According to a recent order of the Court of Justice of the European Union, the statute of limitation for tax base reduction on bad debts should be considered from the moment when the irrecoverable nature of the debts has been established, instead of from the date of supply of the transactions on which the bad debt relief is intended to be applied.
Under the Hungarian VAT Act, the tax base reduction on bad debts is possible as of 1 January 2020.
According to the interpretation of the Hungarian Tax Authority, taxpayers have been entitled to exercise their rights to tax base reduction on bad debts within a 5-year statute of limitation, considered from the date of supply of the transactions on which the bad debt relief is intended to be applied. The Tax Authority's interpretation rejected tax base reductions on bad debts, when the irrecoverable nature of the debts was only established once the 5-year statute of limitation following the date of supply of the transactions had already elapsed due to delays in the enforcement procedures of the debts.
In an ongoing court procedure, the Pécs Regional Court decided to submit a preliminary ruling request to the Court of Justice of the European Union, to determine whether the interpretation of the Hungarian Tax Authority is in line with EU law.
According to the Court of Justice of the European Union, the previously outlined Tax Authority’s interpretation is contrary to EU law, because it could preclude taxpayers from exercising their tax base reduction rights, if the statute of limitation is considered from the date of supply of the transaction on which the bad debt relief is intended to be applied.
Thus, according to the Court of Justice of the European Union, the beginning of the statute of limitation should be considered at the point of time when the irrecoverable nature of the debts has been established in relation to the tax base reduction within the relief of bad debts.
The findings of the Court of Justice of the European Union are noteworthy, thus we advise reviewing the possibility of exercising tax base reduction rights in cases where, due to the statute of limitation, tax base reduction rights have not been exercised so far, or where the Hungarian Tax Authority has already rejected the claims due to the statute of limitations.
We remain at your disposal regarding any questions on the matter, and in providing assistance in exercising tax base reduction rights on bad debts.
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