Day-to-day business practice involve situations where it becomes necessary to write off debts (receivables) against the debtor.
How to account for such an event for corporate income tax (CIT) purposes?
Initially, it should be noted that the term “remission of debts” is understood as a voluntary release of the debtor from the debt. Such a solution is provided for, in particular, by Art. 508 of the Civil Code, according to which the obligation expires when the creditor releases the debtor from the debt and the debtor accepts the exemption.
As a result, the taxpayer no longer has any claims against the debtor.
Pursuant to Art. 16 sec. 1 point 44 of the CIT Act is not considered to be tax costs of remised receivables, with the exception of receivables or their parts that have previously been accounted for as taxable income – up to the amount accounted for as taxable income.
This means that the remission of debts may constitute a tax cost on the part of the taxpayer if it meets the following conditions jointly:
- there is a claim on the taxpayer’s side;
- it was previously accounted for as a taxable income due to the taxpayer;
- is not time-barred – according to the approach of the tax authorities, the remission of the time-barred receivable may not result in the right to settle the tax cost (e.g., Director of the Tax Chamber in Katowice in the individual interpretation of September 22, 2015, reference number IBPB1-3 / 4510-131 / 15 / SK);
- is subject to cancellation, in particular by the remission (releasing the debtor from debt_;
- is properly documented – e.g., in the form of a written agreement;
- is related to the taxpayer’s income (premise specified in Article 15 sec. 1 of the CIT Act).
From a practical point of view, it is worth pointing out that the tax remission related to the principal amount of the loan will not constitute tax-deductible costs, as it did not previously constitute the taxpayer’s income.
It is worth pointing out that, in line with the approach of tax authorities, the cost is the debt redeemed in the net value (i.e., excluding the output VAT). Since 2018, the provision specifies that the cost is settled in the value previously included in taxable income. Due VAT is not such income (Article 12 sec. 4 point 9 of the CIT Act).
It is worth pointing out that not every decision not to pursue a claim is a “remission” of receivables. For example, the Director of the National Tax Information, in the individual ruling of November 10, 2020 (reference number 0111-KDIB1-2.4010.328.2020.2.SK), stated that, based on the provisions of the “anti-crisis shield, withdrawal from debt recovery cannot be equated to” remission “referred to in the provision under analysis.
It is a different matter when the receivable is eliminated from the taxpayer’s books due to its statute of limitations. Here there is no release from debt, the debt still exists but is no longer due. Therefore, if the debtor were to be taken to court, he could effectively raise a statute of limitations. The cost settlement in this respect is regulated by Art. 16 sec. 1 point 20 of the CIT Act.
Another issue is writing off a receivable as uncollectible or creating a provision to cover such receivable. There is also no remission of debt here, the debt still exists, but due to the slim chances of its recovery, the taxpayer may, under certain conditions, settle the tax cost (Article 16 (1) (25) and (26) of the CIT Act).