Spain: Reduction of the VAT taxable base due to bankruptcy of EU non-established clients after the Ramada Storax case (C-756/19). Possibility to apply for the correction of filed VAT returns on a retroactively basis?

Given the economic crisis resulting from the pandemic, the possibility to reduce the taxable base declared by the company for the case that a client, totally or partially, fails with its payment obligation, has significant practical implications and made it worthwhile to remind the conditions under which such a reduction is possible in the Spanish VAT regulations.

Furthermore, the impact on this issue of the Order from the Court of Justice of the European Union (CJEU) on the Ramada Storax case, adds to the actuality of our comments.

According to article 80, numbers three and four of the Spanish VAT Law, correction of the taxable base for bad debt is possible when any of the following circumstances occur:

• The customer becomes bankrupt; or

• The payment has not been settled within a certain period following the accrual of the tax (generally 12 months, small businesses being given the option to reduce it to 6 months). Special rule applies for the case that the special cash account regime applies.

In any case, according to number five paragraph 2º of said article, no correction is possible in those scenarios when the customer is a non-established company. There is no difference for the application of this rule if the non-established company is resident in another EU Member State or in a third country.

Furthermore, the correction is conditioned to keeping with certain formalities, namely:

• A correcting invoice must be issued within 3 months following the publication of bankruptcy declaration or the elapsing of the bad-debt period contemplated in the Law; and

• The taxable person must inform the VAT authorities and provide them with the required supporting documentation within one month following the correcting invoice. To this end a specific electronic form provided at the website of the tax authorities must be used (https://www.agenciatributaria.gob.es/AEAT.sede/tramitacion/G416.shtml)

Up to now, the position of the Spanish tax authorities, as shown in their answer to binding consultations on this issue, has been clear as to their denying the possibility to correct the taxable base when the bankrupt client is a non-established resident in another Member State. The situation has changed as results from binding consultation V3346-20 of 12 November 2020 where, based in the pronouncement contained in Order of the CJEU of 29 April 2020 on case Ramada Storax (Case C-756/19), the Spanish General Tax Directorate reviews its position and accepts that the correction of the taxable base is also possible when the bankruptcy of the non-resident client has been declared by a Court in another Member State eligible for the automate EU application resulting from Council Regulation (EC) No 1346/2000 of 29 May 2000 on insolvency proceedings.

As quoted by the CJEU “Articles 90 and 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as precluding the legislation of a Member State, pursuant to which the right to a reduction of the value added tax paid and relating to debts deemed irrecoverable following insolvency proceedings is refused to the taxable person where the debts concerned have been declared irrecoverable by a court of another Member State on the basis of the law in force in that Member State.”

Although the limitation resulting from said paragraph 2º of number five of article 80 of the Spanish VAT Law has not yet been removed so to conform to the pronouncement of the CJEU, the practical consequences of the binding consultation that has been commented should be:

• For the future, the criteria of the General Tax Directorate in said binding companies can by applied by companies regardless of what is said in the VAT Law since, according to article 89, 1 of Law 58/2003, the tax authorities would be obliged by the same. So, a reduction of the taxable base will be possible for the case that a non-resident client residing in another EU Member State becomes bankrupt, as far as the company complies with the formal obligations required by article 80, numbers three of the Spanish VAT Law.

• As regards VAT returns already filed, it is doubtful that the tax authorities may accept that the new criteria can also be applied and, as a result, the company may ask for a correction of the taxable base declared and a refund of the resulting reduction in the VAT quota, for the case that at the declared periods there were unpaid invoices from non-established EU clients due to bankruptcy which were not originally considered.

In any caser, we consider that, for such an scenario, there are legal grounds to apply for a correction of the VAT returns originally filed which, if denied the tax authorities, would be eligible for a claim before the Spanish Courts.

Lastly, let us mention that, as pronounced by the regional tax authorities, given the different regulation this criterion does not apply as regards the General Indirect Tax of the Canaries (IGIC) where no correction is possible when the bankrupt client is not established in the Canaries.