which decided to stay the national proceedings in order to ask the ECJ whether the Italian provisions in question were in line with the rules and principles governing EU VAT.

The judgment

At the outset, the Court states that while the VAT Directive[1] provides for a reduction of the taxable amount in cases of total or partial non-payment, Member States are in principle allowed to derogate from this rule[2].

The ECJ then recalls that the power of Member States to derogate is based on the notion that in certain circumstances and because of the legal situation prevailing in the jurisdiction concerned, non-payment of consideration may be difficult to establish or may only be of a short-term nature.

The Court thus accepts that it is relevant for the Member States to counteract the inherent uncertainty of whether or not a non-payment would be definitive or only temporary, which, as the ECJ notes, represents the principal objective of the derogation.

However, the Court finds that the derogation cannot extend to instances where such an uncertainty is not present, and thus cannot be construed as meaning that it is possible for Member States to exclude altogether the reduction of the VAT base in cases on non-payment. A contrary conclusion would, according to the Court, run counter to the principle of VAT neutrality[3].

The ECJ goes on to state that the mechanism for reduction of the taxable amount needs to respect the principle of proportionality[4]. In that regard, the Court finds that the objective of the derogation could be achieved not only by (a) granting a VAT base reduction when the receivable is established to be unrecoverable, but also by (b) allowing the reduction where the taxable person could demonstrate a reasonable probability that the client’s debt will not be honored[5]. In the latter case, the ECJ notes that it would be for the national authorities to determine (with due regard to the principle of proportionality and subject to review by the courts) the evidence for a probable extended period of non-payment which would need to be provided by the taxable person, according to the specific features of the applicable national law.


The following key points should, in our opinion, be highlighted:

  • Although the case referred to the Court is focused on the Italian VAT rules, in the absence of a bad debt relief in the Bulgarian VAT Act the conclusions of the ECJ are expected to have significant implications on the Bulgarian VAT provisions as well[6].
  • While waiting for future legislative changes in the Bulgarian VAT Act to reflect the findings of the Court in the national VAT law, the question arises if and under what conditions businesses operating in Bulgaria and having uncollected trade receivables may rely on this judgment in seeking a reduction in their VAT base.

    While waiting for future legislative changes in the Bulgarian VAT Act to reflect the findings of the Court in the national VAT law, the question arises if and under what conditions businesses operating in Bulgaria and having uncollected trade receivables may rely on this judgment in seeking a reduction in their VAT base.

    On the one hand, it is true that the ECJ has already held that the taxable persons cannot directly rely, before the national courts, on the provision in the VAT Directive requiring a reduction of the VAT base in the event of non-payment of consideration[7]. At the same time, however, it is settled case-law of the Court that even where a specific EU law provision does not fulfil the conditions required in order to have direct effect, the national courts are bound to interpret domestic law, so far as possible, in the light of the wording and the purpose of the said EU law rule (the so-called obligation for “reconciliatory interpretation”)[8].
  • Thus, it might be argued that taxpayers should be able to seek a reduction in their VAT base even before such a rule is transposed in the Bulgarian VAT legislation. In principle, such a possibility may be present also for periods prior to the judgment[9]. It is up to the national courts to decide whether such a reduction of the VAT base should be granted based on the reconciliatory interpretation between the VAT Directive and the national VAT legislation.
  • According to the Court’s reasoning, in order for the reduction in the VAT base to be allowed businesses would need to demonstrate (with appropriate and sufficient evidence) a reasonable probability that the debt would remain unpaid. Before the national legislature clarifies the conditions under which a reduction of the taxable amount may be sought, taxpayers willing to pursue such an adjustment would need to argument their case considering the relatively limited instructions provided by the ECJ.

    While these are still uncharted territories from today’s perspective, a comprehensive, case-by-case analysis would most probably need to be performed, taking into account, among others, the duration of the non-payment, the trade relations between the parties (including but not limited to whether or not the companies are related parties), the actions performed by the supplier to collect the outstanding amounts, the financial “health” of the debtor, etc. On that last note, it appears reasonable that companies consider factors such as the liquidity of the counterparties, their financial position (whether or not the debtor has reported accounting losses), their level of indebtedness, etc.

KPMG’s assistance

If you have pre-financed the VAT due on trade receivables that remain outstanding and would like to better understand the implications of the Court’s judgment for your business, including by analyzing in further details the possibilities for potential reduction of the VAT base on the underlying supplies, the Tax & Legal professionals from KPMG in Bulgaria will be glad to assist you.

[1] Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.
[2]Bulgaria is among the Member States that have made use of this derogation.
[3]The principle of VAT neutrality requires that that the trader, as tax collector of the VAT on behalf of the State, is entirely to be relieved of the burden of tax due or paid in the course of his taxable economic activities.
[4] The principle of proportionality states that the means employed for the implementation of the EU legislation must be appropriate to achieve the objectives of the respective measure and must not go beyond what is necessary in order to attain them.
[5] Coupled with a fallback rule providing for a subsequent increase in the taxable amount in the event that the consideration gets paid nonetheless in a following period.
[6] The judgments of the ECJ handed down in the preliminary ruling proceedings have a binding effect on the institutions of all Member States.
[7] See the judgment of the ECJ in case C-337/13, Almos Agrárkülkereskedelmi.
[8] In that regard, judgments of the Court in cases C-14/83, von Colson; T-237/08, Abadía Retuerta, para. 67; C-98/09, Sorge, para. 49 – 55.
[9] Insofar as the ECJ has not limited the temporal effects of the judgment. Generally, the judgments of the ECJ have a retrospective effect.

© 2018 KPMG Bulgaria OOD, a Bulgarian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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