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Poland: Bad debt rules, for tax purposes

Poland: Bad debt rules, for tax purposes

New law in Poland aims at limiting “payment backlogs” relating to commercial transactions. Specifically, the new law adds rules concerning "bad debts."

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The law’s effective date is 1 January 2020.

The legislation (signed by the president in early August 2019) is intended to improve the legal environment for commercial transactions. The legislation modifies certain legal terms, including those that apply for payments made under commercial transactions law, the corporate income tax law, and the individual (personal) income tax law.


Implications for creditors

Changes to the corporate income tax allow creditors to reduce their tax base by the amount of “bad debts”—defined as claims that have been included in receivables but that have not yet been settled or resolved. The bad debt reduction is to be reported by the taxpayer-creditor in the tax return submitted for the tax year as defined or measured by a trigger mechanism (i.e., the period during which 90 days have elapsed as measured from the date of expiry of the payment deadline as specified in the contract or listed on the invoice or bill). If the value of the bad debt reduction is greater than the taxpayer’s tax base, then the bad debt amount can be carried forward and applied for up to three subsequent tax years (the three-year period is measured from the end of the tax year for which the right to the bad debt reduction arose).

Receivables deducted from the tax base are not available to be included as tax deductible expenses for corporate income tax purposes. Accordingly, creditors cannot both deduct a bad debt and also make the bad debt adjustment to their tax base.

If after the tax base has been adjusted to account for a bad debt, the amount receivable is settled (or disposed or), the creditor must increase the tax base for the period when the settlement occurred.


Implications for debtors

The legislation also introduces an obligation for debtors to increase their tax base by the amount of an unpaid liability (included in tax deductible costs). The increase is to be reported in the tax return for the tax year in which a 90-day triggering period has elapsed. The taxpayer-debtor's income, thus, is increased by the amount of its unpaid monetary liability.

In other words, if the taxpayer incurs a loss that is related to a commercial transaction, there is a further requirement for the taxpayer-creditor to reduce its tax deductible costs and possibly increase the tax base. The tax base must be increased (or the loss reduced) if the liability has not been settled by the date when the tax return is filed. However, if the liability is ultimately resolved, the debtor can file an amended return.


Conditions for applying the adjustment

Rules regarding an adjustment of the tax base or loss will apply only with respect to claims or obligations relating to commercial transactions. According to an example provided in the explanatory memorandum to the draft version of the legislation, in the case of an acquisition of a fixed asset for which the taxpayer claims depreciation for three years, the adjustment of the tax base depends only on the date of payment for this fixed asset—and not on the depreciation period.

The legislation introduces additional conditions for making an adjustment of the tax base or the value of the loss such as there are no restructuring proceedings, insolvency or liquidation filed against the debtor on or before the last day of the month preceding the date for filing the tax return; there is a specified period from the date of issuance of the invoice or conclusion of the contract (generally two years); and the income related to the commercial transaction is subject to taxation in Poland.

The new measures do not apply to transactions between related entities (as defined by Poland’s corporate income tax law).


Other amendments

In general, the new law aims at strengthening legal protections for small and medium-sized enterprises by shortening the payment deadline in commercial transactions in which the debtor is a public entity (excluding healthcare or medical entities) to a maximum of 30 days, while the payment deadline in transactions in which the debtor is a large entrepreneur and the creditor is a micro, small or medium entrepreneur cannot exceed 60 days.

Also, there is an increase in the rate of interest for payment delays in commercial transactions (generally by two percentage points).

Lastly, the new rules require large corporate taxpayers to provide the Minister of Economy (currently the Minister of Entrepreneurship and Technology) with reports on payment terms used in a given year.

 

For more information, contact a tax professional with KPMG in Poland:

Rafał Ciołek | +48 (22) 528 11 97 | rciolek@kpmg.pl

Anna Sińczuk | +48 (22) 528 11 92 | asinczuk@kpmg.pl

Przemysław Szywacz | +48 (22) 528 10 03 | pszywacz@kpmg.pl

Wojciech Majkowski | +48 (22) 528 16 80 | wmajkowski@kpmg.pl

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