The answer given by the VAT Directive is clear: when the supplier can demonstrate that debt claim is definitively lost, the State must refund the VAT to him. This is the expression of a fundamental principle according to which the taxable amount is the consideration actually received and the corollary of which is that the tax authorities may not charge more VAT than the taxable person has received

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.

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.

The case was brought before the Court of Justice which ruled that Portuguese VAT law is contrary to the VAT Directive. The only purpose of the special formalities required by national law must be to ensure, before VAT is refunded, that the receivable is definitively lost.  And these formalities must not exceed what is necessary for this demonstration. It is not possible for Member States to exclude purely and simply the reduction of the VAT tax base on the sole ground that the bankruptcy has been declared by the court of another country (Order of 29 April 2020, C-756/19).

The Portuguese case is unfortunately not an isolated case. Many cases have been filed in recent years before the Court of Justice: C-588/10 (Kraft Foods Polska SA),  C-589/12 (GMAC UK), C-107/13 (FIRIN),  C-337/13 (Almos Agrárkülkereskedelmi), C-209/14 (NLB Leasing), C-246/16 (Di Maura), C-396/16 (T – 2), C-404/16 (Lombard Ingatlan Lízing), C-552/16 (Wind Inovation 1), C-672/17 (Tratave), C-127/18 (A-PACK CZ sro),  C-242/18 (UniCredit Leasing),  C-146/19 (SCT), C-292/19 (PORR Epitesi Kft.), C-335/19 (E. Spzoo), C-756/19 (Ramada Storax SA), C-844/19 (TechnoRent), C-182/20 (Administraţia Judeţeană a Finanţelor Publice Suceava and Others), C-324/20 (Finanzamt B), C-398/20 (ELVOSPOL),  C-507/20 (FGSZ), etc.