On 15 February 2021 the Minister of Finance, Funds and Regional Policy of Poland issued a public tax ruling on factoring regarding the quantification of tax-deductible costs attributable to sales of own receivables under factoring contracts. The new ruling is a step towards ending the disputes and doubts about the calculation of tax-deductible costs in income tax in those situations.
The new ruling on factoring applies where a taxpayer (principal) in Poland uses a factoring contract to assign to another party (factor) so-called “own receivables”, meaning claims from the taxpayer’s earlier sales of goods or services to a third party (debtor).
Previously there was no uniform approach on how the taxpayer should recognise tax-deductible costs on such a transaction. The interpretation uncertainty arose from Article 16(1)(39) of the Polish CIT Act, which says that losses on sales of receivables for consideration are not tax-deductible, except where the receivables have been wholly or partly accounted for as income receivables, in which case the amount of the receivable that has been accounted for in this way may be deducted for tax purposes.
Clarification of calculation
This ruling on factoring resolves the interpretation uncertainty to confirm two essential points:
- the amount to be taken into account when calculating tax-deductible costs in such a situation is the gross amount receivable (i.e. the full amount, including VAT); and
- the limit under Article 16(1)(39) of the CIT Act only applies to losses which are deductible up to what was previously recognised as the income receivable at the net amount.
The ruling on factoring ends interpretation disputes in Poland about how to calculate tax-deductible costs in those situations, and in this sense, it is positive. It also shows taxpayers how to properly calculate those costs:
- Determine whether and how much cost has been incurred for the purposes of the CIT Act; this will generally be the nominal gross amount of the sold receivables.
- Determine if the sale of receivables has generated a loss.
- If no loss is involved, then the cost will be tax-deductible in full.
- If there is a loss, and the sold receivables have been accounted for as an income receivable, then it is necessary to determine the proportion of the loss to that income.
- If the loss is higher than the income, the difference should be deducted from the cost and it is only the cost so decreased that may be deducted for tax purposes.
- If the loss is lower than or equal to the income, then the cost is tax-deductible in full.
Further aspects of the ruling on factoring
It is good to know that the ruling on factoring does not have any retroactive effect. However, it is worth examining past transactions and verifying whether the argumentation behind the ruling may be applied in the event of potential corrections.
The ruling on factoring also makes it clear that taxpayers in Poland assigning their own receivables to factors under factoring contracts should recognise income “again” because this transaction is separate from the original sale of goods or services.
If you would like to know more about the new ruling on factoring and how to calculate tax-deductible costs attributable to the sale of own receivables under factoring contracts, please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland.