You issued an invoice, booked the revenue, paid corporate income tax, maybe VAT too, and the money never arrived. That’s a double cost: first you waited for nothing, and then you paid tax on top of the waiting. The good news is that the law lets you make a value adjustment to such receivables, or write them off, and thereby reduce your tax base. The bad news: only if you know exactly what to do, and when. If the conditions aren’t met, the expense won’t be recognized for tax purposes, so your tax base goes up instead of down.
A solution exists, it’s just that hardly anyone uses it fully. Read on to find out when a value adjustment or write-off of receivables is recognized for tax purposes, what happens if your customer does pay later after all, and, the part that’s most often missed, how since 2024 you can even get back the VAT on money you never received.
Value adjustment and write-off: what’s the difference?
You make a value adjustment when a receivable hasn’t been collected on time, but collection isn’t yet ruled out. The receivable stays on your books, and you book an adjustment to its value as an expense.
A write-off is final: you remove the receivable from your books because collection is no longer possible, or is no longer economically justified, for instance after bankruptcy proceedings have concluded, the statute of limitations has run, or a restructuring plan has been confirmed.
In both cases, tax recognition is governed by Article 9 of the Corporate Income Tax Act (ZPD). A write-off is further regulated in more detail by Article 33 of the Corporate Income Tax Ordinance.
When is a value adjustment recognized for tax purposes?
A value adjustment of receivables from customers for goods or services delivered is recognized as an expense if all of the following conditions are met:
- more than 60 days have passed from the due date of the receivable to the end of the tax period,
- the receivable has not been collected by the 15th day before the tax return is filed,
- the receivable is recorded in your business books as income,
- you have taken all actions to secure collection with the diligence of a prudent businessperson.
That last point isn’t left open to interpretation: the law specifically states which actions count. The receivable has been sued on, enforcement proceedings are underway over it, it has been filed in bankruptcy proceedings against the debtor, or you have reached a settlement with a debtor who is not a related party, under the special regulations on bankruptcy, arbitration, or mediation.
For a value adjustment, mere reminders and phone calls won’t be enough on their own, since that provision doesn’t list them. For write-offs due to lack of economic viability or final impossibility of collection, and for the VAT correction, the rules are, fortunately, more lenient, as covered below.
One more thing that’s easy to forget: the deadline for taking these actions is the statute of limitations. If you take no action before it expires, an expense you previously booked as tax-recognized is added back into income.
When is a write-off of receivables recognized for tax purposes?
1. After you’ve taken collection actions. The law doesn’t state this in a single sentence, but it follows from Art. 9, paragraphs 2 and 3 of the ZPD that a write-off is tax-recognized if you’ve carried out the prescribed actions, for instance after unsuccessful enforcement or concluded bankruptcy proceedings.
2. When collection isn’t economically justified or is finally impossible. The law recognizes a write-off of a receivable from an unrelated party even when you prove (Art. 9, para. 8 of the ZPD):
- that the costs of initiating court or enforcement proceedings would exceed the amount of the receivable, or
- that, with the diligence of a prudent businessperson, you initiated collection actions and established that collection is ultimately impossible.
Here the law doesn’t necessarily require a lawsuit or enforcement, just proof that you took action, so even documented reminders can form part of that record. You must keep a record of the collection actions taken, the costs further proceedings would have caused, and the evidence on which you based your finding that collection is impossible. The same rule applies to a write-off after it has been established that an order for payment cannot be enforced under the regulations on enforcement against cash funds.
3. Small, time-barred receivables. A write-off of time-barred receivables from unrelated parties is recognized even if you took no collection action at all, but subject to strict monetary limits:
- up to €665 per individual debtor per tax period, if the debtor is liable for corporate income tax or for income tax from self-employment (i.e., a company or a sole trader). If a receivable from the same debtor has become time-barred across several invoices, the write-off is recognized up to a total of €665.
- up to €40 from unrelated individuals whose debt did not arise from self-employment, if your total receivable from that person as of the last day of the tax period does not exceed that amount.
4. Receivables written off in special proceedings. A tax-recognized expense also includes write-offs confirmed in consumer bankruptcy proceedings and in extraordinary administration proceedings for companies of systemic importance. A write-off of a claim you waive under a confirmed restructuring plan pursuant to the Bankruptcy Act is also tax-recognized.
