8 November 2019

Income tax reduction for bad debts

Counteracting payment gridlocks is the main goal for the legislators working on the tax reduction for bad debts in the field of income tax. The regulations, which come into force at the beginning of 2020, allow entrepreneurs to reduce the tax amount they’ll have to pay by the value from unpaid invoices.

The discussed regulations are not a complete novelty. They have been functioning in the VAT system for several years. Thanks to the new regulations, entrepreneurs will be able to use the tax reduction also in the domain of income tax (PIT, CIT).

In practice, the tax reduction for bad debts allows the creditor to reduce the amount of income tax by decreasing the revenue by the value from invoices unpaid by the contractor. It is worth mentioning that the period after which the claim is considered uncollectible (the so-called “bad debt”) in VAT from January 1st, 2019, is 90 days and the same period will apply from January 1st, 2020, in CIT and PIT. Therefore, only those debts which have not been paid within 90 days from the date specified in the contract are eligible.

When the tax reduction is applicable

The entrepreneur is entitled to the tax reduction only if the following three conditions are met:

  1. the debtor is not undergoing restructuring, insolvency or liquidation proceedings;
  2. two years have not passed since the invoice payment date (or the date from the contract), counting from the end of the calendar year;
  3. when both the creditor and the debtor are subject to income tax in Poland.

The tax reduction is not available if the entities of the transaction (creditor and debtor) are connected in any formal way. Furthermore, it is not due if the creditor sold the liability before the end of the payment deadline.

New obligations also for debtors

The regulations will also affix new responsibilities for flagrant debtors. Effective from January 1st, 2020, debtors will have to add the value of unpaid debt to the income amount while preparing an annual tax settlement, thereby increasing their revenues. Thus, they will increase their annual tax liability. In other words, the debtor will have to increase his income by the value of unpaid invoices and pay an increased tax.

The government forecasts that this will significantly improve the timeliness of payments.

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ARPI Accounting is a part of ARPI Group, a Norwegian holding which started to operate in Poland in 2001.