Court of Justice of the European Union (CJEU) established that for bad debt relief limitation period must begin to run not from the date of performance of the payment obligation initially provided for, but from the date on which the debt became definitively irrecoverable.
Recovery of VAT on bad debts has been on the agenda in Hungary since the Court of Justice of the European Union first clarified in the di Maura case at the end of 2017 and then in the Hungarian Porr case in 2019 that EU Member States need to provide for VAT recovery already paid on such claims. In several cases the Hungarian tax authority refused to refund the VAT on bad debts, since based on the general limitation period rule of 5 years, the limitation period from the original date of performance had expired.
In the current case - C‑507/20 – the Hungarian tax authority once again challenged the applicant taxpayer’s claim for reimbursement, since the limitation period expired since the original dates of performances in 2010 and 2011, respectively. The applicant, however, argued that debtor company was subject to winding up proceedings, and the liquidator recorded that the debt had become irrecoverable only in December 2019. The applicant filed for reimbursement, in accordance with the Hungarian provisions on bad debt relief, once the irrevocability of the debt had been established officially.
Further to the request for preliminary ruling by the Hungarian Court, CJEU clearly established in its ruling of 3 March 2021 that the applicant has acted diligently and that it cannot be deprived of its right to a reduction of the taxable amount. It also follows that, in accordance with the existing case law in this regard, the limitation period for recovery of VAT on bad debts should only start from the date on which the debt became definitively irrecoverable.
This decision, alongside with a recent decision by the Supreme Court of Hungary on bad debt relief, should provide key precedent and clear interpretation in many similar cases where the Hungarian tax authority unlawfully limited the right of reduction and reimbursement of taxpayers regarding the previously duly paid VAT on bad debts.
By Balint Zsoldos, Head of Tax, KCG Partners Law Firm
