Czech Republic: A fundamental change of the rules for the creation of adjustment items for non-barred receivables
On 1 January 2014, an amendment to Act No. 593/1992 Coll., on reserves (for determining the income tax assessment base) has come into force which has impact, in particular, on the creation of adjustment items for receivables that have not yet become statute-barred.
Sec. 8a of the Act abolishes the previous division into six adjustment periods, and as of 1 January 2014, adjustment items will only have to take into account the following two time periods:
– 18 months from the agreed date of maturity – after this period has lapsed, one may create an adjustment item in the amount of up to 50% of the unpaid receivable,
– 36 months from the agreed date of maturity – after this period has lapsed, one may create an adjustment item in the amount of up to 100% of the unpaid receivable.
Adjustment items may only be created for non-barred receivables (whereas the statute of limitation is three years), which is why the creation of adjustment items should be addressed in advance in a suitable form (e.g. by incorporating a clause in the contract which extends the limitation period for this purpose).
Also, companies will no longer have to take into account the actual book value of non-barred receivables when creating an adjustment item, nor will they first have to initiate arbitration or proceedings before a court or administrative authority.
This does not apply in the case of receivables acquired by assignment, if the book value (not including interest, penalties, and fees) at the time at which the receivable originated was higher than CZK 200’000. In such a case, the creation of an adjustment item does pre-suppose that arbitration, a lawsuit, or an administrative procedure has been initiated, and that the taxpayer duly participates in such procedure.
The above changes apply only to receivables which came into existence after the promulgation of the amendment, i.e., after 1 January 2014.