Greece: ECJ decision on bad debt VAT relief could serve as a guide in many Greek cases

March 21 2018

In November 2017, the European Court of Justice (ECJ) released its much anticipated decision in the case C-246/16 (Enzo di Maura). The case related to the right of an Italian taxpayer to reduce the amount of his VATable amount and thus the respective VAT, due to the fact that his customer (debtor) had declared bankruptcy. The court ruled that a member state could not reduce the VATable amount in the event of total or partial non-payment on the basis that insolvency proceedings had been unsuccessful, when such proceedings could last longer than 10 years.

The court made some very interesting findings with respect to the interpretation of the EU VAT Directive provision for the reduction of the VATable amount: in particular, Article 90, paragraph 1 of the VAT Directive 2006/112/EC requires the member states to reduce the taxable amount and consequently the amount of VAT payable by the taxable person in the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place. However, paragraph 2 of this article allows member states to derogate from the rule referred to in paragraph 1 in situations of total or partial non-payment.

The court, being consistent with its judgment in case C-330/95 Goldsmiths (Jewellery), confirmed that a disproportionate restriction of the possibility of adjusting VAT in the case of bad debts was not permitted, given that the tax authorities could not collect an amount of VAT exceeding the tax that the taxable person had himself received as consideration (principle of neutrality). In that regard, the court, bearing in mind the brave opinion of the Advocate General J Kokott, held that it was not permitted for member states to exclude altogether the possibility of VAT adjustment, but the exercise of the power to derogate must be justified in order to ensure the objective of fiscal harmonisation in the VAT field.

In a nutshell, the decision allows for the following concluding remark: while it is acceptable to deny the adjustment of VAT for as long as a debt is potentially recoverable, it is not acceptable to deny the adjustment of VAT in cases where a debt becomes definitively irrecoverable or when a reasonable probability is demonstrated that a debt will not be honoured.

This is apparently a landmark decision, which causes alarm about the soundness of member states' VAT provisions, in case they are not in line with the above interpretation of the ECJ.

The Greek VAT legislation does not provide for a VAT bad debt relief. However, this issue is under the spotlight at the moment. The financial instability of the Greek market has led numerous businesses to bankruptcy or closure or financial suffocation, leaving behind accumulated bad debts to their suppliers, who have already pre-financed the respective VAT by collecting it on behalf of the Greek state. These suppliers may rely on this decision in seeking a downward adjustment of the VAT paid, resulting in a substantial cash-flow effect. Several such cases are already pending before the Greek courts and it remains to be seen if the courts will adopt the said ECJ decision or if the Greek tax authorities will resolve this issue in favour of the taxpayers.