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How is the rule interpreted by EU tax administrations?

But how do they demonstrate that the debt claim in question is definitively lost?

This is where the potential source of dispute with the tax administration lies. In order to avoid fraud, many European countries have made the refund of VAT in the event of a customer's bankruptcy subject to the completion of various formalities.

Illustration: the misadventure of a Portuguese company

A Portuguese company sold goods to a Spanish customer. As the goods remained on Portuguese territory, the supplier's invoices were issued with Portuguese VAT. The Spanish customer did not honour any invoices and went bankrupt.

The Portuguese supplier presented the judgement of the Spanish court to the tax authorities that his invoice payment was definitively lost and claimed back the VAT.

The Portuguese tax authorities acknowledged the irrecoverability of the payment but refused to refund the VAT on the sole ground that the bankruptcy proceedings were not governed by Portuguese law. To put it another way, the VAT regularisation scheme is only applicable when both the creditor and the debtor are taxable persons established in the national territory. No VAT refund is therefore allowed when the customer is established in another European country.

Important to remember

If one of your customers goes bankrupt, you have the right to request VAT refund, provided that you are familiar with the local formalities: do you have to request VAT regularisation to be made as soon as the customer's bankruptcy is declared or only at the closure of the bankruptcy (which can take up to ten years as in Italy)? What documents do you need to send to the tax authorities? What administrative or judicial recourses are available in case of unjustified refusal?

VAT refund is a fundamental right for every company. But exercising this right is sometimes difficult.

 

Source: Order of 29 April 2020, C-756/19