What is the statute of limitations on an obligation?
Important!
In this article, we discuss the statute of limitations in the context of a debt, not a tax liability.
You issue an invoice to a contractor, set a payment date and wait. The due date has already passed, attempts to make contact have been unsuccessful, so you continue to wait, sending out calls for payment from time to time and hoping that the debtor will eventually respond.
In many cases, it’s about small amounts of money that don’t spend your sleep – your business will continue to prosper, with or without that money. However, if you leave the matter to its own course, the debtor’s obligation will eventually become time-barred, just like your claim. It will then become extremely difficult to recover the money and cause negative tax consequences.
When is the statute of limitations on an obligation?
The standard statute of limitations is 6 years, and the time is counted from the date on which the obligation became due (i.e., the due date). However, in Polish law there is a whole list of exceptions to this rule, which shorten the statute of limitations for an obligation.
Thus, for business-related claims, the statute of limitations is only 3 years. The same amount of time will wait for the statute of limitations for claims for periodic benefits.
The statute of limitations will expire after two years if it applies to claims related to a business sales contract.
Another example of an even shorter statute of limitations is a claim arising from a contract for the transportation of persons or goods. In this case, we will be able to talk about the expiration of the statute of limitations after just 12 months.
What effects does the statute of limitations have?
Effects of the statute of limitations on the creditor
A creditor, i.e. in our case a businessman who waited for payment from a counterparty until the statute of limitations had passed, cannot recognize a time-barred claim as a tax expense. After the expiration of the statute of limitations, there is a need to recognize income in an amount equal to the value of the claim, which he had previously recognized as an expense and now cannot collect.
There is also a situation in which an entrepreneur has created allowances for receivables – these allowances are a tax expense. So if the receivable is time-barred, the entrepreneur must account for it on the revenue side. This is mentioned in Art. 14 paragraph. 2 of the Personal Income Tax Law, as well as Art. 12 paragraph. 1 of the Corporate Income Tax Law.
Important!
If the entrepreneur did not include the debt as a deductible expense before it became time-barred, the statute of limitations is tax-neutral.
It’s worth remembering that entrepreneurs can now take advantage of the so-called “business of the future. Bad debt relief – it includes a mechanism for deducting the value of a debt that has not been settled. The statute of limitations does not apply to claims deducted in this way.
Effects of the statute of limitations on the debtor
If the debtor is also an entrepreneur, all time-barred debts (as well as those forgiven) are income for the company. Taxation begins to apply to them after the expiration of the statute of limitations. This follows from the updof (Article 14(2)) and the updopdop (Article 12(1)). Practice shows that VAT is also taken into account when calculating the value of the liability.
Important!
All forgiven or time-barred liabilities from borrowings and/or loans should also be included as income.
If the debtor takes advantage of the statute of limitations, the income referred to above still arises when the debt is time-barred, not when the counterparty raises the subject of the statute of limitations.
Doubtful income – what is it?
If the statute of limitations on a receivable does not apply to entrepreneurs (that is, it did not arise in connection with a business), the value of such a liability also counts as income to be taxed. The Law on Personal Income Tax instructs to qualify income for the so-called “personal income tax”. other sources of income – however, here there is some controversy. Individual interpretations issued by the National Tax Chamber seem to be clear on this issue, but the Supreme Administrative Court has issued several rulings that interpret the regulations differently.
The key difference between the two interpretations is whether the debtor’s performance obligation ceases and whether this happens when the obligation is time-barred. If this is the case (as KIS officials seem to argue), the taxpayer should count the time-barred liability as income and pay tax. However, if the benefit does not cease, the debtor remains a debtor – he does not acquire the right to dispose of the property due to the statute of limitations, but only brings it. According to this interpretation, income does not arise, so there is nothing to tax.
Moreover, Art. 1117 §21 of the Civil Code says that “after the expiration of the statute of limitations, a claim against a consumer may not be asserted.” However, the record is silent on the debtor’s obligation, and since it does not invalidate it, it must be assumed that this one is still in effect.
What happens when a debtor fulfills a time-barred benefit?
It may happen that despite the fact that several years have passed and despite the fact that the obligation has been time-barred for some time, the debtor decides to repay the obligation. There could be many reasons for this behavior – perhaps the few years were needed for the debtor to get the company on the straight and narrow, or perhaps he intends to establish a business relationship with the creditor in the future and realizes that without settling the time-barred obligations there is no warm welcome. However, regardless of motivations, the money will hit the creditor’s account when the debt is actually settled. How do you book such a receipt?
A time-barred liability, once paid, cannot be charged to tax expenses by the debtor. This is because it is not possible to recognize one cost twice. The other way it works analogously – the creditor does not include the money received as income, because he has already done so when he invoiced the contractor.
