Bad debt relief [2023]

November 20, 2023

„Bad debt relief” in Poland is a way to recover the tax paid on goods sold or services rendered, for which the contractor has not paid. For a long time, bad debt relief was associated with the provisions on the tax on goods and services (VAT). From 2020 relevant provisions in this regard have also been introduced to the acts regulating the rules of settling income taxes – CIT and PIT.

How does the bad debt relief work when it comes to VAT?

In the field of VAT, the bad debt relief allows the seller to reduce the tax base and the amount of VAT due on the supply of goods or services, if the irrecoverability of the related receivable is substantiated. Irrecoverability of a receivable is considered substantiated if it has not been settled or disposed of in any form within 90 days from the date of expiry of the payment deadline specified in the contract or invoice.

Conditions for applying the “bad debt relief”

There are 2 conditions for applying the “bad debt relief”:

• on the day preceding the day of submission of JPK, on ​​which the amount of the “bad debt relief” is to be included, the seller is registered as an active VAT payer
• three years have not elapsed from the date of issue of the invoice documenting the claim, counting from the end of the year in which it was issued.

It is worth emphasizing that the conditions of the “bad debt relief” have been significantly eased in 2021 – in accordance with the previous wording of the regulations, the right to reduce the tax base and the amount of tax due was subject to, inter alia, a purchaser (debtor) who has not been able to start bankruptcy or liquidation proceedings.

Correction of the due tax

The lack of payment for goods or services also happened very often in the case of transactions with entities that are not active VAT taxpayers (e.g. consumers). Therefore, the VAT Act introduced a provision according to which (in the case of transactions with such entities) it is possible to correct the tax due under the following conditions:

• the claim has been confirmed by a final court decision and directed to enforcement proceedings or
• the claim has been entered in the debt register or
• the debtor has been declared bankrupt.

Bad debt relief – obligation of the seller

Importantly, if the amount covered by the “bad debt relief” is settled, the seller is obliged to increase the tax base and the amount of tax due in the settlement for the period in which he/she received the payment. This also applies to partial payment of the debt. A taxpayer who uses the “bad debt relief” is obliged to inform the competent head of the tax office about this fact – this is done by entering an appropriate annotation in the JPK file.

Bad debt relief – obligation of the buyer

“Bad debt relief” is also important for a buyer who has not paid for the purchased goods or services. In the event that he/she fails to pay the amount due within 90 days from the agreed payment date, he/she is obliged to correct the deducted tax amount resulting from this invoice. This adjustment is made in the settlement for the period in which the 90th day from the date of expiry of the payment deadline has elapsed.

If the debtor pays the amount due after the lapse of the above-mentioned 90 days, he/she has the right to increase the amount of input tax in the settlement for the period in which he/she made the payment. This rule applies to the settlement of receivables in full or in part

“Bad debt relief” in income taxes

In the event that we do not pay for the purchased goods or services, we are obliged (under the provisions of the CIT and PIT Acts) to:

1. increase the tax base by the value of the liability included in tax deductible costs that has not been settled, or
2. reduce the tax loss by the value of the liability included in tax deductible costs that has not been settled.

This should be done in the tax return submitted for the tax year in which 90 days have elapsed from the date of expiry of the payment deadline specified in the invoice (bill) or in the contract. On the other hand, the creditor has the right to reduce the amount of tax revenue by the amount unpaid by the debtor. It is worth noting that in the case of a creditor, taking advantage of the “bad debt relief” is a right, and in the case of a debtor – an obligation.

The conditions for applying the “bad debt relief” – income taxes

The conditions for applying the “bad debt relief” on the basis of income taxes are as follows:

1. the debtor, on the last day of the month preceding the date of submission of the tax return, is not in the course of restructuring, bankruptcy or liquidation proceedings,
2. 2 years have not elapsed from the date of issuing the invoice (bill) or concluding the contract documenting the receivable, counting from the end of the calendar year in which the invoice (bill) was issued or the contract was concluded,
3. the transaction is concluded as part of the activity of the creditor and the activity of the debtor, the income from which is subject to income tax in the territory of the Republic of Poland.

Particular attention should be paid to the latter condition – it is not possible to take advantage of the “bad debt relief” in the case of transactions with foreign entities, as well as in the case of transactions between related entities.

IMPORTANT! Due to the changes that came into force from the beginning of 2023, it is no longer necessary to submit the CIT/WZ or PIT/WZ attachment.

In the event that after submitting a tax return in which the “bad debt relief” was used, the amount due is settled, the tax base should be increased accordingly and the tax should be paid. In such a situation, the other party to the transaction, i.e. the debtor, will have the right to reduce the tax base.

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