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Bad debt relief

On 1 June 2005 the Polish parliament introduced bad debt relief, enabling VAT payers to decrease output VAT in case of overdue receivables.

Since 2013, the regulation has remained almost unchanged. The prohibition against taking bad debt relief when the debtor and creditor were related parties was lifted. Similarly, to equalize the tax position of both parties to a transaction, Art. 89b of the VAT Act was amended to release a debtor in bankruptcy or liquidation with an unsettled liability from the obligation to correct its input VAT. Before that amendment entered into force on 1 July 2015, a creditor whose debtor entered liquidation or bankruptcy could not take bad debt relief, but the debtor was required to decrease its input VAT when overdue.

The successive amendments to this regulation seem to justify the view that Polish lawmakers forgot that the Polish VAT Act should first and foremost be harmonized with the EU’s VAT Directive (Directive 2006/112/EC).

The connection between the Polish VAT Act and the VAT Directive was outlined by the Wrocław Administrative Court in its judgment of 22 April 2015 (Case I Sa/Wr 2484/14). There the court found that the 2-year time limit in Art. 89a of the VAT Act was inconsistent with Art. 90(1) of the VAT Directive. In the court’s view, member states were free to decide whether to implement bad debt relief, but if they do, they must comply with the directive.

Citing judgments of the Court of Justice, e.g. C-588/10 Ministry of Finance v Kraft Foods Polska SA, the Polish court held that a member state may introduce only conditions aimed at securing proper collection of VAT and preventing VAT fraud. In the court’s opinion, the 2-year limitation in the Polish act went beyond what was necessary to achieve these aims.

The judgments from the Wrocław court and the Court of Justice seem to justify the view that the vast majority of the conditions imposed in the Polish VAT on benefitting from bad debt relief go far beyond the means necessary to prevent VAT fraud.

Consequently, in the case of overdue payments, the creditor should be entitled to seek bad debt relief if:

  • The debtor was not and is still not a VAT payer, e.g. in the case of B2C transactions
  • The debtor was or is in bankruptcy or liquidation
  • 2 years has passed from the end of the year when the invoice was issued, or
  • The creditor has assigned the receivables.

But a tax dispute may be the unavoidable result.

Daniel Więckowski, tax manager

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