Tax treatment in the hands of the creditor
Polish tax regulations provide three major methods for obtaining a tax deduction for irrecoverable debt: waiver or forgiveness of debt, debt write-off and revaluation write-off.
Waived debt, which is only effective if the debtor agrees to it, is normally not treated as a tax deductible cost of the creditor. However, the creditor may nevertheless treat such debt forgiveness as a tax deductible cost if the debt had been previously accounted for by the creditor as income. A creditor is not allowed to deduct waived loans or waived interest on debt/loans.
If the debtor does not agree to a debt waiver (e.g. because it would result in taxable income for him – see below), the creditor may still write off (and deduct) such debt as irrecoverable. However, irrecoverable debt is deductible only if it has been previously accounted for as income and the irrecoverability of such debt has been documented with: (i) a decision of irrecoverability accepted by the creditor as representing the factual situation, issued by an competent enforcement authority; (ii) certain court decisions/orders relating to the debtor’s bankruptcy; or (iii) a report compiled by the taxpayer stating that the expected costs of the legal and enforcement process connected with a claim would be equal to or in excess of the debt amount. In addition, a forgiveness of debt is not tax deductible, if such debt is barred by the statute of limitation.
Finally, a creditor may also proceed to a revaluation write-off (i.e., reducing the net book value of the debt below its carrying value). Although a revaluation write-off is normally not tax deductible, it may nevertheless qualify as a tax deductible cost if the amount written off has been previously been accounted for as income by the creditor and the irrecoverability has been proved as probable. The latter will be the case if: (i) the debtor died; (ii) the debtor has been crossed out from the commercial register; (iii) the debtor has been put in liquidation; (iv) the debtor has been declared bankrupt involving liquidation of all assets; (v) bankruptcy proceedings involving the possibility of entering into composition have been initiated; (vi) the debt was confirmed by a valid court decision and directed to execution proceedings; or (vii) the debt is questioned by the debtor in judicial proceedings.
Tax treatment in the hands of the debtor
The waiver of debt, inclusive of loans but not those granted by the Labour Fund, normally results in a profit for the debtor taxable at the corporate income tax rate of 19%. The taxable profit is equal to the value of the waived debt (which includes loans). However, if the waiver of debt is related to bankruptcy proceedings involving the possibility of entering into composition, the waived debt does not qualify as income in the hands of the debtor.
As neither Polish tax regulations nor the local tax offices’ interpretation are conclusive on whether or not waived interest on debt shall result in revenue for the creditor, it is recommended to contact the local tax office for their respective view.