Dutch Supreme Court Clarifies VAT Bad-Debt Relief

The Dutch Supreme Court's judgment of 24 April 2026 addresses a recurring VAT question: when a business relies on bad-debt relief to recover VAT on an unpaid claim, does it matter that the entity holding the claim and the entity that delivered the underlying goods belong to the same VAT fiscal unity? In ECLI:NL:HR:2026:713, the Court holds that it does, overturning a Court of Appeal ruling that had let a telecom fiscal unity reduce its VAT liability by treating unpaid consumer-credit instalments as unpaid consideration for phone deliveries.

The case concerns the interaction between bad-debt relief in Article 29(1) of the Dutch VAT Act 1968, implementing Article 90 of the VAT Directive, and the fiscal unity concept in Article 7(4). The taxpayer, a fiscal unity of telecom-related companies, sold phones to consumers who could pay in full or take out an interest-free consumer credit. When consumers later failed to pay credit instalments, the fiscal unity claimed a reduction of the VAT paid on the original phone deliveries. The Court of Appeal agreed, reasoning that since the companies belonged to the same fiscal unity, it did not matter which entity was actually owed the money. The Supreme Court disagreed: fiscal unity status does not remove the need to establish, from the actual contracts with the consumer, which claim is unpaid and why.

Facts and circumstances

The taxpayer is a fiscal unity under Article 7(4) of the Dutch VAT Act. Two members are relevant: A BV, which sells phone subscriptions and phones, and B BV, an AFM-licensed consumer credit provider. A consumer buying a phone from A BV can pay in one go or finance it through an interest-free "device credit" agreement with B BV, required whenever the price is not paid in full.

A consumer choosing credit signs, in one document, a subscription agreement with A BV and a legally separate device credit agreement with B BV, each with its own conditions; subscription terms apply only supplementarily, and facts affecting one agreement do not affect the other. Payments are applied first to the device credit debt, then to subscription charges. A BV also handles billing, collection and dunning of device credit instalments for B BV under an outsourcing agreement.

A BV invoices the consumer for the phone delivery, while the fiscal unity accounts for the VAT due on that supply, including where the phone is financed through B BV's device credit. Some consumers subsequently failed to pay part of their instalments. The fiscal unity deducted the VAT it considered attributable to these unpaid instalments from VAT due in its Q1 and Q3 2018 returns, and separately requested a refund for Q4 2018. The inspector disagreed, arguing that unpaid instalments relate to obligations under the device credit agreement, not the earlier phone delivery, and issued additional assessments for Q1 and Q3 while rejecting the Q4 refund.

The dispute therefore raised two connected questions: whether A BV and B BV belonging to the same fiscal unity means it is irrelevant which company is actually owed the unpaid amount, and whether a direct link exists between the unpaid credit instalments and the consideration for the phone delivery such that non-payment of the former can reduce the taxable amount of the latter.

The Hague District Court ruled against the taxpayer: the phone delivery and device credit are separate supplies by different legal entities, unaffected by fiscal unity status, and since the price was, in its view, paid in full at delivery through B BV's loan, non-payment of instalments could not equal non-payment of the phone's price. The Hague Court of Appeal reversed this, holding the direct link should be assessed mainly from an economic and financial perspective, that no distinction should be drawn within a fiscal unity given its purpose, and that it did not matter which member delivered the phone, relying on the CJEU's Norddeutsche Gesellschaft für Diakonie judgment for the view that fiscal unity, for VAT purposes, takes precedence over the underlying civil-law and company-law structure.

The State Secretary for Finance appealed on two grounds: that the Court of Appeal attached far too sweeping consequences to the fiscal unity, disregarding the distinct contractual relationships the individual companies maintain with third parties, and that it overlooked that payment for the phone had effectively occurred, if necessary through novation converting the purchase debt into a loan debt outside the scope of Article 29.

Legal framework

Under Article 8(1) of the Dutch VAT Act, VAT is calculated over the consideration received for a supply. Article 29(1) provides that where invoiced consideration is wholly or partly not received after the supply took place, the taxable amount must be reduced accordingly, entitling the supplier to a refund; this implements Article 90 of the VAT Directive. The taxable amount presupposes a direct link between the supply and the consideration, and that same direct link must be established for a reduction under Article 29(1): the specific unpaid consideration must correspond to the specific supply for which VAT was charged.

