Introductory remarks

In a market economy system, the functioning of businesses is conditioned by competition mechanisms that may force companies to declare bankruptcy, due to their unprofitability. Thus, the natural result of economic reshuffling, which is the sum of individual decisions of consumers, is changes in the functioning of enterprises – some fail so that more can be created. Economic risk thus makes bankruptcy a determinant of resource allocation transformations. According to VAT regulations, tax liability arises when goods are delivered or services are performed. The principle of taxation on the basis of agreed payments introduces a concept in which whether the recipient has fulfilled the consideration does not play a fundamental role. The obligation to pay VAT is, in principle, the business, but it is worth bearing in mind the Court of Justice’s well-established line of case law that VAT is an indirect consumption tax that should be paid by the final consumer. The taxable business therefore acts “”only”” (and as much as!) as a collector for the account of the state.

In the context of the aforementioned possibilities of contractor bankruptcy, an important aspect of doing business is the existence of a risk of default in payment of invoices issued. Additional difficulties are posed by the fact that correlated with them is the obligation to pay the VAT due in a situation, including when the counterparty has not fulfilled the consideration. The generally accepted construction of VAT leads to the state demanding payment of the tax from the entrepreneur, despite the fact that he has not yet received payment for his services from the taxed entity. Due to the negative impact of the scenario presented above on the liquidity of the business, the legislators of EU member states have provided for the possibility of adjusting the existing liability of the businessman in the context of VAT, the discussion of which will be the subject of the following essay.

In Case C-246/16 Enzo di Maura, the Court of Justice of the European Union analyzed for the first time what period of time a Member State can require prefinancing of a tax for which there is a legitimate risk of non-fulfillment of an equivalent service by the counterparty, and thus what are the limits of the right to reduce the tax base.

European law and Italian regulations

The regulations on the subject in question are contained in particular in Council Directive 2006/112/EC of November 28, 2006 on the common system of value added tax. Article 90, relating to the change of the tax base, states:

“”1. In the event of cancellation, termination, dissolution, total or partial default, or in the event of a reduction in the price after the supply, the taxable base shall be reduced accordingly under the conditions laid down by the Member States.
(2) In the event of total or partial default, Member States may waive the application of paragraph (1).””

In the Almos Agrárkülkereskedelmi case, the Court, referring to the above provisions, stated that Article 90(1) alone is not sufficient for taxpayers to be able to invoke the right to reduce the VAT tax base in the event of a default in payment of the price, if the member state concerned has decided to apply the exception provided for in Article 90(2) of the said directive.

The case in question involves an Italian entity, so the national regulations on changing the taxable base for VAT are also crucial. Of particular importance is Article 26(2) of Presidential Decree No. 633 of October 26, 1972. “”Regulations Establishing and Regulating Value Added Tax,”” which states:

“”If a transaction for which an invoice has been issued after the registration specified in Articles 23 and 24 fails in whole or in part, or if its taxable amount decreases as a consequence of its nullity, cancellation, revocation, dissolution, annulment or similar actions, or because of non-payment in whole or in part as a result of unsuccessful bankruptcy or vindication proceedings, or as a result of the application of contractually stipulated discounts or rebates, the seller of goods or the provider of services shall be entitled to deduct in accordance with Art. 19 the tax corresponding to the change by registering it in accordance with Article 25. The buyer or customer who has already registered the transaction in accordance with this provision must then register the change in accordance with Article 23 or 24, subject to his right to a refund of the amount paid to the seller or service provider as compensation.””

Also of significance is Article 101(5) of the Testo Unico delle Imposte sui Redditi (Unified Income Tax Laws), which contains the following regulation:

“”The loss of goods referred to in paragraph 1 […] and the loss of a claim other than deductible under […] may be deducted if it is the result of certain and well-defined circumstances and, in any case, in the case of a loss of a claim, if the debtor is in bankruptcy proceedings or has entered into a restructuring arrangement that has been approved […]. For the purposes of this paragraph, insolvency proceedings shall be deemed to be pending with respect to the debtor from the date of the judgment declaring bankruptcy or the decision ordering compulsory liquidation by administrative procedure or […].””


