Effective as of January 1, 2023, Bulgaria’s Value Added Tax Act (VATA) was overhauled, introducing a comprehensive system for reducing VAT related to outstanding invoices. This framework targets scenarios in which suppliers render it unattainable to collect payments for taxable supplies, offering a mechanism to reduce both taxable base and VAT amounts.
To qualify for a VAT reduction, several specific criteria must be satisfied:
Invoice Issuance: An essential requirement is the issuance of a formal invoice for the supplied goods or services, adhering to the specifications outlined in Article 86 of the VATA.
No Related Parties: The recipient of the supply and the supplier should not be considered related parties at the time of delivery or when the circumstances leading to the classification of the claim as uncollectible occur. This condition prevents undue advantage within connected business entities.
Non-Transfer of Receivable: The receivable, stemming from the taxable supply, should not have been assigned to another party against consideration. This restriction helps prevent tax manipulation through the transfer of claims.
Collection Efforts: To ensure that VAT reductions are legitimate, the supplier must demonstrate efforts to collect the receivables associated with the supply. This condition aims to discourage any attempts to circumvent VAT obligations.
Recipient Notification: If the recipient was a registered VAT person at the time of delivery, the supplier is obligated to send a written notification indicating that they consider the claim uncollectible. Crucially, this notification should be substantiated by evidence that it was duly sent to the recipient’s management address.
Under Article 126a of the VATA, several prerequisites categorize a claim as uncollectible, making it eligible for a VAT reduction.:
Time Limits: After three years for claims subject to a 3-year limitation period or 5 years for claims with a 5-year limitation period, the claim becomes uncollectible. This provision prevents protracted claims from indefinitely affecting VAT obligations.
Court Decisions: If a valid court decision declares a claim, or a portion of it, as non-due, the claim is considered uncollectible for the non-due portion. This legal ruling provides clear guidance on the validity of claims.
Legal Repayment when the debt has been repaid by virtue of law: Claims repaid by law are regarded as uncollectible, ensuring that only genuinely uncollectible claims receive VAT reductions.
Enforcement Proceedings: When enforcement proceedings are completed, and the claim remains either fully or partially uncollected, it is classified as uncollectible. This condition protects suppliers from VAT obligations when their claims are genuinely uncollectible.
Debtor’s Bankruptcy: In scenarios where the debtor (the recipient) undergoes bankruptcy proceedings that result in an unsatisfactory settlement of the supplier’s claim, the debt is deemed uncollectible up to the amount of the unsatisfied part. This provision aligns VAT obligations with the realities of bankruptcy proceedings.
365-Day Rule: To expedite VAT reductions for smaller debts, those with a value of up to BGN 600 are considered uncollectible if they remain unpaid 365 days after their due date. This rule ensures prompt handling of minor uncollectible claims.
Debtor’s Deletion: After bankruptcy or liquidation proceedings, if the debtor is removed, and the claim remains partially unsatisfied, the debt is considered irrevocably uncollectible up to the amount of the unsatisfied portion. This ensures that VAT reductions are aligned with the outcome of legal processes.
Bulgaria’s recent modifications to its VAT regulations, specifically regarding VAT reductions for bad debts, introduce a coherent framework that caters to modern economic realities.
By establishing distinct conditions, circumstances, and procedures, these changes aim to simplify VAT compliance while accommodating the evolving business landscape.
It is essential for both suppliers and recipients of VAT-eligible supplies to be aware of these changes to ensure full compliance and minimize complexities when confronted with uncollectible claims.
Eurofast team in Bulgaria keeps the finger on the pulse of fiscal amendments affecting businesses. For more information please contact our office in Sofia at: firstname.lastname@example.org
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