• Service: Tax, Global Indirect Tax
  • Type: Business and industry issue
  • Date: 6/24/2013

Portugal – New bad debt relief rules 

GITB June 2013 - Portugal
The State Budget Law for 2013 has introduced significant changes that affect the general rules applicable to the VAT recovery related to bad debt relief, creating additional requirements to perform VAT adjustments.

On this basis, two different regimes are established, one for debts that become due before 1 January 2013 (“old regime”) and another one for the debts that become due from that date onwards (“new regime”).

Regarding the old regime, the existing requirements for the VAT recovery on bad debts – based on the taxable status of the debtor, value of the debt and type of judicial proceeding in place – are maintained, however, significant restrictions and additional requirements are introduced for the recovery of VAT in insolvency procedures.

Regarding the new regime, a clear distinction between “bad debts” and “irrecoverable debts” is made, with specific conditions for recovery in each one of the situations.

In the case of bad debts in default for more than 24 months, the recovery is allowed upon previous authorization from the tax authorities, provided the asset has been derecognized for accounting purposes and that procedures to recover the bad debt have been undertaken. For this purpose, a request must be filed electronically within a maximum period of 6 months. This is counted from the date on which the credits are considered as bad debts. This request is presumed allowed/ approved after 8 months when the credit’s value is not higher than EUR150,000 (VAT included). In practical terms, under this new provision, taxpayers will be required to await a period of 32 months or more to recover VAT on bad debts.

The invoices underlying the bad debts, the debtors’ identification, the amount of the VAT to be adjusted and the recovery efforts carried out by the taxpayer should be previously certified by a statutory auditor.

For irrecoverable debts, that is, debts deemed irrecoverable within the scope of specific judicial proceedings (e.g., special revitalization process, extrajudicial recovery process, insolvency proceeding), the new regime also requires the certification by statutory auditor, stating that all the legal requirements for the deduction are complied with.

Additionally, in specific situations, the recovery of VAT is not allowed, namely whenever (a) the credits are covered by insurance; (b) the credits are owed by individuals or legal persons with “special relations” with the beneficiary; (c) at the time of the transaction, the acquirer or recipient is mentioned in the list of public access of terminated enforcement procedures; (d) the acquirer has been declared bankrupt or insolvent in judicial proceedings; (e) the credits are of the State, Autonomous Regions and Municipalities; and (f) a transfer of bad debts has occurred.

The new regime implemented is inevitably more complex for the recovery of VAT on bad debts, requiring additional and burdensome administrative procedures for the taxpayer, as well as having a significant cash-flow impact, due to the postponement of the eligible timeline for the VAT recovery imposed for bad debts.

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Alexandra Martins

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Global Indirect Tax Brief: June 2013

GITB: June 2013
Articles in this edition highlight the increasing importance of indirect tax as one of the most important sources of revenue for governments.