This is to let you know that the bad debt relief, which was introduced by the Act of 19 July 2019 to amend various legislation to limit payment backlogs (“Enabling Act”), now applies also to income taxes (as of 1 January 2020).

According to the new law, the bad debt relief generally works as follows:

  • the creditor is entitled to decrease its taxable base or increase its tax loss by the amount of monetary consideration (as defined in Article 4(1a) of the Payment Delays in Commercial Transactions (Counteracting) Act of 8 March 2013) due to it which is recognised as taxable income but which has not been settled or assigned; while
  • the debtor is required to increase its taxable base or decrease its tax loss by the amount of monetary consideration (as defined in Article 4(1a) of the Payment Delays in Commercial Transactions (Counteracting) Act of 8 March 2013) due from it which is recognised as tax cost but which has not been settled.

These adjustments are to be made in the tax return for that tax year in which a period of 90 days after the due date has expired, counting from the first day following the due date specified in the invoice (bill) or contract.

Importantly, the adjustments are to be made when computing the amount of advance income tax payments. The way the creditor uses this relief is by reducing its net income for the accounting period in which the 90 days’ time expired. If net income for that period is less than the amount of the debt available for deduction, then the deduction is to be repeated in the subsequent accounting periods of the tax year until the debt is settled or assigned. On the other hand, the debtor must increase its net income used for calculation of its advance tax payments, starting with the accounting period in which the 90 days’ time expired and ending with the period in which the debt is settled.

In accordance with transitional provisions of the Enabling Act, the new law applies to commercial transactions (as defined in the Payment Delays in Commercial Transactions (Counteracting) Act of 8 March 2013) for which the due date falls after 31 December 2019. Accordingly, if a transaction took place in 2019 but the due date is in 2020, the new law apply.

As regards entities liable to corporate income tax act whose tax year is not the same as the calendar year and began before 1 January 2020, the law law will apply as of the tax year beginning after 31 December 2019 in relation to commercial transactions whose due date falls after 31 December 2019.

If this issue pertains to your business and you are interested in our assistance, please contact us.

This blog post is provided for general information purposes to keep you up-to-date with changes in tax law, tax rulings by authorities, case law of courts and interesting commentaries. Doradztwo Podatkowe WTS&SAJA shall not be held legally liable for any acts or omissions resulting from reliance on such information.