A necessary condition to recognize uncollectible debts as lasting tax deductible expenses is to classify this debt as revenue accruing from economic activity or income from special branches of agricultural production, as well as to document its uncollectibility.
1. Debt relief
According to art. 16 paragraph 1 point 44 of the law on income tax on legal persons, amortized debts are not considered as tax deductible expenses, except for those which, on the basis of art. 12 paragraph 3 of the act, have previously been reckoned as revenue due.
This means that the debt may be redeemed at the expense of revenue, if:
- the income comes from business activity or special branches of agricultural production
- is in advance reckoned as income due.
2. Barred debt write-off
According to art. 16 paragraph 1 point 20 of the law on corporate income tax, debts written off as barred are not considered as tax deductible expenses. A creditor who has incurred a loss related to expiry of his debt can not reckon the value of the debt as deductible.
It should be noted that legislator does not determine on barred debts, but debts written off as barred. In case of barred debts it is not certain whether they shall be enforced or not. For various reasons, the debtor may be interested in satisfying his time-barred obligations. Therefore, expiry of the limitation period is not sufficient to acknowledge that the debt has been written off as time-barred.
3. Creating reserves
According to art. 16 paragraph 1 point 27 of the law on corporate income tax, provisions other than those listed in paragraph 26 are not considered as tax deductible, if the obligation to create them as an expense does not result from other acts. Provisions established under the accounting act, other than those specified in the said act as such expense, are not deductible for income. The act on corporate income tax law indicates particular situations in which the taxpayer acquires the right to reckon equivalent of claims as deductible and to make a write-down of this debt. The rules link possibility to accept provisions and uncollectible debts as deductible with the moment of an event strictly defined in the act on corporate income tax law. The debt becomes tax deductible if the following conditions have been satisfied:
- the debt was previously reckoned as income due,
- uncollectible debt has been documented in the manner prescribed by the act on corporate income tax law.
4. Creating bank reserves
According to art. 16 paragraph 1 point 26 of the act on corporate income tax law, reserves created to cover the debts which uncollectibility has been substantiated with the exception of regulations on banks, as defined in paragraph a, b, c, d of this provision (paragraph 1, point 26), are not considered as deductible. This arrangement means that in the units which are not organizationally authorized, on the basis of separate laws governing principles of their operation, to provide credit (loans), no established reserves for debts are considered as deductible, unless the obligation to create them arises from separate laws, even if the debt uncollectibility has been made substantiated in accordance with the law on corporate income tax law.
5. Documentation ofuncollectibility
According to art. 16 paragraph 1 point 25 letter a) of the act on corporate income tax law, debts written off as uncollectible, with the exception of claims which have previously been reckoned as income due and which uncollectibility has been documented only in the manner specified in article 16 paragraph 2 of the abovementioned act, are not considered deductible.
Pursuant to the provisions of article 16 paragraph 2 of the tax act, the claims referred to in art.16 paragraph 1 point 25 are the claims which uncollectibility has been documented as defined in the closed directory for the following cases:
by means of provision of uncollectibility, recognized by the creditor as corresponding to reality, issued by the competent authority of enforcement, or
a court order on:
rejection of bankruptcy petition including liquidation of assets when the assets of the insolvent debtor are not sufficient to cover the costs of the proceedings, or
discontinuance of proceedings involving the liquidation of assets when there is a circumstance mentioned in point. a, or
completion of bankruptcy proceedings involving the liquidation of assets, or
protocol, drawn up by the taxpayer, stating that the expected litigation and enforcement costs related to the investigation of claims would be equal to or higher than its amount.
6. Substantiation of uncollectibility
According to art. 16 paragraph 1 point 26a of the act on corporate income tax law, write-downs are not considered as deductible, with exception of write-downs of receivables, as defined in the accounting act, of the amount due, which was previously included as income due and its uncollectibility has been substantiated on the basis of article 16 paragraph 2 point 1. Pursuant to article 16 paragraph 2 point 1 of the act on corporate income tax law, uncollectibility becomes substantiated in case referred to in paragraph 1 point 26a, in particular if:
the debtor has died, has been removed from the register of businesses entities, has gone into liquidation or their bankruptcy comprising the liquidation of the assets has been declared, or
bankruptcy proceedings were initiated with the possibility of an arrangement under the provisions of bankruptcy law, or, at the debtor's request, bankruptcy proceedings were instituted under the provisions of the financial restructuring of enterprises and banks, or
the debt was confirmed by a final court ruling and passed to enforcement proceedings, or
the debt is disputed by the debtor through court action;
Recognition of a write-down of charge as a deductible expense under the provisions on substantiation of its uncollectibility is temporary, because at the time of cancellation, limitation or writing off as uncollectible, the taxpayer is required to demonstrate the income tax, in accordance with article 12 paragraph 1 point 4d, 4e of the act on corporate income tax law. Only a write-down of uncollectible debt as tax deductible on the basis of the exhaustive documentation of rules documenting its uncollectibility has a lasting nature.