Hungary: VAT base reduced by bad debts; five-year limitations period (CJEU judgment)

Hungary: VAT base reduced by bad debts

The Court of Justice of the European Union (CJEU) issued a judgment holding that the date triggering the limitations period when taxpayers can reduce their taxable base for value added tax (VAT) purposes by amounts of bad debts is the date when the taxpayer establishes the irrecoverable nature of the debts.

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Background

Under provisions of Hungarian VAT law, taxpayers can reduce their tax base by amounts of bad debts. This basis-reduction treatment was effective 1 January 2020.

The position of the Hungarian tax authorities has been that there is a five-year limitations period during which the tax base can be reduced by bad debts, and that this five-year period is determined by reference to the date of the supply or the subject transaction that eventually gave rise to the bad debts. The tax authority's interpretation rejected a claim that the five-year period is determined by reference to the date when the irrecoverable nature of the bad debts is only established.

In the case referred to the CJEU, the five-year period had already lapsed when measured by reference the date of the transactions (caused by delays in debt-enforcement procedures). A Hungarian regional court (Pécs) submitted the case to the CJEU for a preliminary ruling with regard to whether the tax authorities’ interpretation of the Hungarian statute of limitations was in line with EU law.

CJEU judgment

According to the CJEU, the tax authority’s interpretation is contrary to EU law because that treatment could preclude taxpayers from being able to reduce their tax base by the amount of bad debts if the statute of limitations was measured from the date of the supply or of the transaction.

Thus, according to the CJEU, the statute of limitations is triggered by reference to the point in time when the irrecoverable nature of the debts has been established (for purposes of reducing the tax base by the bad debts).  

Read a March 2021 report prepared by the KPMG member firm in Hungary

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