27 October 2025

Bad debt relief – when a contractor fails to settle payments

Bad debt relief. If a contractor fails to pay the amount due for a service or goods provided on time, VAT and income tax (PIT/CIT) are still due on that transaction. Legislators have addressed such situations by introducing bad debt relief. This tool allows businesses to improve financial liquidity and recover receivables (due to taxes paid) resulting from unpaid payments by contractors.

Bad debt relief in VAT

VAT relief allows for the correction of tax due on the supply of goods or services for outstanding receivables by the contractor, when the uncollectibility of the receivable has been substantiated.

A receivable’s uncollectibility is considered substantiated for VAT purposes if it has not been settled (or disposed of in any form) within 90 days of the expiry of the payment deadline specified in the contract or invoice.

If the supply of goods or services is made to a contractor who is not an active VAT payer (i.e., to a VAT-exempt taxpayer or a consumer), bad debt relief may be used if:

• a final court decision has confirmed the receivable and has been referred for enforcement proceedings, or
• the receivable has been entered into a debt register maintained at the national level, or
• personal bankruptcy has been declared against the debtor under separate regulations.

The adjustment is made in the settlement for the period in which the debt’s uncollectibility was substantiated.

Bad debt relief in PIT/CIT

In income taxes, the legislator has also provided for the possibility of counteracting tax burdens related to unpaid liabilities of contractors for services and goods provided. The relief in income tax allows for the reduction of the tax base in the annual tax return by the amount of the due value of unpaid revenue.

The necessary condition is that, in the tax year in which the taxpayer intends to benefit from the said relief, the 90-day period from the payment date specified on the invoice or contract has elapsed.

What should be done to reduce the tax amount?

To recover VAT or income tax on an unpaid debt from an invoice or contract, first review the receivables. Verify whether there are any outstanding receivables that qualify for the bad debt relief.

After identifying potential receivables, an amended tax return should be filed for the period during which the taxpayer is entitled to the bad debt relief. If necessary, a request for a refund of the overpayment (to the bank account) should also be submitted.