At the end of each financial year, entrepreneurs face the challenge of properly handling receivables that have not been collected. This is not only a key accounting issue, but also one that directly affects the tax base and ultimately the corporate income tax calculation.
To ensure your balance sheet accurately reflects your financial position, it’s important to understand the difference between impairment and write-off of receivables, as well as when and under what conditions each should be applied.
When is impairment applied?
Impairment of receivables is used when a customer is late with payment, but there is still a realistic chance the debt will be settled. At this point, an objective risk is assessed to determine whether the receivable may not be collected in full.
According to Croatian Financial Reporting Standards (HSFI), such indicators include:
- Serious financial difficulties of the customer,
- Repeated delays in payment,
- Announcement or initiation of bankruptcy proceedings.
From an accounting perspective, the impairment is recorded as an expense and a reduction in value, while the amount remains recorded as an outstanding receivable. However, the tax status is crucial – not every impairment is automatically tax-deductible.
When is impairment tax-deductible?
According to the Corporate Income Tax Act, the expense from impairment is tax-deductible if:
- More than 60 days have passed from the due date by the end of the tax period,
- The receivable has not been collected by 15 days before the tax return submission deadline,
- Documentation exists showing attempts to collect the receivable (e.g., reminders, enforcement procedures, lawsuits).
If all conditions are met, the entrepreneur can include the impairment as a deductible expense. Otherwise, it is a non-deductible expense that increases the tax base.
When is a write-off used?
Write-offs are applied when there is no realistic possibility of collection – for example, in cases of completed bankruptcy, limitation period expiration, company liquidation, or unsuccessful enforcement.
Partial write-offs are also possible – when part of the receivable is collected and the rest is written off through agreement.
A write-off can be:
- A tax-deductible expense – if the receivable does not exceed €665 per unrelated debtor, if it is statute-barred, and collection attempts have been made,
- A non-deductible expense – in cases involving related parties, undocumented collection attempts, or amounts exceeding the legal limit.
For receivables from individuals (citizens), the threshold amount is €40.
What if the customer pays after impairment or write-off?
If a receivable was previously impaired or written off as an expense, and the customer later settles the debt, the received amount must be recorded as income in the year of payment – with a corresponding correction of the tax base.
Documentation is key
Whether it’s impairment or write-off, the entrepreneur must have:
- An internal decision,
- Analytical records,
- Evidence of collection attempts (if the expense is tax-deductible),
- And in the case of payment – an accounting correction of the previously recognized expense.
Responsible receivables management
Timely and accurate handling of uncollected receivables ensures not only a more accurate balance sheet but also optimization of tax obligations.
For all our clients, Coneo Croatia offers support in analysis, planning, and recordkeeping related to receivables – fully aligned with all applicable legal and accounting standards.
