The annual settlement is a good time to look at “bad debts” and the possibility of settling them in tax costs in CIT.
In principle, the “costing” of an uncollectible receivable, previously accounted for as income due, may take place either by:
- “definitive” write-off – Article 16 sec. 1 point 25 of the Polish CIT Act;
- impairment allowance – Article 16 sec. 1 point 26a of the Polish CIT Act.
Ad. a
If the claim is written off, the creditor must have one of the following documents at its disposal (Article 16 sec. 2 of the Polish CIT Act):
- ruling on uncollectibility;
- the court’s decision to:
- dismissal of the bankruptcy petition when the assets of the insolvent debtor are not sufficient to satisfy the costs of the proceedings or are sufficient only to satisfy these costs, or
- discontinuation of bankruptcy proceedings, if the circumstance listed in point (a) occurs, or
- the end of the bankruptcy proceedings, or
- a report drawn up by the taxpayer, stating that the expected costs of litigation and enforcement related to the recovery of the claim would be equal to or higher than its amount.
In a situation where one of the above documents confirming the uncollectibility of the receivable is collected, the taxpayer may include it in tax costs. The moment of settlement is not strictly defined in the Act, but it should be assumed that the tax settlement of the cost is made at the moment of collecting documents confirming the uncollectibility of the receivables.
Ad b
In the case of an impairment allowance, it is required to recognise the impairment allowance (within the meaning of the accounting regulations) and to meet one of the conditions (referred to as the probability of uncollectibility):
- the debtor has died, has been deleted from the Central Registration and Information on Business, put into liquidation or has been declared bankrupt, or
- restructuring proceedings have been opened or an application for approval of an arrangement has been filed in the proceedings for approval of an arrangement referred to in the Polish Restructuring Law or settlement proceedings have been initiated within the meaning of the provisions on financial restructuring of enterprises and banks, or
- The claim has been confirmed by a final court decision and referred to enforcement proceedings, or the claim is challenged by the debtor by way of a court action.
The taxpayer has the option of including bad debts as tax-deductible costs pursuant to Article 16 sec. 1 point 25 or 26a of the Polish CIT Act, at the time of obtaining the documents/events occurring, along with the relevant accounting operation (write-off, allowance). The legislator does not directly indicate the period (time) that must elapse for a given bad debt to be written off as costs.
With regard to VAT, in the case of bad debts, it is worth noting the provisions of Article 89a sec. 1 of the Polish VAT Act, which stipulates that the taxpayer may adjust the tax base and the tax due on the supply of goods or services in the territory of the country in the case of receivables whose uncollectibility has been substantiated. The adjustment also applies to the tax base and the amount of tax attributable to the part of the amount of the receivable, the uncollectibility of which has been substantiated.
At the same time, and importantly, the uncollectibility of the receivable is considered probable if the receivable has not been settled or disposed of in any form within 90 days from the date of expiry of the payment deadline specified in the agreement or invoice.
The above adjustments are made in the settlement for the period in which the uncollectibility of the receivables is considered probable, provided that by the date of filing the tax return for this period the receivable has not been settled or disposed of in any form.
An alternative solution to writing off a bad debt as an expense or making an impairment loss is to apply the CIT bad debt relief mechanism.
The bad debt relief is a mechanism that allows creditors to:
- reduce the tax base or possibly increase the loss as part of the annual return (Article 18f sec. 1 point 1 and Article 18f sec. 2 point 1 of the Polish CIT Act);
- during the year, reduce the income constituting the basis for calculating advances by the value of receivables for payment of cash benefits that have not been paid or sold as revenue due (Article 25 sec. 19 point 1 of the CIT Act).
Creditors are entitled to the above right if the claim has not been settled within 90 days from the date of expiry of the payment deadline specified in the invoice (bill) or in the agreement (this period is counted from the first day following the expiry of the deadline for settlement of the liability specified in the invoice or bill or in the agreement – see Article 18f sec. 11 of the CIT Act), as well as if it has not been settled:
- until the date of payment of the advance payment – in the case of using the bad debt relief at the stage of calculating advances (Article 25 sec. 19 point 1) and Article 25 sec. 21 of the CIT Act);
- until the date of filing the tax return – in the case of using the bad debt relief as part of the annual return (Article 18f sec. 1 point 1, Article 18f sec. 2 point 1 and Article 18f sec. 5 of the CIT Act).
Importantly, the above regulations apply, according to Article 18f sec. 10 of the CIT Act, when the following conditions are met jointly:
- the debtor is not in the course of restructuring proceedings, bankruptcy proceedings or liquidation proceedings on the last day of the month preceding the date of filing the tax return;
- 2 years have not elapsed from the date of issuing the invoice (bill) or concluding the agreement documenting the receivables, counting from the end of the calendar year in which the invoice (bill) was issued or the agreement was concluded, and if the calendar year in which the invoice (bill) was issued is different from the calendar year in which the agreement was concluded – if 2 years have not elapsed from the end of the calendar year of the later of these activities;
- a commercial transaction is concluded as part of the creditor’s and the debtor’s business, the income from which is subject to income tax in the territory of the Republic of Poland.