Relief for bad debts in income taxes

In business, income is due even if it is not actually received. This means that the issuer of the invoice is obliged to recognise the resulting revenue in tax settlements and pay the associated income tax regardless of whether the goods supplied or the service rendered are paid.

At the same time, the purchaser may classify the same amount as the cost of obtaining revenue, thereby reducing its income tax base and the liability to the tax on that tax, even if he did not regulate the invoice in question.

Such a situation has for some time been the subject of discussions aimed at reaching a solution to address existing inequality.

Their effect is the introduction from 1 January 2020 so-called reliefs for bad debts for settlement of income taxes – a mechanism already in operation under the provisions of the Act of 11 March 2004 on tax on goods and services 1 (Next: the VAT Act).

1. Introduction

The above-mentioned mechanism allows the seller to reduce the tax base or increase the loss accordingly by the value of the claim resulting from the revenue of the sales invoice, while at the same time requiring the buyer to increase its tax base or reduce the loss by the revenue liability of the unpaid purchase invoice.

At the same time, it should be borne in mind that claims deducted from the tax base or increasing the amount of the loss, in accordance with the rules governing the application of the relief for bad debts, are not subject to the cost of obtaining revenue under other income tax rules (Article 18f(12) Act on 15 February 1992 on corporate income tax 2 , Next: the Corporate Income Tax Act) and Article 26i(12) Act on 26 July 1991 on personal income tax 3 (Further: u.p.d.o.f.) Similarly, as regards claims which have been included in the cost of obtaining revenue under other provisions, including through reserves or write-downs, according to Article 18f(13) the Corporate Income Tax Act and Article 26i(13) they shall not be deducted from the tax base nor shall they increase the tax loss on the basis of the arrangements for the relief of bad debts.

2. Rules for applying relief for bad debts

This relief has been regulated in an almost identical manner for both income taxes, i.e.

both corporate income tax (newly added Article 18f the Corporate Income Tax Act), and personal income tax (newly added Article 26i u.p.d.o.f.), of course, with the exception that in the area of personal income tax it concerns only income from non-agricultural business activities.

This benefit applies only to claims or liabilities for payment or payment of cash benefits resulting from commercial transactions respectively, if, for those transactions, at least: at least one of the parties shall determine the revenue or the cost of obtaining revenue.

The relief shall apply regardless of the date on which the claims or liabilities are recognised in the income or the cost of obtaining the taxpayer's income respectively (Article 18f(9) the Corporate Income Tax Act and Article 26i(9) u.p.d.o.f.).

Under new legislation Article 18f(1) the Corporate Income Tax Act and Article 26i(1) u.p.d.o.f. tax base (after deduction of the R & D allowance):

1. on the creditor’s side, it may be reduced by the value of the claim for payment of the cash benefit within the meaning of Article 4(1a) Act on 8 March 2013 countering excessive delays in commercial transactions[4] (hereinafter: u.p.o.), which has not been regulated or disposed of, the reduction being made in the tax return submitted for the tax year in which it passed 90 days from the date of expiry of the payment period specified on the invoice (account) or in the contract;
2. on the side of the debtor, the value of the liability to pay the cash benefit within the meaning of the increase is included in the cost of obtaining revenue Article 4(1a) U.P.O., which has not been regulated, with an increase being made in the tax return submitted for the tax year in which it passed 90 days from the date of expiry of the payment period specified on the invoice (account) or in the contract.

Thus, as under the law the VAT Act, on the creditor’s side, the application of the relief is a right (the creditor ‘may’ reduce the tax base), and on the debtor’s side, a duty (the tax base ‘is to be increased’).

Example

On 11 January 2020 the taxable person received an invoice documenting the purchase of goods of value 12,000 PLN net with payment deadline 25 January 2020 Due to liquidity problems, he did not pay this invoice at the agreed time, but only at the beginning 2021 The taxpayer is obliged to apply a relief for bad debts and an appropriate increase in the tax base (repeated costs). From the point of view of the debtor's tax settlements, it does not matter whether the creditor has benefited from the relief or not.

In principle, period 90 the days referred to above shall count from first on the day following that specified on the invoice (account) or in the contract, the deadline for settling the undertaking.

However, the rules introduce specific rules for determining it where the time limit for payment specified on the invoice (account) or in the contract has been set by the parties in breach of the provisions of the U.N.O.

