VAT01/08/11 / cata_tax-news

Corrected VAT applicable to receivables due from debtors in insolvency proceedings

The General Financial Directorate (the “Directorate”) has provided information on application of the provisions of the VAT Act concerning correction of the VAT applicable to receivables due from debtors in insolvency proceedings. The cited document stipulates that receivables arising prior to 1 April 2011 may be corrected.

The amendment to the VAT Act effective from 1 April 2011 introduced the possibility to correct the amount of the tax applicable to receivables due from debtors in insolvency proceedings. Taxpayers may thus reduce their tax duty under certain circumstances if they have outstanding receivables from which they have already paid the VAT. The correction of the amount of the tax is considered as a separate taxable supply and may be carried out in the taxation period in which the relevant legal conditions were fulfilled (for example when a tax document for such correction is delivered to the debtor).

Claim to tax deduction on the basis of a tax document provided by a tax-nonpayer

The recipient of the taxable supply is entitled to receive a VAT deduction if it presents a document provided by a tax-nonpayer in the event that the provider should have become a taxpayer prior to the taxable supply but did not become such taxpayer since it failed to fulfill the registration duty.

On the basis of the negotiations of the Directorate’s Coordination Committee with the Chamber of the Tax Advisors of the Czech Republic held on the grounds of a judgment of the European Court of Justice[1], the Directorate provided a standpoint concerning the possibility to raise a claim to VAT deduction on the basis of a document provided by a non-taxpayer.

A person obliged to pay the tax becomes a taxpayer on the day when such person receives a service from a person who does not have its domicile or registered office in the Czech Republic. Non-fulfillment of the registration duty cannot have an influence on whether such person acquires the position of a taxpayer and, if a tax document is issued with all legal particulars – except for the tax identification number of the taxable supply provider – the taxpayer receiving the supply from such person is entitled to apply a tax deduction.  

Similarly, if a person obliged to pay the VAT due to exceeded registration turnover determined by law becomes a taxpayer but fails to fulfill its registration duty and issues a tax document containing all particulars, the claim to tax deduction can be raised at the moment when such person should have been registered if it had duly fulfilled its duty.

The taxpayer that raised such claim will have to demonstrate that the supply provider should have been registered as a VAT payer at the moment of the taxable supply but failed to do so.

Definition of establishment pursuant to an EU Council Regulation

On 1 July 2011, the EU Council Regulation took effect setting forth a decree implementing the Common System of VAT Directive. The regulation amends the definition of establishment for the VAT purposes and determines the place of supply where services are to be provided to such establishment. Establishments or branches that have not yet been registered for the VAT purposes should pay increased attention to the provisions set forth by the cited regulation.

Any establishment or branch can newly be considered for the VAT purposes as an establishment that has reached a sufficient level of stability and the structure of its human as well as technical resources is appropriate and enables the establishment to receive and use services intended for its own needs. Performance of economic activities is not a parameter necessary for an assessment whether or not the relevant entity constitutes such an establishment.

The above-mentioned facts indicate that the Czech VAT may apply to services provided to establishments complying with the definition stipulated by the above Regulation and in certain events, an obligation may arise on the part of establishments conducting business in the Czech Republic to be registered in respect of the VAT. 

For the sake of completeness, we add that EU Council Regulations are binding on all entities and need not be necessarily implemented in the form of national legal regulations.

[1] ECD’s judgment No. C-438/09