The legislative Act regarding amendment of certain acts with the objective of reducing payment backlogs (2019 Dz.U. item 1649) signed into law by the Polish president on 6 August 2019 introduces an accommodation accounting for “bad debts” in the assessment of income tax.
In this way, the Polish legislature is seeking to address the question of unenforceable receivables in the realm of income tax analogously to the provisions already obtaining with respect to VAT.
General taxation rules
The general principle of personal income tax and corporate income tax in Poland is that taxable revenue is comprised of amounts due, even if such amounts have not been actually collected/received yet.
Tax-deductible expenses, or the cost of obtaining revenue, is defined in analogous terms. Debtors may reduce their taxable income by the number of their tax-deductible liabilities even if they have not actually remitted those liabilities yet.
This approach clearly entails considerable grief for taxpayers whose contracting parties do not pay them on time. Under such a regime, debtors are in a more favourable position – as opposed to their creditors, they do not face adverse tax consequences if they settle their bills late. The laws coming into force in the New Year aim to change this.
New provisions regarding personal and corporate income tax
The imminent amendments to the legislative Acts regarding personal income tax and corporate income tax mean that beginning on 1 January 2020:
- creditors will be able to deduct from their taxable income
- debtors will be compelled to add to their taxable income
the value of any receivables/labilities classed as revenues due / expenses associated with settlements for the supply of goods and services in commercial transactions, provided that the receivable / liability has not been settled or divested.
As much is provided for in art. 26i.1 and in art. 18f.1 of the legislative Acts regarding, respectively, personal income tax and corporate income tax subsequent to the amendments.
For these purposes, a commercial transaction shall be taken as, in accordance with art. 4.1 of the legislative Act regarding counteraction of excessive delays in commercial transactions (2019 Dz.U. item 118), a contract the object of which comprises delivery of goods/provision of services against payment, provided that the taxpayers execute it in connection with their operations.
The taxable revenue shall be adjusted to account for “bad debts” in the tax return filed for the fiscal year which brought elapse of 90 days past the relevant payment deadline stipulated in the invoice or contract.
In the event that the problem receivable is settled or divested (in whole or in part) subsequent to such adjustment, then:
- The creditor must duly increase his taxable amount and pay the resulting tax when settling his taxes for the period in which successful collection or divestment of the receivable occurred;
- The debtor may reduce his taxable amount for the period in which he settled his debt.
The above shall apply per analogam where a taxpayer has suffered a loss from the source associated with the commercial transaction.
Such adjustments of the taxable revenue amount may be effectuated only with respect to pecuniary receivables/liabilities arising from commercial transactions if such transaction constitutes a basis for defining taxable revenue or tax-deductible expenses for at least one of the parties, whatever the date of their posting as, respectively, revenue or expenses.
The new laws also provide that, where an invoice or contract sets a payment deadline in violation of the legislative Act regarding counteraction of excessive delays in commercial transactions, the applicable payment deadline for purposes of applying the “bad debts” exemption shall be defined in accordance with the Act.
Much as in the case of VAT, a taxpayer wishing to avail himself of the new “bad debts” tax facilitations must meet certain additional conditions, to wit all of the following:
- As at the last day of the month preceding that in which the relevant tax return is filed, the debtor may not be in restructuring, bankruptcy or liquidation proceedings;
- Less than 2 years have elapsed since issue of the invoice / execution of the contract documenting the receivable, counted from the end of the calendar year in which the invoice was issued or the contract was executed (or from the end of the calendar year in which the later of these two actions were performed, in cases where execution of the contract and issue of the invoice occurred in different years);
- The commercial transaction is executed in the context of operations of the creditor and, respectively, of the debtor subject to tax in Poland.
- The new tax provisions for “bad debts” will not apply to transactions between affiliates (as defined in the CIT and PIT Acts);
- Taxpayers invoking the new “bad debt” rules will need to specify the receivable / liability concerned when making their tax filing;
- The “bad debt” adjustment will be reflected in the amount taken as the basis for calculating advances towards income tax (provided that the taxpayer is actually achieving profits).