For the purposes of applying the relief for bad debts by the concept of the term of payment, then the term defined in accordance with the provisions of U.C., rather than the contract or invoice (Article 18f(15) the Corporate Income Tax Act and Article 26i(15) u.p.d.o.f.).

This may occur where:

1. the date of payment specified in the contract exceeds 60 days, calculated from the date of delivery of the invoice or account to the debtor, confirming the delivery of the goods or the performance of the service, and the parties have not clearly established this in the contract or this finding is grossly unfair to the creditor (Article 7(2) U.P.N.O.);
2. the date of payment specified in the contract exceeds 60 days, calculated from the date of delivery of the invoice or account to the debtor, confirming the delivery of the goods or the performance of the service, if the debtor liable for the goods or services is a large trader and the creditor is a micro-entrepreneur, small entrepreneur or medium-sized entrepreneur (Article 7(2a) u.p.n.o. ).

Example

On 11 January 2020 the taxable person issued and delivered an invoice to the customer documenting the sale of the goods, and due to the payment deadlines applied by the customer had to agree to the payment within the time limit 120 days from the date of delivery of the invoice. Due to liquidity problems, the client did not pay the invoice within the agreed deadline, but only In 2021 The creditor has the right to benefit from the relief and make an appropriate reduction of the tax base (repeal of revenue) in the accounts for June 2020 – the time limit for payment for the application of the relief falls in this case 10 March 2020 (11 January 2010 + 60 days), which means that the period of entitlement to the relief falls within 8 June 2020 (10 March 2020 + 90 days).

If the value of the concession is higher than the tax base in a given tax year, the reduction of this base by the uncounted value of the concession shall be made in subsequent tax years, but no longer than the period 3 years from the end of the tax year for which the right to reduction was created.

This reduction is made if the claim has not been settled or disposed of (Article 18f(3) the Corporate Income Tax Act and Article 26i(3) u.p.d.o.f.). The mechanism introduced thus recalls the settlement of the tax loss, although the settlement period in this case is 3 years and is not subject to a quota or percentage limit.

If, in turn, the taxpayer has incurred a tax loss in a given year, the amount of the loss:

1. may be increased by the value of a claim for payment of a cash benefit, which has not been settled or disposed of, which shall be increased in the tax return submitted for the tax year in which it expired. 90 days from the date of expiry of the payment deadline specified on the invoice (account) or in the contract (Article 18f(2)(1) the Corporate Income Tax Act and Article 26i(2)(1) u.p.d.o.f.);
2. is subject to a reduction of the revenue costs of the value of the liability to be paid which has not been regulated, with a reduction being made in the tax return for the tax year in which it expired 90 days from the date of expiry of the payment deadline specified on the invoice (account) or in the contract (Article 18f(2)(2) the Corporate Income Tax Act and Article 26i(2)(2) u.p.d.o.f.). If the liability is higher than the loss, the difference increases the tax base (Article 18f(4) the Corporate Income Tax Act and Article 26i(4) u.p.d.o.f.).

This means that if the creditor has suffered a loss in a given tax year in connection with the business activity, the amount of the loss may be increased by the value of the unpaid receivables due. If he has achieved income, he will benefit from a reduction to the amount of income obtained. The remaining value of unpaid claims may be used by him to reduce the tax base in subsequent 3 tax years, provided that the claims are not settled or disposed of during that period.

The debtor who has suffered a loss in a given tax year is required to increase the tax base or to reduce the loss incurred by the cost of obtaining revenue by the value of the outstanding liabilities. If the value of the outstanding liabilities is higher than the amount of the loss, the excess will give rise to taxable income in the debtor.

Example

In 2020 the taxpayer-believer has achieved an income of 20,000 PLN. At the same time, it has outstanding claims on customers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline. In the tax return for 2020 the taxpayer can benefit from a relief for bad debts and reduce the taxable amount by the total value of unpaid receivables. As a result, the taxpayer will declare for this year tax revenue of 5,000 PLN (20,000 PLN - 15,000 PLN).

Example

In 2020 the taxpayer-believer has achieved an income of 5,000 PLN. At the same time, it has outstanding claims on customers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline.

In the tax return for 2020 the taxpayer can benefit from the relief of bad debts and reduce the tax base, but only to the amount of income achieved for that year, i.e. to the amount of 5,000 PLN. Others 10,000 PLN will be deducted as 2021, provided that, for that year, the taxpayer achieves income of at least 10,000 PLN.

If not, the allowance will be deducted in the statement of assurance 2022 or 2023, subject to adequate income for those years. If the taxpayer is unable to settle the relief in the statement of 2023, The relief is gone.

Example

In 2020 the taxpayer-believer has achieved a loss of 10,000 PLN. At the same time, it has outstanding claims on customers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline. In the tax return for 2020 the taxpayer can benefit from a relief for bad debts and increase the loss for that year by the value of unpaid receivables. As a result, the taxpayer will declare for this year a loss of 25,000 PLN (10,000 PLN + 15,000 PLN).

Example

In 2020 the taxpayer-debtor achieved income of 20,000 PLN. At the same time, it has outstanding liabilities to suppliers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline. In the tax return for 2020 the taxpayer is required to apply a relief to bad debts and to increase the income for that year by the value of unpaid liabilities. The application of the relief will result in the taxpayer declaring for that year tax revenue of 35,000 PLN (20,000 PLN + 15,000 PLN).

Example

In 2020 the debtor taxpayer has achieved a loss of 20,000 PLN. At the same time, it has outstanding liabilities to suppliers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline. In the tax return for 2020 the taxpayer is obliged to apply a relief to bad debts and reduce the loss for that year by the value of unpaid liabilities. Applying relief will cause the loss of 2020 decrease to 5,000 PLN (20,000 PLN – 15,000 PLN).

Example

In 2020 the debtor taxpayer has achieved a loss of 10,000 PLN. At the same time, it has outstanding liabilities to suppliers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline.

In the tax return for 2020 the taxpayer is obliged to apply a relief to bad debts and reduce the loss for that year by the value of unpaid liabilities. However, since in this case the value of outstanding liabilities exceeds the value of the loss, the amount of the difference is to be recognised as taxable income.

As a result, the taxpayer will declare for this year tax revenue of 5,000 PLN.

3. Conditions for applying the relief

The application of this relief is subject to certain conditions, the list of which is appropriate under Article 18f(10) the Corporate Income Tax Act and Article 26i(10) u.p.d.o.f. In accordance with these provisions, the relief shall apply if the following conditions are met cumulatively:

1. the debtor on the last day of the month preceding the day of submission of the tax return is not in the course of restructuring proceedings, insolvency proceedings or liquidation;
2. the date of issue of the invoice (account) or conclusion of the contract documenting the claim has not expired 2 years from the end of the calendar year in which the invoice (account) was issued or the contract was concluded, and where the calendar year in which the invoice (account) was issued is different from the calendar year in which the contract was concluded, when it has not expired 2 years from the end of the calendar year following that;
3. the commercial transaction is concluded as part of the activities of the creditor and the activities of the debtor, the proceeds of which are subject to income tax in the territory of Poland.

On the part of taxpayers, it is mandatory to provide information on the presentation of claims or obligations which increase or reduce the tax base in tax returns (Article 18f(19) the Corporate Income Tax Act and 26i section 19 u.p.d.o.f.).

4. Application of the reduction during the tax year

The relief for bad debts may (and in the case of the debtor – must) be applied also during the tax year in respect of advances paid by the taxpayer. This principle is introduced by newly added regulations Article 25(19-26) the Corporate Income Tax Act and Article 44(17-24) U.p.d.o.f., according to which the income underlying the calculation of the advance:

1. may be reduced by the amount of receivable that has not been settled or disposed of, with the reduction occurring from the settlement period in which it expired. 90 days from the date of expiry of the payment period specified on the invoice (account) or in the contract, until the period during which the claim was settled or disposed of;
2. is subject to an increase of the revenue-related costs of the value of the liability that has not been regulated, with an increase in the income on which the advance is calculated from the settlement period in which it has expired 90 the days from the date of expiry of the payment period specified on the invoice (account) or in the contract, until the period during which the commitment is settled.

If the value of the reduction in income on which the advance is calculated is higher than that of the income over a given period, the reduction in income by an uncounted value shall be made during the subsequent tax year for which the right to a reduction arose.

This reduction is made if the claim has not been regulated or disposed of (Article 25(20) the Corporate Income Tax Act and Article 44(18) (u.p.d.o.f.) The creditor shall make the material reduction if, by the date of payment of the advance, the claim has not been settled or disposed of.

The debtor increases the tax base if the obligation has not been settled by the date of payment of the advance (Article 25(21)(22) the Corporate Income Tax Act and Article 44(19)(20) u.p.d.o.f.).

Example

On 11 January 2020 the taxpayer-believer has issued and delivered a net invoice to the customer 15,000 PLN with payment deadline 25 January 2020 Because the customer did not pay the invoice, in the settlement for April 2020 (month in which it passed 90.

the day after the deadline for payment of the invoice) the taxable person has the right to benefit from the relief. For April 2020 the taxpayer has achieved income of 8,000 PLN.

Since the income achieved is below the value of the concession, in advance for the income tax for April 2020 the taxpayer may deduct the relief only to the amount of income obtained, i.e. up to 8,000 PLN. Others 5,000 PLN will be able to deduct in the next advance (e.g. for May) if it reaches income at least at this level.

If In May 2020 income will be less than 5,000 PLN, difference between the amount of income achieved In May 2020 and the remaining amount of relief to be deducted will be able to settle in subsequent advances for months in which it will achieve sufficient income relief to be deducted until the end of the tax year.

Example On a day 11 January 2020 the taxpayer-believer has issued and delivered to the client two invoices: one net amount 15,000 PLN, second net amount 20,000. The payment deadline for both invoices is set at 25 January 2020 Because the customer did not pay the invoices, in the settlement for April 2020 (month in which it passed 90.

the day after the expiry of the deadline for payment of the invoice) the taxpayer planned to benefit from the relief for bad debts and make an appropriate reduction in the tax base with income tax. On 15 May 2020 (i.e.

before the deadline for payment of the advance on income tax for April 2020) the customer has settled the invoice for the net amount 20,000 PLN. This means that, in relation to this invoice, the taxpayer-believer will not be able to apply relief for bad debts.

5. Disposal or settlement of claims

Disposal or settlement of claims requires ‘withdrawal’ of the effects of the relief. According to Article 25(23)(24) the Corporate Income Tax Act and Article 44(21)(22) u.p.d.o.f.

the creditor who has reduced the income underlying the advance calculation shall be obliged to increase that income during the period during which the claim was regulated or disposed of.

In turn, the debtor who has increased the income underlying the advance calculation reduces that income during the settlement period during which the liability was settled.

Example

On 11 January 2020 the taxpayer-believer has issued and delivered a net invoice to the customer 15,000 PLN, with payment deadline set for 25 January 2020 Because the customer did not pay the invoices, in the settlement for April 2020 (month in which it passed 90.

the day after the expiry of the deadline for payment of the invoice) the taxpayer has benefited from the relief for bad debts and has made an appropriate reduction in the income tax base. On 15 July 2020 the customer has regulated the charge.

On the creditor’s side, this event requires an appropriate increase in the tax base in the July settlement 2020

Where the claim is settled or disposed of after the tax year for which the credit was granted, the creditor shall be obliged to increase income or to reduce the loss in the tax return submitted for the tax year in which the claim was settled or disposed of, respectively, by the value of the amounts previously deducted or added.

If the loss amount is less than the amount reducing it, the difference increases the tax base (Article 18f(7) the Corporate Income Tax Act and Article 26i(7) The same rules apply to debtors where, after the tax year for which the debtor has increased the tax base, the liability is regulated, the taxpayer reduces that basis or increases the loss in the tax return for the tax year in which the liability was settled.

If the reduction in the tax base is higher than that base, the reduction in the tax base by the unpaid value shall be made in subsequent tax years, but no longer than the period 3 years from the end of the tax year for which the right to reduction was created (Article 18f(8) the Corporate Income Tax Act and Article 26i(8) u.p.d.o.f.).

6. Cases where the relief does not apply

The relief for bad debts shall not apply to trade transactions between related parties within the meaning of the transfer pricing provisions. Such a rule shall be introduced accordingly. Article 18f(18) the Corporate Income Tax Act and Article 26i(18) u.p.d.o.f., according to which the provisions in question do not apply to trade transactions between related parties within the meaning of the relevant provisions Article 11a(1)(4) the Corporate Income Tax Act and Article 23m(1)(4) u.p.d.o.f.

