DOUBTFUL DEBTS AND CORPORATE INCOME TAX

When preparing corporate income tax returns, there is much discussion in professional circles about doubtful debts. Which actions will affect the monthly return, and what needs to be declared in the last month of the reporting period?
#1
First, in practice, it is important to distinguish between receivables arising from uncollected funds from buyers until December 31, 2017 (old receivables), and those receivables that arose after January 1, 2018 (new receivables), because the application of CIT will be completely different.
Reference regarding what to do with old receivables can only be found in the transitional provisions of the Corporate Income Tax Law, which explain situations where it is necessary to consult Article 9 of the Corporate Income Tax Law, which addresses lost debts, specifically in cases where such receivables are directly written off as losses (expenses) or if previously created provisions for these receivables are written off.
Thus, actions related to old receivables, which arose until December 31, 2017, and new receivables, which arose in the period from January 1, 2018, will have different consequences. It is necessary to understand the subsequent steps.
#2
Article 9, Paragraph 1 of the Law on Corporate Income Tax stipulates that corporate income tax is applied to receivables (or a portion thereof) for which a provision for doubtful debts has been created, if the debt has not been recovered within 36 months from the date of provision creation or if the exemption mentioned in Article 9 of the Corporate Income Tax Law is not applicable to it during this period.
Consequently, when creating provisions for doubtful debts, a 3-year period is allowed during which to work with the debtor: either recover the debt or conclude all related legal actions to recover it.
However, if the provision remains on the balance sheet after 36 months, all accumulated amounts must be included in the CIT taxable base in the declaration for the last month of the nearest reporting period, meaning 25% corporate income tax must be paid on it. The criteria for not having to pay CIT are similar to those already known, and they are listed in Article 9, Paragraph 3 of the Law on Corporate Income Tax.
For example, the debtor’s liquidation has been completed, there is an act of impossibility of recovery, the amount of the debtor’s debt is less than the costs associated with its recovery, etc.
It is important to note when creating provisions that this norm applies only to new receivables! Provisions created for old receivables after 2018 do not need to be included in the CIT taxable base, and Corporate Income Tax will not be payable on them. This is explained by the transitional provisions of the Corporate Income Tax Law.
It should also be noted that provisions for doubtful debts created until December 31, 2017, must be accounted for separately from provisions created from January 1, 2018!
#3
Perhaps unpleasant, but it is a fact that often receivables must be written off the balance sheet because there is no hope of recovering them. Even when writing off debts, the application of CIT will differ:
For old receivables, which arose until December 31, 2017 – if the exemption criteria are met, the company can reduce the taxable base in monthly declarations. It should also be noted that in this case, the CIT taxable base is reduced by the amount of the receivable multiplied by a coefficient of 0.75. If the exemption criteria are not met, writing off old receivables will not create additional CIT costs;
For new receivables – if the exemption criteria are met, writing off these receivables will not have CIT consequences. However, if the exemption criteria are not met, the company must include the written-off receivables in the taxable base in the declaration for the last month of the reporting year. It is important to remember that the taxable base can be reduced later if an exemption criterion becomes applicable subsequently.
Based on the above, it is clear that in the case of old receivables, the company can claim a reduction in the taxable base, while in connection with new receivables, the company may have to increase the CIT taxable base. In both cases, the determining factor will be whether the exemption criteria, listed in Article 9, Paragraph 3 of the Corporate Income Tax Law, are met, but the CIT consequences will be different.
And these would be:
1) the debtor is a resident of Latvia or another European Union member state or European Economic Area country, or a resident of a country with which Latvia has concluded a convention for the avoidance of double taxation and tax evasion, if this convention has entered into force;
2) the debtor is a state or municipal capital company that has been liquidated in accordance with the decision of the relevant institution;
3) there is a court judgment for the recovery of the debt from the debtor and an act by the bailiff on the impossibility of recovery, and the commercial company – debtor – has been excluded from the commercial register or a corresponding register in another European Union member state or European Economic Area country, or a country with which Latvia has concluded a convention for the avoidance of double taxation and tax evasion, if this convention has entered into force;
4) there is a court judgment for the recovery of the debt from the debtor – a natural person – and an act by the bailiff on the impossibility of recovery;
5) the amount of the debtor’s debt is less than the costs associated with its recovery, but not more than 20 euros;
6) the recovery of the debtor’s debt through court is not possible due to expediency considerations because the amount of the debtor’s debt is less than the costs associated with its recovery, provided that measures have been taken previously to recover the debt, subject to the condition that the amount of the respective debtor’s debt does not exceed 0.2 percent of the taxpayer’s net turnover for the reporting year, but is not more than 500 euros;
7) the amount of the debt has not been recovered from the debtor – a natural person who is not a related party to the company – by canceling the loan granted to them, subject to the condition that the respective canceled amount is not subject to personal income tax in accordance with Article 9 of the Law “On Personal Income Tax”;
8) the amount of the debt is recognized in accordance with the register of creditors’ claims when the court has confirmed:
a) the completion of the insolvency procedure for the debtor – a legal entity, partnership, or individual merchant,
b) the completion of the bankruptcy procedure for the debtor – a natural person;
9) the amount of the debt, in accordance with a court decision, corresponds to the proportional amount of the principal debt, contractual penalty, or interest cancellation or reduction specified in the legal protection process measures plan during the debtor’s legal protection process or out-of-court legal protection process;
10) the amount of the debt has not been recovered from a debtor whose activity has been suspended based on a decision by the tax administration, and who has been excluded from the commercial register;
11) the debtor – a natural person – has died.
It should also be noted that when writing off old receivables directly as expenses (if no provision was created for them in previous periods), the taxable base can be reduced, but at the same time, the undistributed profit as of December 31, 2017, must also be reduced.
We hope this wasn’t too complicated… If you have any questions, we will be happy to answer them!
P.S. But next time, we will talk again about the Corporate Light Vehicle Tax (CLVT) – who has to pay it and why.

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