Abstract
This paper discusses the current Czech and European legal framework applicable to the adjustment to the taxable amount with respect to claims partially cancelled due to the insolvency of the customer resolved by reorganisation. The partial cancellation, according to the authors, serves as grounds to adjust a taxable amount under the EU VAT Directive. The supplier is entitled to issue a corrective invoice and claim a refund of a proportion of the VAT paid with respect to the delivery of goods or services to an insolvent debtor. However, such practice is not yet followed by the Czech tax authorities who do not allow for a reduction of a taxable amount in reorganisation and only allow such reductions in the case of bankruptcy liquidation. The paper argues that this approach is not compatible with European law. Moreover, such a different treatment of VAT payers in bankruptcy liquidation (resulting in higher satisfaction of VAT taxpayers as creditors) puts reorganisation at a considerable disadvantage and is contrary to the basic principles of insolvency law. Finally, the paper argues that the corresponding claim of the tax authority resulting from the VAT base adjustment constitutes a standard pre-insolvency claim and should not be preferred in the insolvency proceedings under Czech law.
Highlights
The reorganisation of MOTORPAL, a.s. was one of the first which intensively opened the question of whether creditors that are VAT payers may make an adjustment to the output VAT taxable amount in the event of partial cancellation of their claims as a result of the reorganisation plan’s entry into effect
No 11 VSOL 6/2016-57 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax Interpretative opinion No 6 of the Expert Group for Insolvency Law of 4 October 2011 Act No 182/2006 Coll., on insolvency and methods of its solution Act No 235/2004 Coll., on value added tax Act No 294/2013 Coll., amending Act No 182/2006 Coll., on insolvency and methods of its solution (Insolvency Act)
Summary
The reorganisation (in Czech reorganizace) of MOTORPAL, a.s. was one of the first which intensively opened the question of whether creditors that are VAT payers may make an adjustment to the output VAT taxable amount in the event of partial cancellation (in Czech zánik) of their claims as a result of the reorganisation plan’s entry into effect. Pursuant to the provision of Section 74(1) of the VAT Act (again in accordance with Article 185(1) of the VAT Directive,[6] as the basis for the transposition of that provision into national legislation), the debtor’s mirror obligation arises to make an adjustment to the tax deduction in the taxable period when it became aware of the decisive circumstances for an adjustment This is again the point when the reorganisation plan becomes effective unless laid down by the reorganisation plan that the claim (or any part thereof) is cancelled later
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