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Bad debt relief for VAT

Estonian Parliament adopted changes to the VAT Act on 10 February 2021, which inter alia prescribe that under certain conditions taxable persons can adjust from 1 January 2022 their output VAT declared in previous VAT returns, if this relates to bad debts, i.e. VAT invoices issued to customers, which are wholly or partially unpaid.

The conditions and order of the respective adjustment are established with the new § 291 of the VAT Act. The wholly or partially unpaid invoice will be treated for VAT as a bad debt, when all the following conditions are met:

• the VAT invoice, which is wholly or partially unpaid, has been issued by the taxable person for the goods supplied or services provided;
• the VAT amount calculated on this supply has been declared in the respective monthly VAT return;
• the debt claim has not been alienated;
• at least 12 months (this criteria will not be applicable if the claim exceeds EUR 30 000, when there must be also a court settlement that has entered into force), but not more than three years, has elapsed from the due date of payment of that VAT invoice;
• the claim has been written off in the accounting of the taxable person, as it was unable to collect that claim, regardless of its efforts to make the utmost for collecting that claim, or the costs for recovering that claim will exceed the estimated income to be accrued;
• if the claim exceeds EUR 30 000, then such claim must be proved with the court settlement that has entered into force;
• the recipient of the goods supplied or services provided is not a related person in the meaning of the Income Tax Act;
• at the month of write-off of the claim, the taxable person has informed  in written the recipient of the goods or services about the write-off of the claim in its accounting and has specified therein the VAT amount related to the written-off claim.

In the explanatory letter to the draft law amendment has been described that there are no other requirements for submitting the write-off information. However, in such a case it is not correct to submit the credit invoice to the debtor, as the credit invoice should be issued upon the adjustment of supplies of goods and services, but not upon the write-off of bad debts. That requirement for informing the debtor must be treated in combination with the write-off requirement – it was not possible to collect the claim, regardless of efforts to make the utmost for collecting that claim from the debtor. Thus, in case where it is not possible to submit the information, for example when that customer has been liquidated and the contact details to whom and where to submit the information are missing, then in these circumstances upon the fulfilment of other conditions the taxable person is entitled to adjust its output VAT due to such bad debt.

The referred law amendment also prescribes the time period for such VAT adjustment – the tax period, when the claim has been written off in the accounting of the taxable person. If in future the written-off claim will be partially or fully paid, then the taxable person must account it in its output supplies in that tax period, when the claim was partially or fully paid. There is also prescribed the liability of the debtor to adjust its input VAT in relation to such partially or fully unpaid VAT invoice and account it as its VAT liability in the tax period, when the debtor received information from the supplier about the write-off of the claim, provided that the debtor had partially or fully deducted the respective input VAT from its output VAT.

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