In practice, this means that the relief for bad debts will not apply to commercial transactions:

1. performed between entities, of which one has a significant effect on second, i.e.:

(a) has, directly or indirectly, at least 25% shares in capital or voting rights in control bodies, acting as or managing bodies, or shares or rights to participate in profits or assets or their exspects, including units and investment certificates, or

(b) has the actual ability of a natural person to influence key business decisions by a legal person or an organisational entity without legal personality, or

(c) is married or is related to or related to second the degree;

1. performed between entities that are significantly affected by the same other entity or spouse, relative or related to second the degree of natural person having a significant influence on at least one the entity;
2. performed between a non-legal entity and its partners;
3. made between the taxpayer and its foreign establishment and, in the case of a tax group, between the capital company which is part of it and its foreign establishment.
4. Rules for the application of the allowance to taxable persons subject to a registered lump sum

Tax payers on the basis of the so-called registered lump sum (Article 11(4-19) Act on 20 November 1998 a flat-rate income tax on certain income generated by individuals 5 , Further: u.z.p.d.). Whereas, in their case, the solutions adopted take into account the characteristic method of tax fixing, i.e.

no cost side resulting in revenue taxation. Such a taxable person who owes more than 90 days, will be required to increase the amount of taxable income. Similarly, if the taxpayer’s counterparty is late with payment above 90 days, the taxpayer will be able to reduce the amount of taxable income (Article 11(4) u.z.p.d.).

The increase or reduction shall be made in the tax return submitted for the tax year in which it expired. 90 days from the date of expiry of the payment deadline specified on the invoice, account or contract, provided that the obligation has not been settled by the date of the tax return (Article 11(4)(6)(7) u.z.p.d.).

If the value of the revenue reduction is higher than these revenues, their uncounted value will be able to reduce the amount of revenue in subsequent tax years, but no longer than for the period 3 years from the end of the tax year for which the right to reduction was created (provided that the claim has not been regulated or disposed).

At the same time, the increase or reduction of the tax base will not be taken into account in the context of an overrun of the limit allowing the use of a registered lump sum (Article 21(1b) u.z.p.d.).

Example

In 2020 the taxpayer-believer has achieved an income of 20,000 PLN. At the same time, it has outstanding claims on customers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline. In the tax return for 2020 the taxpayer may benefit from a relief for bad debts and reduce the income by the full value of unpaid receivables. As a result, the taxpayer will declare for that year tax revenue of 5,000 PLN (20,000 PLN – 15,000 PLN).

Example

In 2020 the taxpayer-believer has achieved an income of 5,000 PLN. At the same time, it has outstanding claims on customers of value 15,000 PLN, for which In 2020 past 90. the date of expiry of the agreed payment deadline.

In the tax return for 2020 the taxpayer may benefit from a relief for bad debts and reduce the declared income, but only to the amount of income achieved for that year, i.e. to the amount of 5,000 PLN.

Others 10,000 PLN will reduce income in the statement 2021, provided that for that year the taxable person reaches at least the amount of income 10,000 PLN. If not, the allowance will be deducted in the statement of assurance 2022 or 2023, subject to adequate income for those years.

If the taxpayer is unable to settle the relief in the statement of 2023, The relief is gone.

8. Transitional provisions

According to Article 16(17) Act amending certain laws to limit payment congestion 6 (hereinafter: u.z.o.z.p.) the regulations in question apply to commercial transactions whose payment deadline expires after 31 December 2019 This means that the scope of the relief and the resulting rights and obligations may also be covered by transactions executed (invoices issued) In 2019 For taxable persons whose tax year is different from the calendar year and starts before 1 January 2020, These regulations apply from the tax year starting after 31 December 2019, in respect of commercial transactions within which the payment deadline expires after 31 December 2019

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1 i.e. Journal of Laws of 2020, item 106

2 i.e. Journal of Laws of 2019, item 865.

3 i.e. Journal of Laws of 2019, item 1387 as amended

4 Journal of Laws of 2019, item 118.

5 i.e. Journal of Laws of 2019, item 43.

6 Journal of Laws of 2019, item 1649.

Legal basis

Article 16(17) U.z.o.z.p.

Article 23m(1)(4), Article 26i, Article 44(17-24) u.p.d.o.f.,

Article 11a(1)(4), Article 18f, Article 25(19-26) the Corporate Income Tax Act,

Article 11(4-19), Article 21 U.z.D.,

Article 4(1a), Article 7(2)(2a) U.P.N.O.