VAT recovery related to bad debts

Law 66-B/2012, dated 31st of December, has introduced significant changes to the Portuguese tax regime for the recovery of VAT related to bad and unrecoverable debts, establishing a clear distinction between “bad debts” and “unrecoverable debts”.

In this sense, some modifications were introduced to the Portuguese VAT Code defining new rules and procedures to the VAT recovery from debts that become due after January 1, 2013.

For VAT purposes it should be considered as a bad debt a debt that has a duly justified risk of non-receivable, as follows:

►► Credits outstanding for more than 24 months for which there is a clear evidence of impairment and that efforts have been made to collect such debts;
►► Credits outstanding for more than 6 months not higher than €750, including VAT, when the client is a private person or a taxpayer that performs exclusively exempt transactions without the right to VAT deduction.

For this purpose the due date is considered as the payment date established in the agreement between the Company and the client.

Regarding the VAT recovery procedure related to these bad debts, it now requires a previous authorization to the Portuguese Tax Authorities (PTA), which should be submitted via internet and presented within a period of 6 months counting from the date when such credits were considered as bad debts.

Note that all supporting documentation to VAT recovery should be certified by a Statutory Certified Auditor (“Revisor Oficial de Contas”). This official certification should be performed for each document as well as for each period that the VAT to recover relates to.

As a mere example, taking into consideration a debt which is overdue since January 2013, it may be considered as bad debt in January 2015. Therefore, the deadline to request for the VAT recovery ends in June, 2015.

Last but not least, we note that in case the taxpayer does not conclude the request for the VAT recovery related to bad debts within the mentioned deadline, such recovery is no longer allowed, even if the debt become deemed irrecoverable.