Bad debt relief for VAT available only to the original creditor – the EU Court judgment in case T-233/25 Mokoryte

A taxpayer who has not received payment for goods or services supplied may – subject to certain conditions – benefit from a bad debt relief, i.e. to reduce the output VAT previously paid to the tax authorities (Article 89a of the VAT Act).

However, as confirmed by the Court in case T-233/25 Mokoryte, this possibility is available exclusively to the entity that carried out the original taxable transaction, and not to an entity that has acquired the related receivable by assignment.

Background of the case

The case concerned a multi-tier commercial relationship in the construction sector in Romania. A developer entered into a contract with a contractor for the execution of a business centre project. Subsequently, the contractor subcontracted the construction works to a subcontractor – Mokoryte.

The subcontractor performed the construction works and issued VAT invoices to the contractor. As the contractor failed to settle the full amount due, the parties entered into an agreement under which the contractor paid part of the outstanding amount and, in respect of the remaining balance, assigned to the subcontractor a receivable owed to the contractor by the developer.

In practice, this meant that the subcontractor stepped into the contractor’s position as creditor against the developer. However, the developer declared bankruptcy and failed to settle the amounts due to the subcontractor, and the receivable ultimately proved irrecoverable.

The subcontractor took the view that, since it had economically borne the burden of the irrecoverable receivable, it should be entitled to claim bad debt relief. It therefore issued corrective invoices, reduced its output VAT and applied for a tax refund.

The Romanian tax authorities denied the right to adjust VAT, indicating that services were supplied to the contractor, not the developer. Consequently, only the contractor could exercise the right to reduce the taxable amount.

The company challenged this decision, and the case was referred to the court, which submitted a preliminary question to the CJEU as to whether Article 90 of the VAT Directive should be interpreted as allowing an assignee of a receivable to adjust VAT where the final debtor fails to make payment.

Judgment

The Court adopted a negative position, emphasising that the right to reduce the taxable amount under Article 90(1) of the VAT Directive is linked to the status of the taxable person liable to pay VAT in respect of a specific taxable transaction.

In the Court’s view, the assignment of a receivable cannot result in the transfer of the obligation to pay VAT due in respect of that transaction, nor the right to adjust the taxable amount for VAT purposes, irrespective of its effects under national civil law.

The Court also noted that, in the case at hand, the receivables between the subcontractor and the contractor had been economically settled – partially through payment and partially through the assignment of the receivable. This means that, from the perspective of the initial transaction (subcontractor–contractor), the claim had been satisfied.

The non-payment occurred only within the second relationship between the contractor and the developer. It was therefore the contractor who remained the taxable person that had accounted for VAT on that transaction and who could potentially benefit from an adjustment.

Consequently, the Court held that the right to reduce the taxable amount provided for in Article 90(1) of the VAT Directive cannot be exercised by a subcontractor acting as an assignee, who is not the taxable person liable for VAT on that second transaction.

Significance of the judgment

The judgment confirms a restrictive approach to bad debt relief, under which the right to adjust VAT is linked to a specific taxpayer and a specific taxable transaction.

This means that the right to bad debt relief is available exclusively to the direct supplier or service provider who has declared output VAT, whereas the acquisition of a receivable by way of assignment does not confer a right to adjust VAT, even if the assignee bears the economic burden of non-recovery. It should also be noted that Polish regulations explicitly address situations where a creditor disposes of its receivable before the lapse of 90 days from the payment due date, which precludes the application of bad debt relief (Article 89a(1a) of the VAT Act). The judgment therefore complements Polish provisions by excluding the possibility of applying bad debt relief by the new creditor following assignment.

In practice, particular caution should be exercised by entities operating in multi-tier structures, especially contractors and subcontractors in the construction sector, where receivables assignments are a common method of settlement.