The VAT refund on a purchase of goods from a bankrupt company

At the end of last year, the Constitutional Court gave the clarifications that touched upon the practice of the courts, applying the rules on VAT refunds in case purchasing goods from a bankrupt company (Decision of the Constitutional Court of December 19, 2019 No. 41-P).

After that, the Federal Tax Service prepared an internal letter, containing recommendations for the lower tax authorities. We should recall that up to this point, the courts were interpreting the rule of this law in different way - some refunded VAT, others refused to refund.

What has changed now? It is established now that if the buyer purchased the goods from the bankrupt company, he has a right to refund VAT on it. However, we are talking about goods that the bankrupt company produced in the course of its normal business activities.

At the same time, VAT will not be refunded if the buyer or the bankruptcy trustee of the bankrupt company was informed that the seller was unable to pay tax. In such a case, the Federal Tax Service recommends not to refund VAT if the debtor conducts unprofitable activities. This position makes it practically impossible for the buyer to refund VAT.

It is also explained that the buyer's awareness of the seller’s insolvency can be confirmed if there is interdependence between the buyer and the seller, or if the buyer received a notification from the tax authority about the insolvency of his counterparty.

However, the tax authorities also clarified that the Constitutional Court forbade the tax authorities to refuse to deduct VAT, if the Federal Tax Service is involved in the bankruptcy process of the debtor and has not taken measures to stop the production of its products.