Article 7(4) allows financially, economically and organisationally interlinked persons to be treated as a single taxable person, a fiscal unity. Per the CJEU's Norddeutsche Gesellschaft für Diakonie judgment, a VAT group exists solely for VAT purposes; each member keeps its own legal form, but the group concept takes precedence, for VAT purposes only, over civil-law or company-law distinctions. Per the CJEU's Finanzamt T II judgment, supplies members legally perform for third parties are treated as supplies of the fiscal unity as sole taxable person, while supplies between members of the same unity fall outside VAT altogether.

Judgment of the Supreme Court

The Supreme Court agrees with the State Secretary's first ground. Even where supplies are attributed to a fiscal unity for VAT purposes, applying Article 29(1) still requires establishing the direct link between the unpaid consideration and the relevant supply. Legally, it is not the fiscal unity itself that enters into contracts with third parties, but its individual members, and it is those underlying relationships that determine whether a direct link exists and to whom, and for what, a consumer is obliged to pay.

Assessing this direct link "mainly from an economic and financial perspective," as the Court of Appeal did, finds no support in the law, even given that the fiscal unity concept takes precedence over civil-law or company-law forms. That precedence means supplies a member legally performs towards a third party are attributed to the fiscal unity, and intra-group supplies fall outside VAT. It does not follow, however, that it becomes irrelevant for what reason, or to which member, a third party owes payment. The rule that intra-group flows are disregarded for VAT applies between fiscal unity members; it has no bearing on supplies the fiscal unity, through a member, performs towards third parties. Where a VAT rule's application, as with Article 29, depends on the specific legal relationship with a third party, it remains necessary to establish under which contract, and towards which member, that payment obligation exists.

The Supreme Court therefore holds that a fiscal unity can only invoke Article 29(1) for an irrecoverable claim of a member if that claim, per the contractual relationships with the third party, constitutes the consideration directly linked to the specific supply for which VAT was charged and remitted. The burden of proving this rests on the fiscal unity; only then can it be said the tax authorities received more VAT than the fiscal unity collected from the consumer. As the Court of Appeal's reasoning did not follow this framework, its judgment reflects an incorrect view of the law, and the first ground succeeds; the second ground, on novation, need not be addressed. The Supreme Court annuls the judgment and refers the case to the Amsterdam Court of Appeal, which must examine whether the taxpayer can show that the amounts claimed from consumers, per the actual contractual relationships, in fact represent unpaid consideration for the phone deliveries rather than unpaid device credit instalments.

Practical implications

This judgment matters for any VAT fiscal unity built around functionally separate entities, for instance a seller of goods and a related finance entity, that relies on bad-debt relief. It confirms that fiscal unity status is not a shortcut around identifying, contract by contract, which specific claim went unpaid and why. Businesses cannot attribute unpaid amounts within the group to whichever earlier VAT-bearing supply they prefer; the underlying legal relationship with the customer is decisive, and the burden of proof rests on the taxpayer.

For telecom operators and similar businesses offering device or instalment credit through a separate entity, this means carefully documenting how payments are contractually allocated between the underlying supply and any financing arrangement. Where the contractual documentation distinguishes clearly between the purchase price and the credit obligation, and payments are allocated to the credit claim, those contractual arrangements will be relevant when determining whether unpaid instalments can still be regarded as unpaid consideration for the original supply.

More broadly, the judgment confirms that treating a fiscal unity as a single taxable person does not make the contractual relationships between its individual members and third parties irrelevant where the application of a VAT rule depends on those relationships.

Conclusion

The Supreme Court's judgment draws a clear boundary around the practical effect of VAT fiscal unity status. While a fiscal unity is a single taxable person towards the tax authorities, and intra-group transactions fall outside VAT, this does not mean the contractual relationships its members maintain with third parties can be disregarded when applying rules, like Article 29(1) bad-debt relief, that depend on the specific content of those relationships. The Court of Appeal's economic-and-financial approach, which let the fiscal unity treat two legally distinct claims as interchangeable, was set aside precisely because it lost sight of that distinction.

The case now returns to the Amsterdam Court of Appeal, which must determine, based on the actual contracts between the taxpayer's members and the consumers, whether the amounts claimed truly represent unpaid consideration for the phone deliveries. Until then, the taxpayer's right to a VAT refund under Article 29(1) remains unresolved. For businesses with comparable group structures, the judgment signals the need to verify that the documentation underlying any bad-debt relief claim actually supports a direct link between the unpaid amount and the VAT-bearing supply in question.