Enzo di Maura, doing business in Italy, had a business relationship with an entity that had declared bankruptcy, having failed to pay an invoice amounting to €35,000. Therefore, Enzo di Maura made a corresponding adjustment in 2004, reducing the declared VAT tax base by the amount in question, due to the fact that he simply had not received it. The tax authority (Agenzia delle Entrate) refused to approve the adjustment, justifying this belief on the grounds that this would only be possible after bankruptcy proceedings had been unsuccessful – tantamount to being certain that the claim would not be paid. Enzo Di Maura decided to appeal the tax authority’s decision, arguing that a reduction in the tax base due to non-payment of the consideration should be possible as soon as the debtor is declared bankrupt. The competent local court (Commissione tributaria provinciale di Siracusa) raised doubts about the compatibility of the regulations found in Italian law with the principles of proportionality, effectiveness of Union law and neutrality (additionally, given that the average duration of bankruptcy proceedings in Italy is 10 years!). The Court also noted that the limitation of the right to reduce the tax base established by the Italian legislation is excessive, as EU law already makes this limitation conditional on the mere non-payment, and not on the ineffectiveness of bankruptcy proceedings or enforcement measures. For this reason, the General Court referred questions to the Court of Justice of the European Union for a preliminary ruling on the compatibility of national and EU regulations with respect to compliance with the principles of proportionality, effectiveness and neutrality in the field of VAT. The General Court wished to determine whether EU law allows the Italian legislature to make an adjustment to the tax base conditional on proving that prior ineffective bankruptcy proceedings have been carried out, even if they could last for more than ten years under certain circumstances.

Court’s conclusion

After hearing the case, the Court came close to Enzio di Maury’s argument, stressing that: “”a Member State may not make a reduction in the VAT taxable base conditional on the ineffectiveness of insolvency proceedings, where such proceedings could last for more than ten years.”” Moreover, the Court, responding to the preliminary questions, stressed that if the default on payment of all or part of the purchase price is not accompanied by the termination or cancellation of the contract, the buyer remains obligated to pay the agreed price, while the seller, even though he no longer owns the goods, still in principle has a claim that he can enforce through the courts. However, since it cannot be ruled out that such a claim will in fact eventually become irrecoverable, the Union legislator wanted to leave it up to each Member State to decide whether the case of default in payment of the purchase price, which, unlike termination or cancellation of the contract, does not imply a restoration of the situation of the parties before the transaction, is a source of the right to an appropriate reduction in the tax base under the conditions set by the State in question, or whether such a reduction is not permissible in the situation described. Thus, the line of jurisprudence evident in, for example, the Goldsmiths (C-330/95) and Almos Agrárkülkereskedelmi (C-337/13) cases was upheld. Referring to the concept of submitting evidence confirming a certain probability of default, the Court pointed out that this solution is more favorable due to the fact that it is effective for achieving the objective pursued, and at the same time less burdensome for the taxpayer, who provides the VAT pre-financing by collecting the tax for the state’s account. Indeed, the panel ruled that it is incumbent on the taxpayer to provide evidence of the likelihood that the amount due will not be paid. On the other hand, it is up to the national tax authorities to assess this evidence, respecting the principle of proportionality and under the control of the court. Consequently, in clarifying the doubts raised, the Court held that the provisions of the VAT Directive must be interpreted to mean that a Member State may not make the reduction of the VAT tax base conditional on the ineffectiveness of bankruptcy proceedings.

Regarding the length of Italian bankruptcy proceedings, the Court ruled: “”Such a time limit may, in any event, create a liquidity disadvantage for businesses subject to that legislation in the event of non-payment of an invoice vis-à-vis their competitors in other Member States, which may clearly frustrate the objective of tax harmonization pursued by the Sixth Directive.”” The Court further stressed that it follows from the wording of the VAT Directive’s provisions that although member states have the option to waive the adjustment of the tax base, they do not have the option to exclude it altogether. The Court pointed out that in accordance with the principle of proportionality, the measures used to implement the VAT Directive should not go beyond what is necessary to achieve them.

