Euler is a Hungarian insurance company which offered an insurance product under which the company undertook, under an insurance contract, to pay compensation in the event of non-payment of claims by its insureds against third parties. The indemnity was in principle 90% of the value of the unpaid claim plus VAT. Under the insurance contract, the indemnity was accompanied by the transfer to Euler of the part of the claim insurance corresponding to its value and all rights originally belonging to the insured. Once the contract had come into force, two possibilities arose: either Euler, as a creditor with full rights, filed a petition for the opening of liquidation proceedings against the debtor in its own name, or it filed a creditor’s claim in its own name in the liquidation proceedings already opened. As a result, the actual burden of the VAT, which the insured parties had previously paid into the budget but failed to pass on to their buyer, was borne by Euler.

Euler has submitted an application to the Hungarian Tax Authority for the reimbursement of the VAT amounting to HUF 225 855 154 and EUR 128 240,44 on the irrecoverable debts and for the payment of default interest. The application was rejected on the basis of the CJEU decision in the Porr Case (C 292/19). According to the decision, only taxpayers who have previously fulfilled their obligations to declare and pay tax on the goods and services they have supplied as the basis of the irrecoverable debts, and who have therefore been obliged to declare and pay tax, may benefit from the possibility of reducing the tax base. Since Euler was not obliged to declare or pay the tax on the supplies of goods and services underlying the claims in question, it cannot benefit from the reduction of the tax base under the decision of the tax authorities. Euler appealed against the decision and the case was referred to the CJEU.

Euler argued that, as it was the legal successor to its policyholders in respect of the debts, it was entitled to claim a VAT refund because it had become the civil successor to the policyholders under the insurance contract. The company further argued that the right to recover VAT on irrecoverable debts is conferred on it by Community law, subject to the principle of fiscal neutrality.

The CJEU based its decision primarily on Article 90(1) of the VAT Directive. Paragraph 1 obliges Member States to reduce the taxable amount and, consequently, the amount of VAT payable by the taxable person in all cases where the taxable person does not receive all or part of the consideration following the supply of the goods or services. This provision is the practical implementation of the principle of tax neutrality, according to which the taxable amount is the consideration actually received. The CJEU has stressed that the exercise by taxable persons of their right to reduce the VAT amount before the tax authorities requires, inter alia, that the taxable person must provide sufficient evidence that some or all of the consideration has not been definitively received after the conclusion of the transaction.

The CJEU, referring to its previous case law, has held that a transaction ‘for consideration’ presupposes the existence of a direct link between the supply of goods or services and the consideration actually received by the taxable person. However, the case-law does not exclude the possibility that the consideration for the goods or services is provided by a third party, so that, on balance, it can be said that the decisive element for qualification is that the consideration is actually paid.

Euler paid compensation to the insured taxpayer’s customers in an amount corresponding to 90% of the claims including VAT. In this context, it can be seen that the part of the claims for which Euler paid compensation was received by the insured persons as consideration for the taxable transactions in question and cannot therefore be regarded as constituting a case of ‘non-payment’ within the meaning of Article 90(1) of the VAT Directive. It follows that this part of the debt cannot give rise to a right to a reduction in the VAT base for the taxable customer.

The CJEU also pointed out that the insurer in Euler’s situation could in no way be identified as a taxable person entitled to a reduction of the taxable amount who would fall within Article 90(1) of the VAT Directive in respect of the part of the claims covered by the indemnity and the assignment. In support of that argument, it argued, first, that to recognise that would be contrary to the principle of tax neutrality and, second, that the VAT paid to the tax authorities would not be strictly proportionate to the price actually received by the taxable persons carrying out the taxable transactions in question.

Conclusions

The CJEU’s decision is significant in several respects. On the one hand, the previous case law of the CJEU has resulted in mostly favourable rulings for taxpayers in relation to the recovery of VAT on irrecoverable debts, a practice which the above judgment seems to overrule. The CJEU’s approach is also novel in that it interprets the payment of sums by the insurer under the above agreements as a payment of consideration by a third party. Although the Court in this case refers to the service as insurance, the agreements appear very similar to factoring. However, in the Euler Hermes case, it can be noted that input VAT on services which give rise to an original debt cannot become input VAT of the factor or the insurer under EU law.