Writing off bad debts
During this process, the creditor presents evidence of bad debt (in full or in part) and evidence of his/her/its effort to recover the debt. Once it has been proven that the debt is bad, the creditor has legal grounds not to pay taxes on the appropriate amount included in the company’s balance sheet. The process of recognising debts bad is regulated by the Procedure of Presenting Evidence of Bad Debts and Efforts to Recover the Debts and Calculating Bad Debts approved by the Order No. 40 of 11/02/2002 of the Minister of Finance of the Republic of Lithuania amended by the Order No. 1K-099 of 06/03/2007 of the Minister of Finance of the Republic of Lithuania (hereinafter – the Order).
The Order provides that debts may be written off if the following two conditions are met:
1. There is evidence showing that the debt is bad;
2. There is evidence of the effort to recover the debt.
Only if the above conditions are met, bad debts can be written off as losses and no taxes are paid on the appropriate amount. The process of bad debt write-off consists of two stages: first, determining whether the creditor has the right to consider the debt bad, in other words, determining whether there is legal basis to deem the specific debt bad. The Order provides a list of circumstances under which the aforesaid right is acquired and documents that can be used as evidence. If the creditor has the required evidence showing that he/she/it has the right to consider the debt bad, we can proceed to the second stage of the write-off process: demonstrating the effort to recover the debt. In this case, the Order also lists the circumstances and documents that serve as evidence that the creditor made efforts to recover the debt.
Having recognised the debt bad, the creditor has the right to redeem VAT (21%) paid to the state. Having added the bad debt to costs and permitted deductions, the creditor can reduce the payable amount of corporate tax.