The key judgment. The Supreme Administrative Court [NSA] in favor of relief for bad debts.

We have written many times about disputes with the tax authorities regarding the possibility of using the bad debt relief and adjusting the tax base by the amount of receivables that have not been paid by debtors when more than two years have passed since the issuance of the invoice. To date, provincial administrative courts [WSA] have consistently agreed with taxpayers. This time, however, the Supreme Administrative Court also agreed with the taxpayer – represented by Gekko Taxens – which is an important step for the formation of a uniform jurisprudence practice in this regard.

In a judgment dated January 31, 2023 (I FSK 1715/22), NSA dismissed the cassation appeal of the Director of a Tax Administration Chamber in Warsaw [DIAS], thereby admitting the right of Gekko Taxens’ client, who had previously complained against the tax authority’s decision.

The dispute was caused by the tax authority’s conclusion that the taxpayer could not effectively adjust the VAT due under the bad debt relief, as the correction was made after the lapse of 2 years from the end of the year in which the disputed invoices were issued. According to DIAS, this meant that the condition under Article 89a(2)(5) of the VAT Act had not been fulfilled, and therefore the claim for relief was no longer possible. At the same time, the authority pointed out that the national legislation on bad debt relief had been analyzed by the Court of Justice of the European Union [CJEU], which in its judgment of October 15, 2020. (C 335/19 in the case of E. sp. z o.o. sp. k.) considered the provision of Article 89a of the VAT Act to be contrary to the provisions of EU law within the scope in which it allowed the possibility of taking advantage of the bad debt relief only with respect to debtors who are still active VAT taxpayers and are not in the process of bankruptcy or liquidation proceedings. However, according to DIAS, the CJEU, in its ruling, did not comment on the deadline for issuing an invoice under Article 89a(2)(5) of the VAT Act (which, until the amendment of the legislation in 2021, was two years), which means that this deadline – as compliant with the Community Regulations – still applies. The key issue in the case, however, was that during the period of the indicated 2 years after the issuance of the disputed invoices, during which the taxpayer was entitled to take the benefit of the relief, he de facto could not take advantage of this relief due to his status as debtors (which was subsequently questioned by the CJEU).

Success before the WSA

However, the complaint of the company, which operates in the leasing business, was fully accepted by the Provincial Administrative Court in Warsaw, which, in a judgment of June 13, 2022 (ref. III SA/Wa 2647/21), agreed with the applicant’s argumentation and found that the above condition could not be applied, as the applicant company could not effectively apply for bad debt relief within the two-year deadline provided by the legislature, as it was prevented (or significantly hindered) by national regulations that were deemed to be in conflict with EU law. This determined the legitimacy of the complaint filed.

In its justification, the WSA pointed out that at the time when the relief should have been taken – during the periods when the uncollectibility of the debt was probable – the conditions, contrary to Article 90(1) of Directive 2006/112/EC, were in effect under Article 89a(2)(3) of the VAT Act, which concerned the status of the debtor. According to the WSA, the company, acting in confidence to the national legislator, in compliance with the literal wording of the provisions of Article 89a of the VAT Act, had neglected to exercise its right to bad debt relief, due to a reasonable belief that this would not be possible in its case. The court noted, however, that since taking advantage of the relief within 2 years from the end of the year in which the invoices documenting the bad debt were issued, was impossible (or significantly hindered), due to the incorrect implementation of the provisions of Directive 2006/112/EC, which was questioned by the CJEU in its judgment C-335/19, therefore the condition related to the two-year time limit – in this particular case – should be disregarded.