Unreliable debtors are a big problem for companies. First of all – receivables are not regulated by them, which in consequence is not so much a lack of profit as a loss. Secondly – a double loss, because the creditor has to pay income tax on the income that he has not actually obtained – because he has not received the amount due. Moreover, the debtor in such a situation was not forced by the letter of the law to reduce tax costs – despite the fact that he did not really pay. It used to be like that, now the situation has changed a bit – there is bad debt relief in PIT and CIT, similar to bad debt relief in VAT.
Bad debt relief for PIT and CIT – what is it about?
The regulations are clear – a debtor who has not paid the amount due within 90 days from the date of expiry of the payment deadline on the invoice (bill) or contract is obliged to increase the tax base by the value of the amount due. In turn, the creditor may apply the opposite action – that is, increase the costs due to the failure to receive payment from the debtor. As you can see – arrears in payment have consequences for both parties to the transaction.
Previously, the problem was more complicated – the income tax due had to be paid, and the change of unpaid payment at the expense of the creditor became a fact after long and difficult proceedings. This was because such a claim had to be documented as irrecoverable and the following decisions had to be obtained:
- About irrecoverability – issued by an enforcement authority (e.g. a bailiff);
- On dismissal of the bankruptcy petition or on the discontinuation / termination of bankruptcy proceedings – issued by the court;
- Protocol drawn up by the taxpayer, showing that the costs of the proceedings and enforcement exceed the amount due.
Bad debt relief in PIT and CIT – who can and who cannot take advantage of it
Technically – the answer to the question “who cannot take advantage of the bad debt relief in PIT and CIT?” it is simple. The legislator clearly specifies – this relief cannot be applied to commercial transactions between related entities. So it seems that in every other case the matter is simple, but – as is usually the case – the reality is a bit different. Currently – due to COVID-19 – the conditions for using the bad debt relief in PIT and CIT have been eased, among others the deadline of 90 days from the date of expiry of the payment deadline has been reduced to 30 days – but it applies to tax advances. On an annual basis, the deadline of 90 days still applies. In addition, the shortened period applies to the debtor, the creditor does not have to increase the income tax advance.
Bad debt relief in PIT and CIT – the interpretation of the tax office matters
Another issue is the interpretation of regulations by the tax office – and this one is usually strict. An example is the interpretation No. 0111-KDIB1-2.4010.344. 2020.1.AK – concerning a company from the financial industry. The company wanted to take advantage of the tax relief when calculating CIT advances on a monthly basis, and the problem related to the lack of payment for services by the company’s contractors. In the light of the law – the company has the right to perform such an action, but the tax office has presented its own interpretation:
- It is necessary to verify on the part of the debtor – whether the unregulated transaction took place as part of the contractor’s business activity;
- Both parties to the transaction must operate in Poland;
- Debtor status must be verified before calculating income tax advances;
- The contractor may not be in the process of bankruptcy / liquidation / restructuring.
The tax office stated that in this situation the company was not entitled to the relief. If the legislator does not intervene, the company will not benefit from the relief. It is much easier to take advantage of the bad debt relief for VAT – the ruling of the Court of Justice of the European Union, which is a precedent (reference number C 335/19), is not without significance in this matter. You can find more about the relief for bad VAT debts and the CJEU ruling here. If you have any doubts regarding the optimization of taxes and the use of bad debt relief – contact us. Taxes are our bread and butter, we help businesses develop every day.