There are provisions in the Estonian Value Added Tax Act since 1 January 2022 which make possible, if certain conditions are met, to reduce the taxpayer’s value added tax (VAT) obligation in the case of hopeless monetary claim.
Today, if the purchaser is insolvent – it has no influence to the amount of VAT payable on the goods or services, if the goods were actually transferred or the services were actually provided, but the purchaser has failured to pay for goods or services partially or in full. Change of the VAT calculation related to invoices which are partially or in full unpaid arises from the judgment of the European Court in case C-246/16. By this judgment, the European Court changed its earlier treatment of Article 90 (2) of the EU VAT Directive 2006/112/EC.
Taking into consideration this judgment, Article 291 is added to the Estonian VAT Act since 01.01.2022. Since this date, the taxable person can reduce his/her VAT obligation in following circumstances:
- the invoice is issued for the transfer of goods or provision of services in accordance with the requirements of Article 37 of the VAT Act;
- the amount of VAT from the sales transaction is calculated and declared in the VAT return concerning the taxable period during which the supply of the goods or services was created;
- the monetary claim is not transferred;
- no less than 12 months and no more than three years has passed from the due date of the payment of the invoice, except in case described in clause 6;
- the monetary claim is written off in accounting because there was impossible to collect the claim although the taxable person made all feasible efforts to collect the claim – or if the estimated reasonable costs of collecting the monetary claim exceed the claimed amount;
- if the monetary claim includes more than 30 000 euros of VAT, the monetary claim is cerfified by the judgment which has entered into force;
- the acquirer of the goods or the recipient of the services is not an associated person for the purposes of the Estonian Income Tax Act;
- the taxable person has, during the month when the monetary claim was written off in accounting, notified the acquirer of the goods or the recipient of the services thereof in writing, denoting the amount of VAT related to the monetary claim which was written off.
If all these conditions are met, the seller can reduce his or her VAT obligation in the amount of unpaid sum in the VAT return submitted concerning the taxable period during which the monetary claim was written off in his or her accounting. If the VAT obligation is reduced like this, but at some other time the claim, however, is paid partially or in full – in such case this claim is included in the taxable supply in the amount of paid sum in the VAT return submitted concerning the taxable period during which the claim was paid partially or in full.
The purchaser who did not pay for the goods or services because of insolvency must take into consideration that if he or she is also a taxable person and has deducted the input VAT according the invoice which he or she did not pay partially or in full – if he or she receives a notice from the seller that the monetary claim was written off in the seller’s accounting, he or she must increase his or her VAT obligation in the amount of VAT related to this claim in the VAT return submitted concerning the taxable period during which he or she received such notice.
If the abovementioned conditions are met, a taxable person can apply Article 291 of the VAT Act for hopeless monetary claims which are written off in accounting since 1 January 2022. Subsection 291 (2) stipulates: "(2) According to subsection (1) of this section a taxable person shall adjust the amount of VAT to be paid by amount of VAT calculated from the goods transferred or the services provided for which is partially or in full unpaid, in the taxable period during which the monetary claim was written off in accounting." If the monetary claim is written off at the time when the new provision of the VAT Act is not valid yet (before 01.01.2022), the seller cannot apply Article 291 yet and cannot reduce his/her tax obligation according to this new provision.