Authorization to reduce VAT by amounts corresponding with claims against the debtors in bankruptcy

Authorization to reduce VAT by amounts corresponding with claims against the debtors in bankruptcy

At the end of 2014, the Supreme Administrative Court issued Decision No. 9 Afs 170/2014 - 47, which dealt with the permission of creditors to reduce the value added tax on output by amounts corresponding with outstanding claims against the debtors in bankruptcy.

According to § 44 para. 1 of Act no. 235/2004 Coll., On Value Added Tax, the taxpayer, who was, during the taxable event against another taxpayer, obliged to pay tax and whose claims had arisen six months before the bankruptcy decision at the latest and had not ceased to exist, is entitled to correct an amount of output tax of the value of ascertained claim provided it met the respective statutory conditions.

The age of claims for which the repair tax can be performed, i.e. the interpretation of the six-month test period, was the main legal issue in the respective proceedings at the Supreme Administrative Court. The time test which defines claims eligible for tax repair is defined in law as follows: „claim, which had arisen six months before the court's bankruptcy decision at the latest.”

Consistent interpretation of the professional public and established practice of tax administrators were such that a correction is allowed for claims which arose earlier than six months before declaration of bankruptcy. The main supportive argument for this interpretation was that if the law stipulated the claim needed to arise six months before the declaration of bankruptcy at the latest, it declared the latest possible moment when the claim may have arisen; i.e. any claims which arose in the later in time were exclude. The second argument was that the aim of the law was to avoid speculative “creation” of claim in last month before the debtor went officially bankrupt.

The Supreme Administrative Court, however, in this case accepted exactly the opposite interpretation and confirmed the Regional Court's opinion that the claims eligible for tax repair must arise no later than six months before the declaration of bankruptcy. In other words, the tax repair is allowed only in respect of claims which arose no more than six months before the declaration of bankruptcy. The Supreme Administrative Court explicitly stated: „it is clear from the law that the time period in which claims eligible for repair must arise preceded the bankruptcy decision, and must therefore be assessed in terms of the passage of time into the past, and that from the date of the bankruptcy decision. The court's bankruptcy decision is the moment, which is connected with the reverse of flow of time.”