Approaching deadlines for VAT reclaims of bad debts

In the Hungary-related case of FGSZ Földgázszállító Zrt., the European Court of Justice (ECJ) held that the limitation period for VAT-reclaims on bad debts should be calculated from the date when the receivables had been recorded as irrecoverable, notwithstanding the limitation period of the VAT liability on the underlying transaction. The ECJ decision gives the opportunity to a VAT reclaim for businesses who have already said goodbye to their VAT paid on the sums which had never been received from the customer. Nevertheless, such a reclaim is bound by tight deadlines and other conditions.

Pursuant to the ECJ decision, the Hungarian legislator has introduced a special VAT reclaim procedure under which, in case of a bad debt, the VAT paid on the underlying transaction may be reclaimed within one year calculated from the date when the respective debt had been recorded as irrecoverable, notwithstanding the VAT limitation period of the underlying transaction. This procedure is recommended for taxable persons who charged the VAT for the underlying transaction in a period which cannot be self-revised due to the limitation, however the date of recording the non-payment as a bad debt is not earlier than one year. For the sake of a successful VAT reclaim, the claimant should practically meet the criteria for the tax base reduction within the relief of bad debts. The tax authorities will make decision on such claims within 6 months. In principle, the new procedure only applies for bad debts recorded no earlier than 10 June 2021, but the transitional regulations of the Hungarian VAT Act allow to initiate the procedure also in cases where the date of recording of bad debts is between 10 June 2020 and 10 June 2021. The forfeit deadline for such reclaims is 7 December 2021.

In cases where the respective bad debt had become irrecoverable before 10 June 2020, the VAT may be reclaimed by other means. Another special VAT-refund procedure may be initiated on the ground that the ECJ has found the bad debt-related Hungarian VAT regulations to be inconsistent with the EU law, establishing a VAT refund claim for the taxable person. In order for such claims to be accepted, the claimant should only refer to the relevance of the ECJ decision, however the tax authorities, on deciding whether the claim is established, may examine the fulfilment of conditions for the tax base reduction within the relief of bad debts. If the reclaim is accepted by the tax authorities, the claimant is entitled to a late refund interest, calculated from the original due date to the date of submission of the reclaim. The tax authorities will make decision on this sort of claim within 30 days. The claimant should be mindful of a forfeit deadline, which is 180 days calculated from the date of publishing the ECJ decision in the Official Journal. In cases where the underlying transaction took place before 2016 and the claim had become irrecoverable before 10 June 2020, the deadline for the submission of claims with reference to the FGSZ case is 11 December 2021.

Nevertheless, in cases of bad debts where the limitation period for the original VAT return has not lapsed, the taxable person should declare a tax base reduction under the general conditions, however retrospective tax base reduction (via self-revision) is only provided where the date of supply of the underlying transaction is later than 31 December 2015. Thus, if the date of supply of the underlying transaction falls within the last filing period of 2015, the taxable person may only seek VAT refund with direct reference to the FGSZ decision.

Should you have any questions related to the above, please do not hesitate to contact us.

Krisztián Vadkerti, partner
Márta Pénzely, adómenedzser
Márton Ráskai, senior adótanácsadó

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