Legal analysis

The Italian tax authority did not share Enzo di Maury’s view and argued that in the case of a debtor’s bankruptcy, in fact, the provision of Article 26(2) of Decree No. 633/72 allowed the interested party to recover the tax previously paid to the tax authority only if it was certain that there were no funds available and thus no possibility of recovering his claim. The axis of the dispute arose along the line of when it becomes certain that the claim will not be paid – according to the appellate authority, proof of the ineffectiveness of the bankruptcy proceedings occurs only when there has been a distribution of assets and the deadline for submitting comments on the distribution plan has passed, or, in the absence of such a plan, when the deadline for filing a complaint against the order terminating the bankruptcy proceedings has passed. In addressing the preliminary questions, the General Court sought to determine whether EU law allows the Italian legislature to make the adjustment of the tax base contingent on proof that bankruptcy proceedings had previously been unsuccessfully conducted, even if they might have lasted for more than ten years under certain circumstances. The regulations of Article 90 (especially paragraph 2) of the Directive do not provide guidance on when it is possible to limit it (to exclude the possibility of adjustment) and, as the Court points out, it is necessary to refer to the general VAT rules.

It should be pointed out that the Court has repeatedly ruled that “”the amount constituting the taxable amount of VAT to be collected by the tax authorities may not be higher than the consideration actually paid by the final consumer and on the basis of which the VAT actually paid by him was charged.”” Thus, since there is no payment from the final consumer, the company is not materially obligated to pay VAT – since there has been no consideration. What’s more, Article 90(1) of the VAT Directive expresses the principle that taxation is a consideration actually received – thus the tax authorities cannot charge VAT on an amount higher than that received by the taxpayer.

Doubts are raised, however, by paragraph 2, which introduces a rule under which member states may provide for exceptions to the adjustment principle. The functional implementation of paragraph 2 seems to apply in a situation where, in the face of a counterparty’s default, there remains the possibility of claiming the debt, if only through the courts. Some claim that the purpose of the second paragraph is to eliminate fraud and tax evasion, but its application in this regard could violate the principle of VAT neutrality.

The interpretation of this principle is based on the following two assumptions:

business entities that carry out the same transactions cannot be treated differently in the field of VAT collection;
a business, as a tax collector for the state, should in principle be exempt from the ultimate burden of VAT if the business activity as such serves (in principle) to obtain taxable turnover.

A violation of the principle of neutrality occurs when the tax authority of a Member State, in applying Article 90 of the VAT Directive, aims to create a long-term state of uncertainty with regard to the prefinancing of VAT on services that have not been fulfilled. By limiting, delaying or excluding the possibility of adjustment (refund), the state is enriched while impoverishing the taxpayer. The principle of proportionality, which is one of the main principles of Union law, on the issue of state action requires that the incriminating measure “”be appropriate, necessary and proportionate in view of the objective pursued by it.”” Therefore, it seems that de facto shifting the tax obligation to the entrepreneur (and not the end consumer) at a time when bankruptcy proceedings may last even for more than 10 years is a violation of it. An important part of the regulation should be provisions clearly establishing the permissible length of collection and payment of foreign taxes without receiving a monetary amount from the taxed entity. Juliane Kokott, Advocate General of the Court of Justice, aptly opines in her opinion, stressing that: “”The principle of proportionality further dictates that a company, as a ‘tax collector for the state,’ cannot be required to provide more than it is capable of providing. However, its (financial) capacity is – in the case of indirect consumption tax – in principle limited to what it was able to collect from the taxed entity. Anything it has not been able to collect, it must pre-fund from its own assets.

However, the purpose of VAT is not to tax the taxpayer’s assets.”” In the case at hand, doubts arise on the question of determining the point at which it becomes evident that it will be impossible to collect the taxable amount. The Italian tax authorities opted for the moment when the bankruptcy proceedings end, the complainant argued, which should be when they begin.

In my opinion, in the situation of the opening of bankruptcy proceedings of a counterparty, at least two solutions could be a more proportionate measure:

a reduction, in principle, of the tax base for contracts concluded with an insolvent entity, subject to the possibility of a proportional increase at the time of: a) recovery of broad-based liquidity, b) termination of bankruptcy proceedings, c) repayment of the claim (e.g., by a third party);
assignment of claims to the state treasury.

