Credit Insurers confronted with the VAT limits of Bad Debt Relief!

European VAT provisions (article 90 of the VAT Directive 2006/112/EC) allow for the reversal of output VAT in case of non (or partial) payment. In the past, the European Court of Justice consistently ruled against EU countries which do not allow refund of VAT paid on bad debts.

There are countless court rulings confirming that VAT should be neutral to businesses and that the tax authorities may not, in any circumstances, collect a VAT amount exceeding the tax which the taxable person has himself received as compensation.

The recent European judgment (Euler Hermes; C-482/21) revolves around the question of whether credit insurers are able to reclaim VAT on unpaid debts.
Factual context

Euler Hermes (EH) is an insurance company that offers coverage for unpaid debts. EH pays insured persons an indemnity which usually covers 90% of the value of the debt, plus VAT. This means EH bears the burden of the VAT that the insured person couldn't collect from their client.

EH applied for a refund of VAT on the basis that it paid VAT for a debt that had become uncollectible. However, the tax authority declined the refund application, on the grounds that the transactions leading to the lost debts were not conducted by EH. Therefore, one of the substantive requirements for a VAT refund had not been fulfilled.

Notably, until January 1, 2020, Hungarian VAT law was also in violation of EU law, as it prohibited refunds for VAT on bad debts.


The Court began its analysis by examining the relevance of Article 90(1) of the VAT Directive to EH and pointed out that the formalities required for a taxable person to reduce the output VAT should only be limited to what is essential to show that payment will not be received. Article 90(2) gives Member States limited discretion in cases where non-payment is uncertain, but it does not permit them to deny cases where full payment has not been received.

The Court went on to clarify that supplies done "for consideration" should have a direct connection between the supply and the payment received. However, it is not necessary for the payment to come directly from the recipient of the supply.

In casu, the "suppliers" received 90% of the debts from EH, which the Court considered to be the consideration for their supply; meaning that the debt cannot be regarded as "unpaid". Therefore, a taxable person cannot reduce the payable VAT under Article 90(1) for that supplier.

In short: the Court ruled that a taxable person who carries out supplies "for consideration" can exercise their right to lower the payable VAT. An insurer, however, cannot be considered as the supplier and therefore, not entitled to a reduction of the payable VAT under Article 90(1), as doing so would contravene the principle of fiscal neutrality.


The ruling may have significant implications for credit insurers in EU countries, including Belgium.

Under the current Belgian rules, if a credit insurance contract did not exclude the VAT amount, the credit insurer, to the extent that they took over the rights of the insured, have the possibility to claim VAT refund for the lost portion of the debt.

It remains to be seen how the authorities will respond to this ruling. To be continued!