Italy: Amendments to VAT “bad debt” relief rules

Measure allowing taxpayers to claim “bad debt” relief for VAT purposes at the beginning of bankruptcy or insolvency proceedings

Measure allowing taxpayers to claim “bad debt” relief for VAT purposes

Decree Law no. 73 (published in the official gazette on 25 May 2021 and effective 26 May 2021) introduces a measure allowing taxpayers to claim “bad debt” relief for value added tax (VAT) purposes at the beginning of bankruptcy or insolvency proceedings without waiting for the proceedings to conclude. 

Background

Under prior rules, a taxpayer-supplier was allowed to adjust output VAT by issuing credit notes in the event of a total or partial non-payment because of bankruptcy or insolvency proceedings.

The time when taxpayers could claim such bad debt relief varied according to the type of the debtor’s proceedings.

  • If due to the customer’s insolvency, VAT recovery was possible only when foreclosure proceedings were unsuccessful.
  • If due to the customer’s bankruptcy or similar insolvency proceedings, VAT could only be recovered at the end of the proceedings.

The requirement that output VAT was not paid by customers involved in bankruptcy (or similar proceedings) and was recoverable by taxpayers only after the conclusion of the bankruptcy or insolvency proceedings was found to be contrary to the judgment of the Court of Justice of the European Commission (CJEU) in a November 2017 judgment.

New bad debt relief rules

Under the Decree Law no. 73 (referred to as the “Sostegni-bis Decree Law”), output VAT charged on supplies to customers involved in bankruptcy and similar proceedings will be recoverable (by means of credit notes) by taxpayer-suppliers from the beginning of the bankruptcy proceedings. It will no longer be necessary to wait for the proceedings to conclude.

The supplier will be entitled to issue a credit note to “recover” the unpaid output VAT from the date when a customer becomes subject to the bankruptcy or insolvency proceedings. A customer is deemed to be “subject to proceedings” from the date when: (1) a bankruptcy judgment becomes enforceable; (2) the judge orders the liquidation of the debtor’s assets; (3) the debtor enters into a creditor composition agreement (concordato); or (4) the debtor goes into special administration.

In addition, the Sostegni-bis Decree Law establishes that a customer involved in bankruptcy or insolvency proceedings does not have to adjust its VAT position upon receiving the credit note from the supplier; and if the customer later settles the debt, the supplier must adjust its VAT position by issuing a new debit note to account for the VAT. 

Increased annual limit for offsetting VAT credits for 2021

For fiscal year 2021 only, the VAT credit that can be offset against other taxes and contributions, or claimed as a refund through the fast-track procedure, is capped at €2 million (up from €700,000).
 

Read a May 2021 report [PDF 190 KB] prepared by the KPMG member firm in Italy

 

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