Insolvency law after the amendment
Since July 2017, there has been an effective bulk amendment to the Insolvency Act. The amendment is significant in many ways not only for insolvency administrators, insolvency courts, debtors or creditors, but also for auditors and tax advisors.
Let us look into at least two changes, which have impact in the area of accounting as well as have tax implications.
The first change is the effort to avoid the so-called imidation proposals and the acceleration of the findings in the insolvency case by reasonable proposals. For this reason, an economic evaluation of insolvency has been introduced. When evaluating a debtor´s solvency, there is a new hypothesis “coverage gap”. This hypothesis implements a rebuttable presumption of non-existence of the insolvency in the form of a default in case the different between the payable liabilities and the amount of the disposable finance of the debtor will be less than 10 % for their settlement. This will be provided by the statement of liquidity status and the liquidity development outlook. The debtor will present them to the insolvency court. The court will allow the reports to be processed by authorised persons, such as statutory auditors, value experts or a person occupyied with economic advisory in the field of insolvency and restructuring. In case when the amount will be higher than 10 %, the liquidity development outlook will be used. The expectation will be examined by this outlook, whether it is possible to expect a decrease under the 10 % limit in the difference between the payable liabilities and the amount of the disposable finance of the debtor to their settlement over a period of 2 months. The term for developing these liquidity reports is not an easy task, which is 14 days from the publication of the notice of initiation of insolvency proceedings. The content of these reports and the way of developing them are adjusted in the notice.
The second change related to accounting applies to submitting one´s claim. The creditor will have to document that he has a claim that is mature against the debtor. If the debtor is a legal entity, the insolvency petitioner doing the accounting or keeping the tax evidence is obliged to document the claim by debtor’s recognition with a verified signature or by an executable decision or by notarial record with agreement of performability or by an auditor´s, a court expert´s or a tax adviser´s confirmation that the creditor has a claim against the accounts. The intention is to avoid submitting fictive claims. The auditor, the value expert or the tax adviser will affirm the fact that the creditor has a claim in the accounts only. To avoid the submission of fictive claims, the court has, among others, at its disposal the possibility to impose a fine in the amount of 0.5 Mio. CZK.
For tax advisers and auditors, this second change will have a benefit in the accessibility to information that is related to the claim. Economic departments could use, at least some of possibilities, to minimise the economic consequences of unpaid receivables more operationally. Often, these can be substantial values where we can lose any advantages when not paying attention to this issue. One of these benefits is the possibility of claiming VAT on receivables from debtors in insolvency. VAT can be claimed back for receivables that arose in a period ending 6 months before the court’s decision on bankruptcy of the debtor. It means, for example, if a bankruptcy judgment was taken on December 31st, 2017, the claim must be at least 6 months old and it should have a date of the taxable payment on June 30th, 2017 and older. The VAT law sets up other conditions for the deduction. The necessity of delivering the tax document to the debtor is in question, the creditor submitted the claim, at the latest, in a term determined by the court´s decision about insolvency. This claim was determined and is taken into consideration during the insolvency proceeding. Furthermore, the creditor and the debtor are not and were not a close person, even at the time the claim has developed, as well as they are not or were not connected persons, which the VAT law lists. For the debtor, the cost will be tax deductible.
At this opportunity, it is worth reminding the reader of another possibility allowed by tax laws in case of claims against a debtor in the insolvency proceeding. The reserve act allows us to make tax-deductible adjustments if we do accounting for 100 % of the balance value of the claim. The significant part is that the adjustment will be made in the period the claims were submitted in. The reserve act sets up further necessary conditions for accounting the claim in the revenue that were covered in the tax base.
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