Up until recently, the VAT Act did not provide a clear mechanism for traders to recover VAT where a receivable has become uncollectible. In several judgments, the CJEU has ruled that this is in breach of the basic principles of VAT legislation.

Therefore, an amendment to the VAT  Act has been adopted, which entered into force on 1 January 2023. This amendment provided for the possibility to reduce the taxable amount of supplies for which the receivables have become uncollectible. In other words, clear rules are now provided for the refund or deduction of VAT charged on such receivables.

The law explicitly lists the circumstances under which a receivable will be considered uncollectible, such  as:

• repayment of the receivable by operation of law or expiry of 3 or 5 years depending on the limitation period of the receivable;
• a final court decision declaring that the receivable or part of it is not due;
• following unsuccessful enforcement proceedings;
• deletion of the debtor after liquidation or bankruptcy;
• others.

Small receivables - of up to BGN 600 will be considered uncollectible after 365 days from the moment they became due.

What are the conditions for the  application of the mechanism:

• the supplier has charged VAT by issuing an invoice in accordance with the requirements of the law;
• the supplier can prove that they have taken action to recover the supply receivables;
• the trader proves that they have notified the debtor that they consider the receivable to be uncollectible –  this condition applies only if the debtor is VAT registered;

The law also provides for cases in which the mechanism cannot be applied, namely:

• if the supplier and the recipient are related persons;
• if the supplier has assigned the receivable
• where, at the time of delivery, the trader knew that they would not receive payment. This is presumed if the delivery is illusory, circumvents the law, or is at a price that differs significantly from the market price.

The mechanism is applied by issuing a report or a credit note depending on whether the debtor has been registered for VAT. For receivables over BGN 100,000, a permission from the NRA to apply the mechanism should also be requested.

The document reducing the tax base and the tax due is issued within three months of the uncollectibility arising.

Amendments to the Implementing Rules of the VAT Act are still to be adopted and will further specify the procedure.

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