This content is from: Romania

Bad debt procedures set to evolve in Romania

Alex Milcev and Costin Manta of EY Romania assess how companies can ensure that VAT related to bad debts are recovered.

Bad debts are a source of stress for companies. Besides the risk of losing revenue, bad debts also have a tax impact on the creditors, which is not negligible.

Based on VAT principles, VAT should be paid by the supplier to tax authorities at the moment of supply, even if it was not paid by the beneficiary to the supplier (e.g. the invoice is payable within 90 days). 

But what happens when the beneficiary has financial difficulties and is unable to pay the invoice, even after the due date? Romania and other Eastern European countries are not so generous when it comes to VAT on bad debts, when compared to western countries. In Romania, for example, a company can recover the output VAT paid to the tax authorities if its client enters bankruptcy or the receivable was reduced during the client’s insolvency proceedings. The process can take years, meanwhile the supplier has blocked its cash in VAT paid to the tax authorities. Countries such as the UK have a more relaxed regime, allowing companies to recover the VAT paid to the tax authorities if the client did not pay the invoice within 6 months as of the due date. 

The European Court of Justice analysed multiple cases during recent years related to VAT on bad debt and, thankfully, clarified the VAT treatment (e.g. C-246/16 Enzo di Maura, C-242/18 Unicredit Leasing). In both cases, taxable persons face difficulties in recovering the receivables from clients for very long periods of time (approximately 10 years), having to pre-finance the VAT. The conclusions of the European Court of Justice do not leave any doubt: taxable persons may recover the VAT paid to the tax authorities related to receivables which have a reasonable degree of uncertainty of being cashed. The suppliers are not liable to finance the tax authorities with the VAT which was not paid by the clients, Also, the court provides that the supplier is required to pay back the recovered VAT if the clients eventually pay the invoice. 

Based on the Treaty of Accession to the EU, as well as the provisions of the Romanian tax law, Romania should obey the decisions of the European Court of Justice. Thus, when compared to the above-mentioned case law, the Romanian VAT legislation raises some question marks.

But what can companies do about this issue? There are solutions: currently there are multiple administrative and court proceedings for the recovery of VAT related to bad debts. Even solely on the provisions of the Romanian tax law, without involving the court, companies can recover the VAT related to bad debts under specific conditions. However, there are no specific guidelines in case the bad debts were sold, often for a very low price, which is a frequent situation. Even in this case though, there are solutions to recover the VAT.

Based on the jurisprudence of the European Court of Justice, ideally the Romanian VAT legislation will soften the conditions for recovering the VAT related to bad debts and this may happen in the next years. Meanwhile, companies can still take steps to recover this VAT themselves.


Alex Milcev

Costin Manta


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