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Bad debt allowance in PIT and CIT

2018-10-30

A new solution has been proposed in the statutes on personal income tax and corporate income tax, favourable to those businesses whose customers fail to pay their liabilities on time. The Ministry of Entrepreneurship and Technology has proposed a bill to amend certain statutes in order to mitigate payment gridlocks by introducing an allowance for bad debts. The proposed solution has been modelled on a similar allowance under the VAT Act and aims to strengthen the creditor's position.

The proposed solution will be applicable where a debtor has not settled its liabilities within 120 days of the lapse of the due date specified on the relevant invoice or contract. Failure to pay within the above deadline will enable the creditor to reduce the taxable base (or increase its tax loss).

On the other hand, an obligation will arise on the debtor’s part to increase the taxable base by the unsettled amount. It should be noted that it will be of not importance whether the amount has been recorded as a cost of revenue or, perhaps, as a purchase of goods or a fixed asset.  However, the bill does not decide the question whether the PIT and CIT bad debt allowance should refer to the net or gross amount. It may be worth reminding that as early as in a judgment of 11 June 2012 (case no. I FPS 3/11), the Supreme Administrative Court held that a liability should be expressed as a gross amount.

Three conditions must be met for a creditor to be entitled to apply the allowance, viz.:

  • Neither the debtor nor creditor can be subject to restructuring proceedings within the meaning of the Restructurisation Law of 15 May 2015, or insolvency proceedings, nor can it be being wound up;
  • A term of 2 years has not lapsed since the invoice (bill) was issued or a contract was entered into that documents the liability, to be calculated from the end of the calendar year in which such invoice (bill) was issued or contract concluded;
  • Both the creditor and debtor are:
    • Income tax payers having their place of residence, registered seat or place of management on the territory of the Republic of Poland, or
    • Income tax payers not having their place of residence, registered seat or place of management on the territory of the Republic of Poland who receive income on the territory of the Republic of Poland through a foreign establishment, and if the debt or liability resulted from a trade transaction for the purposes of the act on payment terms, made via the foreign establishment, and the revenue or costs of revenue under such transaction has been earmarked to that foreign establishment.

The bill is currently at the consultations stage. The intended date of entry into force is 1 January 2020.

 

Magdalena Walczyńska, Tax Consultant, ATA Tax Sp. z o.o.

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