Companies in Denmark can obtain a VAT deduction for bad debt write-offs, but this requires that the loss is final, and that “all reasonable efforts” have been made to collect the debt. This means that the company must be able to document that all necessary steps have been taken to secure payment before a debt can be written off as irrecoverable.

What Does “All Reasonable Efforts” Entail?

“All reasonable efforts” include, among other things:

  1. Reminder Notices: The company must have sent reminder notices to the debtor.
  2. Dialogue: Attempts must have been made to contact the debtor to find a payment solution.
  3. Installment Agreements: Offering installment agreements may be necessary.
  4. Legal Action: If relevant, the company must have attempted to collect the debt through debt collection or legal action.

Documentation of Efforts

To obtain a VAT deduction, the company must provide documentation of the actions taken in the attempt to collect the debt. This includes copies of reminder notices, correspondence with the debtor, agreements on installment plans, and documentation of any debt collection or legal actions.

Debtor’s Bankruptcy

A debtor’s bankruptcy is not, in itself. sufficient grounds for obtaining a VAT deduction for bad debt. To deduct VAT, the law requires that the company can document that “all reasonable efforts” were made to collect the debt, even if the debtor has gone bankrupt. This includes sending reminder notices, attempting dialogue, and pursuing any relevant legal actions. Without this documentation, the VAT deduction may be rejected by the Danish Tax Agency, even in the case of bankruptcy. Therefore, it is crucial to maintain thorough documentation of all collection efforts.

VAT Deduction for Foreign Debtors

When a company seeks a VAT deduction for bad debt on foreign debtors, such as those in e.g. Norway, United Kingdom or Germany, the same fundamental documentation requirements apply as for Danish debtors.

However, special considerations must be taken into account for foreign debtors. Local laws and practices in the debtor’s home country may affect which actions are considered reasonable, and the company must therefore adapt to these conditions.

Although the overall documentation requirements are the same, collecting debt from foreign debtors requires the company to adjust and ensure that the documentation meets both Danish and foreign requirements. Therefore, it may be necessary to collaborate with local advisors to ensure proper handling.

Sources:

  • SKAT, Momsvejledningen, section D.A.8.1.1.6.
  • Eastern High Court ruling in SKM2010.321.ØLR.