Caution with related parties
The law expressly ties the relief for settlements, small time-barred receivables, and write-offs for lack of economic viability or final impossibility of collection to unrelated parties. If you write off a receivable from a related company, a member of a company, or another related party on those grounds, that expense will not be recognized. Such a write-off must be documented with particular care and, where possible, carried out through formal court, enforcement, or bankruptcy proceedings.
What if the conditions aren’t met?
You can make a value adjustment or write off a receivable even when the tax conditions aren’t satisfied, since accounting rules require it. But then it’s a non-tax-recognized expense, which increases your tax base in your corporate income tax return. The same applies to a write-off recorded in an amount exceeding what’s allowed, for instance above the €665 limit.
If you determine your tax base on a cash basis, bear in mind that you additionally increase the base for value adjustment expenses on receivables from customers.
What if the customer pays later?
Collection of a previously adjusted or written-off receivable is recorded as income. If the value adjustment or write-off was previously tax-recognized, that income is taxable, since the tax benefit you previously obtained is being reversed.
If the write-off was not previously tax-recognized, i.e., it was already included in the tax base, you reduce the base in the period of collection by the income from the collected, written-off receivable. That way the same amount isn’t taxed twice.
The same applies to expenses that were conditionally not recognized in earlier periods, for instance because collection actions hadn’t yet been taken at the time of the adjustment. You can reduce the base for these as soon as you meet the recognition conditions.
VAT: correction for uncollectible receivables
Since 1 January 2024, the Croatian VAT Act has let you reduce both the tax base and VAT even when a receivable hasn’t been collected (Art. 33, paragraphs 8 to 11 of the VAT Act, amendments NN 114/23). Previously, VAT on uncollected invoices generally remained your cost. The conditions are:
- the receivable has not been collected for more than one year from its due date,
- you carry out the reduction within six months of the right to the reduction arising,
- you have evidence that, with the diligence of a prudent businessperson, you took collection actions, in particular that enforcement proceedings are underway, that the receivable has been sued on, that a settlement was reached with a debtor who is not a related party, or that you otherwise demanded payment from the customer,
- the customer has been notified of the correction carried out,
- you have notified the competent Tax Administration office of the correction on the VAT-ispravak form, within the deadline for filing the VAT return for the period in which you carried out the correction.
Unlike with the value adjustment for corporate income tax purposes, the list of actions here is not closed. The Tax Administration, in its opinion, states that any provable action aimed at collection, including documented reminders, can be accepted as evidence.
Important for the customer on the other side: once the customer receives your notification, they must correct their input VAT deduction by the same amount, in the period in which they received the notification. If they fail to do so, the Tax Administration charges them that amount by decision, and an appeal does not suspend enforcement. If you collect the receivable later, in full or in part, you are required to increase the tax base again.
Limitation: the new rules apply only to invoices issued from 1 January 2024 onward. The previous correction rules still apply to older invoices.
The most common mistakes
- making a value adjustment without any collection actions, on the wrong assumption that the mere passage of 60 days is enough,
- relying only on reminders where the law requires a lawsuit, enforcement, filing in bankruptcy, or a settlement,
- missing the statute of limitations, after which a previously recognized expense has to be added back into income,
- writing off receivables from related parties on grounds the law only recognizes for unrelated parties,
- a write-off for lack of economic viability without documentation of the costs and actions taken,
- applying the €665 limit per invoice instead of per debtor,
- missing the six-month deadline for the VAT correction,
- attempting a VAT correction for invoices issued before 1 January 2024,
- failing to subsequently report collected, written-off receivables as income.
Conclusion
Tax recognition of a write-off doesn’t depend only on whether the customer paid, but above all on what you did and whether you can prove it. A timely lawsuit, enforcement, or filing in bankruptcy is decisive for both corporate income tax and VAT, and proper documentation is what prevents an uncollected invoice from becoming a double loss.
The tax treatment of each receivable depends on who your debtor is, how large the amount is, and what collection actions you took. CONEO Croatia’s experts will help you assess which conditions you meet, prepare the documentation for the write-off, and carry out the VAT correction within the prescribed deadlines. Contact us.
