Offsetting of Value Added Tax Claim and Input Tax Credit in Bankruptcy Proceedings

Facts

The case concerns the treatment of value added tax in the bankruptcy proceedings of a corporation. The key questions are:

• How should the input tax deduction be handled in the event of reductions in consideration during bankruptcy proceedings?
• How should advance and dividend payments to creditors be treated for value added tax purposes?
• To what extent may the Federal Tax Administration offset its input tax credit against its value added tax claim?

Considerations

The Federal Supreme Court reaches the following conclusions

1. Input Tax Deduction in the Event of Reductions in Consideration With the granting of the deferment of bankruptcy, a case of reduction in consideration within the meaning of Art. 40 VATA occurs. The debtor in bankruptcy must therefore correct the input tax deduction accordingly. The Federal Tax Administration was allowed to make a lump-sum reduction in the input tax, as the debtor in bankruptcy had not provided proof of the payments to suppliers. As soon as proof is provided, the input tax deduction must be corrected again.

2. Treatment of Advance and Dividend Payments Advance and dividend payments to creditors in bankruptcy proceedings are to be classified as consideration for services. The creditor must accordingly correct the tax base for value added tax. The debtor in bankruptcy is entitled to…