Introduction
In a dynamic economic environment, many companies face the problem of bad debts—debts that, for various reasons, cannot be collected. Such debts not only worsen a company’s financial position but can also negatively impact its tax base. Latvia has a mechanism that allows companies to optimize their tax liabilities by properly accounting for and writing off such debts. One key tool in this process is obtaining a Certificate of Inexpediency of Debt Collection.
What is a Certificate of Inexpediency of Debt Collection?
A certificate of debt collection futility is an official document confirming that further collection efforts for a specific debt are economically unviable or legally futile. This document is typically issued by specialized collection companies or law firms after a comprehensive analysis of the debt situation. It serves as an important basis for accounting and tax purposes, allowing the company to accurately reflect losses and take advantage of tax benefits.
Benefits of the service for the enterprise
Obtaining a certificate of inexpediency of debt collection provides a number of significant advantages for companies with bad debts:
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Tax optimization: The main benefit is the ability to reduce income tax. In Latvia, according to tax legislation, bad debts can be excluded from the corporate income tax (CIT) taxable base under certain conditions. This means that the amount recognized as bad debt will not be taxed as profit, which directly reduces the tax burden on the company [1].
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Improved financial reporting: Writing off bad debts allows a company’s balance sheet to be cleared of assets that have no real value. This makes financial reporting more accurate and realistic, which is important for investors, creditors, and other stakeholders.
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Reduction of administrative burden: The company no longer needs to waste resources (time, personnel, funds) on debt collection efforts deemed unfeasible. This allows the company to focus on core business and allocate resources more effectively.
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Compliance with legislation: Proper execution of write-offs of bad debts in accordance with the requirements of legislation and tax authorities prevents possible fines and claims from regulatory authorities.
How to reduce the amount of income tax?
Latvia has a corporate income tax model in which tax is paid only on profit distributions or expenses not directly related to business activities. Regarding bad debts, according to PwC, a debt that remains uncollected for 36 months after a provision has been created must be added to the tax base unless the exemption criteria are met. However, if a debt is deemed bad and relevant documentation is available (such as a certificate of unrecoverable nature), it may be excluded from the tax base, preventing its taxation as distributed profits [1].
To do this you need to:
Documentary evidence: The presence of a Certificate of Inexpediency of Debt Collection is a key document.
Compliance with deadlines: It is important to take into account the deadlines established by law for recognizing a debt as bad (for example, 36 months after the creation of a reserve, with the possibility of extension to 60 months in the event of insolvency proceedings of the debtor) [1].
Transparent Accounting: Maintaining accurate and transparent accounting records that separately record bad debts and the provisions created for them is a must.
Example of work
Let’s imagine a company called “Alfa” that provided services worth €10,000 to a company called “Beta.” Beta went bankrupt, and all of Alfa’s attempts to collect the debt have been unsuccessful. The debt has been on Alfa’s balance sheet for over three years.
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Contacting specialists: The Alfa company contacts a collection company (for example, Paus Konsult) to analyze the debt situation.
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Analysis and conclusion: The collection company conducts an investigation, confirms Beta’s insolvency and issues a Certificate of Inexpediency of Debt Collection in the amount of 10,000 euros.
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Accounting: Based on this certificate, Alfa’s accountant writes off 10,000 euros as a bad debt.
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Tax Optimization: Since the debt is recognized as uncollectible and documented, these €10,000 will not be included in Alfa’s corporate income tax base. This allows Alfa to avoid paying CIT on an amount that is effectively a loss, thereby reducing the overall tax burden.
Conclusion
Obtaining a Certificate of Inappropriateness of Debt Collection is an essential tool for effective financial management. It not only helps clear the balance sheet of unrealistic assets but also provides legal opportunities for tax optimization, which ultimately contributes to financial stability and business growth.
Links
[1] PwC. (2025, July 3). Latvia - Corporate - Deductions. Retrieved from https://taxsummaries.pwc.com/latvia/corporate/deductions