Doubts arise, however, because of the difficulty of distinguishing between claims for which the probability of non-fulfillment is significant and those for which it is difficult to determine this precisely. This is because it seems that the construction of the VAT regulations excludes the possibility of a definite default. Fulfillment of the claim may take place at least at the hands of a third party. Therefore, it is difficult to speak categorically about “”default””. A more apt criterion for division could be the probability of non-payment, directly proportional to the passage of time since maturity.

De lege ferenda, it should be analyzed whether the mere contestation of the claim by the debtor and taking legal action or declaring bankruptcy are not sufficient grounds to adjust the tax base of the entrepreneur-contractor. A multi-year pre-financing period clearly seems to violate the principles of both proportionality and VAT neutrality. On the other hand, it is the entrepreneur, exercising his freedom to conduct business, who freely chooses his contractors. In my opinion, it is natural that an honest businessman is interested in doing business with economic interest in mind and with the goal of making a profit. Certainly, from this point of view, the concern for fulfilling the tax obligation to the state for VAT will be secondary to the fulfillment of orders and the orders of his customers. Due to the multiplicity of factors and random situations, in my opinion, it would be a violation of the principle of proportionality to make the adjustment conditional on the exercise of due diligence in the selection of a contractor. Naturally, in terms of elements directly influenced by the entrepreneur, the situation is different. In this regard, the key issue becomes relevant evidence – which would confirm to the tax authority a certain probability of default by, for example, an insolvent contractor, providing a premise for reducing the tax base. There are no relevant regulations in this regard, or they are different in the member states. This leads to different positions of business entities in the market, negatively affects competitiveness in the European market and slows down the harmonization of the tax system. An apt solution could be the creation of a closed catalog, enumerating the prerequisites for the reduction of the tax base – one of which should undoubtedly be the initiation of bankruptcy proceedings of a counterparty. In sum, in my opinion, it is not a proportionate solution to expect a taxpayer to conduct business in the face of reduced liquidity caused by the freezing of funds from “”non-existent”” VAT liabilities.

National regulations

The ruling in question concerned the so-called “”bad debt relief”” that is also in force in the Polish VAT law. The ruling may be important from the point of view of Polish taxpayers, given the wording of the domestic regulations, which provide for several conditions that must be met in order to benefit from a reduction in the tax base, and which still raise many doubts in practice. It has thus become a contribution to academic discussion. Dr. Beata Rogowska-Rajda and Dr. Tomasz Tratkiewicz gave a different opinion from the above work in the article: “”Reflections on the Polish institution of “”relief for bad debts”” in the context of the principles of correcting output and input tax in the light of the recent case law of the Court of Justice”” (Tax Review 7/2018, pp. 18 et seq.). The authors argue that allowing adjustments in the situation of concluding a contract with an insolvent counterparty leads to a situation in which the risk of taxpayers’ business is shifted to the Treasury. The regulations adopted in Polish law (the key one being Article 89b of the Value Added Tax Act of March 11, 2004) refer to a situation in which bankruptcy or restructuring proceedings are already underway with respect to the entrepreneur’s counterparty, on whom the tax obligation rests, at the time of the transaction. In the facts of the case, however, the declaration of bankruptcy occurred after the invoice had already been issued. Polish regulations provide very simple rules for the adjustment, which do not require the collection of additional evidence. In fact, it is sufficient for it to be carried out if the counterparty fails to make payment by the end of the month in which the 150th day from the date of expiration of the deadline for payment for the transaction in question expires. It seems, however, that due to further ambiguities in the discussed matter, it might be desirable for a Polish court to ask its own preliminary question regarding the compatibility of Polish VAT regulations regarding an insolvent (and under bankruptcy proceedings) counterparty with EU law.


Judgment of the Court of November 23, 2017 in Case C-246/16 Enzo Di Maura v. Agenzia delle Entrate – Direzione Provinciale di Siracusa, ECLI:EU:C:2017:887 [available at:],
Opinion of Advocate General Juliane Kokott delivered on June 8, 2017,
Dr. Beata Rogowska-Rajda, Dr. Tomasz Tratkiewicz in the article: “”Reflections on the Polish institution of “”relief for bad debts”” in the context of the principles of correcting output and input tax in light of the recent case law of the Court of Justice”” (Tax Review 7/2018, pp. 18 et seq.).”