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Newsletter special – Hogan Lovells

Le Cabinet Hogan Lovells a préparé la newsletter spécial dédiée au problématique de la faillite ou la restructuration du client et l’allègement des créances douteuses. Ce texte est disponible en anglais.

Bankruptcy and restructuring of a counterparty – impact on bad debt relief

Legislative works on the Act regulating the so-called Anti-Crisis Shield have been completed, and the vast majority of legislation concerning the specific measures to combat COVID-19 entered into force 31 March 2020. The tax solutions introduced by this Act have already been recently, widely discussed and have not changed significantly in the final version of the adopted provisions. These regulations, only to a small extent, change the rules of the functioning of so-called bad debt relief which applies in the event of a late payment and which is intended to allow a creditor to adjust the tax paid on actual non-received payments. Unfortunately, the provisions introduced do not improve the position of creditors taking advantage of this relief which is a major drawback considering the devastating impact that the Coronavirus epidemic has already had on the Polish and global economy. In the absence of any new legal solutions in this area, taxpayers have been left to apply the existing regulations.

1. Bad debt relief in income tax 

The so-called bad debt relief was introduced into the Corporate Income Tax and Personal Income Tax Acts at the beginning of 2020 and allows a creditor to reduce the tax base by the value of those monetary receivables which were reported as taxable revenue which however have not been settled or disposed of within 90 days of the deadline to settle the liability.

Income is reduced in a tax return which has been submitted for the tax year in which 90 days have elapsed since the date of payment as specified in the invoice or contract. If the creditor has suffered a tax loss, this can be increased by the amount of the outstanding claim. However, the regulations also provide the opportunity to take advantage of the relief on an ongoing basis when paying income tax advances throughout the year. The income, which is the basis for calculating the advance payment, can then be reduced by the value of the monetary claim that has not been settled or disposed of. The reduction can be made starting from the settlement period in which 90 days have elapsed from the date of the expiry of the payment deadline.

The use of the above relief is, however, only possible if the following conditions have jointly been met:

1. the debtor, as of the last day of the month preceding the date of submission of the tax return is not undergoing restructuring proceedings, bankruptcy proceedings, or liquidation,
2. a period of two years has not elapsed since the end of the calendar year in which the invoice was issued, or the contract was concluded, and
3. a commercial transaction has been concluded as part of the creditor’s and the debtor's operations, the income of which is subject to income tax on the territory of the Republic of Poland.

Given the anticipated turbulence in the Polish economy related to the COVID-19 epidemic, meeting, in particular, the first of the above conditions can prove to be a problem. In the situation where a debtor is subject to bankruptcy or restructuring proceedings (in accordance to the Restructuring Law) or has started liquidation, the possibility of taking advantage of bad debt relief will be excluded.

In order to decrease the tax base for unpaid payment, the creditor will then only be able to implement a more troublesome solution which is to include within the tax-deductible costs a claim previously shown as receivable income which will be written off as uncollectible. However, a necessary condition for deducting this cost will be the appropriate documenting of the uncollectability of these receivables in the manner specified in the CIT and PIT regulations. Documentation of the uncollectability of claims can be made, among other things, by a court decision to terminate the insolvency proceedings, dismiss the bankruptcy petition, or to discontinue these proceedings in the situation where the insolvent debtor’s assets are insufficient to cover the costs of the proceedings, or are sufficient only to cover these costs. On the other hand, the likelihood of the uncollectability of receivables necessary to classify the revaluation write-offs as tax costs occurs, among other things, when restructuring proceedings have been opened within the meaning of the Restructuring Law.

The failure to pay the due amount within 90 days from the payment deadline also results in significant consequences for the debtor who is obliged to increase the tax base (or reduce the tax loss) if the amount was included in the tax-deductible costs. The obligation to increase the tax base arises, as a rule, at the same time as the payment of the tax advance during the tax year. However, the implemented law on the so-called anti-crisis shield stipulates that taxpayers (debtors) who have suffered negative economic consequences as a result of the COVID-19 epidemic will not be required to increase their income as the basis for calculating an income tax advance for settlement periods in 2020 if the revenues generated in a given period are lower by at least 50% compared to the same period of the previous tax year. The condition of the revenues decrease does not apply to entities which started operating in 2020, or commenced activity in the last quarter of 2019, and did not generate revenues during this quarter.

      2. Bad debt relief in VAT

The legal provisions of the “anti-crisis shield” do not introduce any changes in the rules of the functioning of bad debt relief within the VAT regulations. In accordance to these regulations, the taxpayer (creditor) can correct the tax base and the tax due for the supply of goods or services in the territory of the Republic of Poland in the case of claims whose uncollectability has been proved, i.e. when the claim has not been settled or disposed of within 90 days from the expiry of the payment deadline as specified in the contract or invoice (this also applies to parts of the claim).

The above relief can be applied if the following conditions have jointly been met:

1. the supply of goods or services is made to an active registered VAT payer who is not undergoing restructuring proceedings (within the meaning of the Restructuring Law), bankruptcy proceedings, or is in liquidation,
   • on the day preceding the day of filing the tax declaration in which the correction is made:
   • the creditor and debtor are taxable persons and are registered as active VAT taxable persons,
2. the debtor is not in the process of restructuring, bankruptcy, or liquidation, and
3. a period of two years has not elapsed since the end of the year in which the invoice documenting the claim was issued.

The correction can take place in the settlement for the period in which 90 days have passed since the payment deadline expired.

It follows from the above that one of the conditions necessary for the creditor to adjust the VAT is that the debtor should not be in the process of restructuring, bankruptcy, or liquidation both at the time of delivery and on the day preceding the submission of the declaration showing the corrected tax. As a result of the anticipated economic turbulence which could lead to many bankruptcies for entrepreneurs, this condition is very important.

Despite the fact that the adopted regulations do not introduce any change in the subject matter, there are arguments to say that the requirement that the debtor does not remain in the course of restructuring, bankruptcy, or liquidation is contradictory to the EU VAT Directive. In a similar case concerning a Czech taxpayer, the Court of Justice of the European Union already made a decision in 2019 in which it stated that the possibility of a correction is also available if the debtor ceases to be a VAT taxpayer. Concerning the subject of the provisions of the Polish VAT Act, the CJEU plans to comment on the case initiated by the preliminary question submitted by the Supreme Administrative Court; however the date for issuing this judgment is not yet known.

The failure to pay an invoice documenting the delivery of goods or services within the territory of the Republic of Poland within 90 days of the expiry of the payment deadline also has significant effects on the side of a debtor who is obliged to correct the deducted amount of tax. This provision, however, does not apply if the debtor, on the last day of the month in which 90 days from the payment date has expired, is undergoing restructuring proceedings, bankruptcy proceedings, or liquidation. In contrast to the abovementioned changes in the income tax regulations allowing a debtor not to adjust its costs in the event of a difficult financial situation caused by the COVID-19 epidemic, no additional facilitation on the part of the debtor has been introduced into the VAT regulations.

Legal status as at April 1, 2020,  01:00 pm.