The company has a receivable in 2020. The debtor has been liquidated in 2022. Can the receivable be written off as expenses and not included in the corporate income tax (CIT) taxable base in accordance with Article 9, Part 3, Clause 10 of the Corporate Income Tax Law (CIT Law)?
According to Article 9, Part 1 of the CIT Law, the amount of an unsecured debtor's debt is included in the taxable base with CIT if it meets at least one of the criteria:
- a provision was created for the bad debt of the debtor, it is included in the expense item - in the profit and loss account - and the debt has not been recovered within 36 months (within 60 months if the debtor has started insolvency proceedings) from the date of creation of the provision;
- the amount of the debtor's debt was recognized as a loss, if no provision was made for this debt beforehand;
- a provision has been made for the debtor's debt, it was included as an expense in the calculation of the loss of profit, i.e. the recognition and write-off of the debtor's debt was created in accordance with the accounting procedures and the debt has not been recovered within 60 months, counting from the moment of the debt's occurrence - when the debtor (recipient of goods or services) had must be settled, but the payment was not made.
The criteria mentioned in Section 9, Part 1 of the CIT Law do not apply to the amounts of unsecured receivables, if the taxpayer has carried out appropriate debt recovery and recovery activities and if the debtor is Latvia, another member state of the European Union (EU) or the European A resident of the country of the Economic Zone (EEA) or a resident of the country with which Latvia has concluded a convention on the prevention of double taxation and tax evasion, if this convention has entered into force.
In addition, the CIT Law stipulates that at least one more of the conditions mentioned in Section 9, Part 3 of the CIT Law must be met in order to be exempt from taxation.
Regarding liquidated bad debtors (excluded from the commercial register), Article 9, Part 3, Clauses 3 and 10 of the CIT Law stipulates that the tax exemption should additionally meet at least one of the following conditions:
- there is a court judgment on debt collection from the debtor and a bailiff's act on the impossibility of collection, and the commercial company - the debtor - has been excluded from the company register or a corresponding register in another EU member state or EEA country, or in a country with which Latvia has concluded a convention on double taxation and taxes prevention of non-payment, if this Convention has entered into force;
- the amount of the debt has not been recovered from the debtor, whose activity has been suspended based on the decision of the tax administration, and he has been excluded from the commercial register.
Accordingly, in this situation, the taxpayer, recognizing this amount of the debtor's debt as a loss, would create a CIT object.
Source: iFinanses