Similarly to existing regulations in the Act on Value Added Tax, “bad debt relief” is also to be introduced to the Corporate Income Tax Act and the Personal Income Tax Act in Poland, starting from 1 January 2020.
How will bad debt relief work for income tax?
The introduction of bad debt relief for (both corporate and personal) income tax purposes is the main change enabled by the Act amending various laws in order to limit payment backlogs. The Act of 19 July 2019 was signed by the Polish President on 6 August 2019 and will take effect on 1 January 2020. The main goal of the Act is to improve the legal environment in which the parties to commercial transactions operate in order to limit payment backlogs. It modifies several legal acts, including the Polish Payment Dates Act, the Corporate Income Tax Act and the Personal Income Tax Act.
Bad debt relief will work as follows:
- creditors will be entitled to decrease their taxable base or increase their tax loss with any monetary debt due to them which has been recognised as taxable income but has not been settled or assigned; while
- debtors will be required to increase their taxable base or decrease their tax loss with any monetary debt they owe which has not been settled or assigned.
Adjustments for unsettled debts will be made in the tax return for the tax year in which a period of 90 days has expired, starting from the due date specified in the invoice (bill) or contract. These adjustments will affect the taxable base for the calculation of advance tax payments due for the accounting period in which the 90-day period expired.
The legislation will also amend the Payment Dates (Commercial Transactions) Act. Where the debtor liable to pay for goods or services is a large enterprise, and the creditor is a microenterprise, small enterprise or medium-sized enterprise, the payment term specified in the contract cannot be longer than 60 days from delivery of the invoice (bill) to the debtor. Also, if an agreed payment term breaches that provision, any applicable bad debt relief will operate on the presumption that the payment term is 60 days.
There will also be further requirements for the application of bad debt relief:
- As at the last day of the month preceding the tax filing, the debtor is subject to restructuring or bankruptcy proceedings or is in liquidation.
- As regards the invoice (bill) or contract giving rise to the debt, it has been less than two years since the end of the calendar year in which the invoice (bill) was issued or the contract made or, if the invoice (bill) was not issued in the same calendar year as the contract, then it has been less than two years since the date of the invoice (bill) or the date of the contract, whichever is later.
- The commercial transaction was executed in the course of the creditor’s business and debtor’s business, while income from those businesses is subject to income tax in Poland.
If, after bad debt relief is used,
- the debt due to the creditor is settled (or assigned), the creditor will have to make a reverse adjustment referring to the period in which the debt was settled (assigned);
- the debt due from the debtor is settled, the debtor will be entitled to make a reverse adjustment referring to the period in which the debt was settled.
The above regulations will not apply to commercial transactions between related parties.
Do not forget!
In relation to transactions worth more than PLN 15,000 (roughly EUR 3,500) where payments are made by taxpayers by bank transfer to VAT taxable persons, as of 1 January 2020 such taxpayers will no longer be entitled to recognise these expenses as deductible for income tax purposes if the payment was made to a bank account that does not feature as a designated bank account in the Database of Taxable Persons as at the date on which the instruction for the bank transfer is given.
If you would like to know more about the introduction of bad debt relief for income tax purposes in Poland, please visit the homepage of WTS&SAJA Sp. z o.o., the exclusive representative of WTS Global for Poland.