War-torn worries: recovery of receivables from Ukrainian companies and tax aspects of Ukrainian bad debt
Piotr Prokocki & Daniel Klementewicz
by Piotr Prokocki & Daniel Klementewicz
Russia’s invasion of Ukraine has led to unpaid liabilities of many Ukrainian companies. This is now more visible than in other armed conflict in recent years due to the scale of ongoing military operations and the degree of Ukraine’s economic integration with the rest of Europe.
Creditors of Ukrainian companies face difficulties in two areas. The first is an attempt to enforce unpaid debts. The second is solving tax difficulties caused by the unsettled legal situation of their receivables.
Tax Aspects of Unpaid Receivables
Unpaid receivables increase the tax revenues of creditor companies, which directly translates into an increase in their income tax base. It is therefore necessary to look for ways to eliminate this negative tax effect. Each jurisdiction provides its own means of removing bad debt. Polish tax residents, for example, have three options to choose from:
writing off receivables as uncollectible, with parallel documentation thereof;
making a write-down of receivables, with the parallel likelihood of their uncollectibility;
conducting a remission of receivables.
Writing off Receivables
In order for uncollectibility to be likely, one of the strictly defined premises should be met:
obtaining a decision on uncollectibility issued by the Ukrainian enforcement authority;
obtaining a Ukrainian court decision on the bankruptcy of the company; or
obtaining confirmation of the claim by a final court decision and referral to enforcement proceedings.
It should be noted that despite the war, most courts in Ukraine work normally. Courts in occupied or regions near hostilities have been relocated to other parts of the country. In regions such as Kherson – which have already been de-occupied – the review of cases has resumed. In consequence, the fulfilment of the three above conditions should be verified on a case-by-case basis.
Remission of Bad Debt
If none of the methods discussed above is available, the last way to remove bad debt from the tax result is to conduct a remission of debt. This may be particularly helpful in the case of intra-group debts incurred by companies from Ukraine. Then, debt recovery may be of limited importance especially where other entities from the group know the economic condition of the company from Ukraine and that it will not settle its liabilities. If the latter method is used, it is worth ensuring that all factual circumstances accompanying the remission of liabilities are thoroughly documented to protect against any accusations of tax evasion.
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