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Czech Republic: VAT corrections and refunds, insolvent customers

Czech Republic: VAT corrections and refunds

The Court of Justice of the European Union (CJEU) issued a judgment concluding that certain Czech rules with regard to refunds of value added tax (VAT) are contrary to an EU directive and the fundamental principles of VAT.

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An amendment to Czech VAT law (effective 1 April 2019) was in response to a prior judgment of the CJEU, and extended the scope of VAT refund for irrecoverable receivables from non-payers when previously paid VAT could be corrected.

CJEU judgment

The CJEU in the most recent judgement (A-PACK CZ, C‑127/18) found that the rules were still not sufficient to be consistent with the EU directive and the fundamental principles of VAT. At issue was whether a provision of the Czech VAT rules that prevents correcting the tax base for irrecoverable receivables when the debtors have ceased to be VAT payers is contrary to the EU VAT directive.

The Czech entity requested a refund of VAT on an irrecoverable debt from a debtor in insolvency. The Czech tax administration refused to refund the VAT, asserting that a correction was not possible under Czech law even though the customer had, in the meantime, ceased to be a VAT payer. The Czech company appealed, and eventually, the case was before the Supreme Administrative Court which referred a question to the CJEU to determine if the provision of the Czech VAT rules requiring the debtor to remain a VAT payer to allow a correction of the VAT was in accordance with the directive.

The CJEU determined that:

  • The EU Member States may limit the refunding of VAT on irrecoverable debts solely on the grounds of uncertainty as to their non-payment.
  • The requirement that makes the correction to the tax base conditional upon the debtor not ceasing to be a VAT payer does not take account of such an uncertainty.
  • The fact that the debtor ceased to be a taxable person in the context of insolvency proceedings was evidence of the definitive nature of the non-payment.
  • The provisions of the Czech VAT rules are contrary to the directive—generally, it is not possible for a VAT payer in the position of creditor to be liable to pay VAT that it did not receive from the customers.

KPMG observation

Although the case did not directly concern debtors / non-VAT payers, some tax professionals believe that the CJEU judgement may provide opportunities for creditors (VAT payers) facing the insolvency of their customers that are end-consumers and non-VAT payers. VAT corrections may also be possible in such instances. Czech legislators will now have to respond to the judgement, given that current law has been found to be contrary to the directive.


Read a June 2019 report prepared by the KPMG member firm in the Czech Republic

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