The new Polish law on combating payment delays will enter into force on 1 January 2020. It is aimed at dealing with payment delays but will also considerably change the current payment terms regime. It will apply to all agreements concluded after 1 January 2020. However, payments following from agreements concluded before that date but due after that date will be also taken into account for various purposes (e.g. excessive delays assessment or reporting obligations) and will be also subject to increased penalty interest and additional enforcement costs. Specific regulations apply to public sellers and entities with financial years which do not correspond to the calendar year.
Key changes from 1 January 2020:
Public reporting of the payment practices
All entities subject to the Polish corporate income tax provisions which: (1) are in tax capital groups, and/or (2) exceeded EUR 50 million in revenues in the previous year, have to annually report their payment practices to the Minister of the Economy. The reports will be made publicly available, including being published on the official website.
The first reporting period is 1 January 2020 to 31 December 2020. Reports are due by 31 January of each following year and are to be submitted through an online reporting system. The members of the management board are personally liable for reporting, and non-compliance is subject to a fine. The first payment practices reports will be published in February 2021 and will cover the payment practices in 2020.
The payment practices report will cover payments received and payments made in the thresholds of less than 30 days, 31 to 60 days, 61 to 120 days, and over 120 days from the invoice, delivery of goods, or performance of services, as well as payments that have been or have not been received within the terms provided for in the underlying agreements.
Please note that these reports are likely to trigger public shame campaigns, attract the attention of the UOKiK (which is to supervise the payment practices in Poland and carry out the “excessive delays” penalty proceedings - see below), as well as increase the number of civil claims of individual sellers and organisations representing sellers.
Action steps required:
- Prepare classification for reporting purposes.
- Prepare reporting procedures and provide training for the reporting team.
- Prepare a memorandum on the risk for executives arising from
Prohibition on excessive delays
The new law prohibits “excessive delays” in payments. Excessive delays are understood to be a situation where the total sum of overdue payments, as well as payments settled with a delay, exceeds PLN 2 million (approx. EUR 450,000) in total for three (3) consecutive months (PLN 5 million (approx. EUR 1,150,000) in 2020/21). In this situation, the Competition Authority (UOKiK) - as the new payment supervisory authority appointed under the new law - has a right to commence proceedings ex officio based (among other things) on data on payment practices reported by the entities to the Ministry of the Economy, as well as on reports on “possible delays” received from the tax authorities and notifications from third parties (any party can notify the UOKiK about a suspicion concerning excessive delays).
The first reports on possible delays provided to the UOKiK by the tax authorities will concern January 2020 (please note that “possible delays” means a situation where the sum of unsettled invoices exceeds PLN 2 million in 60 days from the date of the invoice (PLN 5 million in 2020/21), so the threshold is different than in the “excessive delays” test and may attract UOKiK audits, even if there are no delays).
The UOKiK (also with the assistance of the Trade Inspectorate) has the right to carry out audits and to request information and documents (also from entities which are not parties to the audited transactions) and to impose fines up to EUR 50 million for non-compliance. The auditing period may cover up to 2 years in reverse, but only payments with due dates which fall after 1 January 2020 may be taken into account.
The fine for excessive delays is the sum of the fines for each delay calculated in the following way: X (the overdue amount) * Y/365 (number of days overdue/365) * the penalty interest. Repeated fines are increased by 50%.
Furthermore, information about the commencement of proceedings, as well as on the fines imposed, is published on the official UOKiK website.
Action steps required:
- Arrange internal audit of payment practices and prepare a regulatory risk assessment.
- Prepare a memorandum for the employees on how to handle the UOKiK audit.
- Prepare a risk mitigation memorandum for the executive.
The payment term cannot exceed 60 days if the seller is an SME and the buyer is a non-SME. The SME classification is to be made in line with EU Regulation 651/2014, i.e. it is an enterprise which employs fewer than 250 persons and with an annual turnover not exceeding EUR 50 million (excluding VAT and other indirect taxes) or an annual balance sheet total not exceeding EUR 43 million, save that, due to the ownership structure, entities within groups may need to include the other group entities. A non-SME is an entity which does not fall within those thresholds.
The calculation data is taken from the latest approved accounting period (in the case of newly established entities the data is estimated on a bona fide basis). Calculations are to be made on an annual basis and if the entity exceeds or falls below the thresholds for two consecutive accounting periods, it is re-classified.
The non-SME buyer is to represent to the seller that the buyer should be classified as a non-SME entity not later that following conclusion of the agreement. Non-compliance is subject to a fine, which will result in an enhanced documentation requirement for such agreements.
The non-SME buyer cannot just rely on the seller’s representation on its non-SME/SME classification unless - with all due diligence - it could not have known its status. It seems that, in practice, representations of sellers with payment terms longer than 60 days will have to be confirmed by the buyer based on an assessment of the data provided by the sellers (e.g. limited financial data, headcount, structure chart) and such assessment will have to be updated annually in the case of pending contracts.
Action steps required:
- Prepare a non-SME/SME classification procedure and amend documentation.
- Prepare a memorandum on risks and practical consequences of breaching those regulations.
Unfair competition act and burden of proof
A breach of the payment terms law, a gross deviation from good commercial practice, a failure to take into account the nature of the product or the service, or a failure to adjust the payment terms to the delivery schedule, are considered to be an unjustified extension of the payment term, which will constitute an unfair competition act.
Furthermore, the burden of proof that the payment term exceeding 60 days is not grossly unfair to the seller (which is one of the requirements of the payment terms law) will lie with the buyer, so it should be able to evidence, for example, what the market standard is in a particular industry, that the terms of business are clearly disclosed at the outset of the arrangement, that the payment term is a trade-off for other business benefits, or that the payment term is objectively justified due to the specificity of the particular business, seasonality, long supply chain, etc.
This is aimed at encouraging sellers to bring civil claims. Such claims may be also brought on behalf of sellers by public interest organisations/associations. These organisations/associations have not been very active to date due to the complexity of litigation under the previous legal regime.
Please note that all contractual provisions which are contrary to the payment terms law, and/or any arrangements aimed at circumventing the payment terms law, are null and void and are replaced by the relevant provisions of the payment terms law (e.g. (1) a payment term exceeding 60 days, which is not expressly agreed in the agreement and/or which is considered by the competent court to be grossly unfair, and (2) a payment term exceeding 60 days in a non-SME-SME transaction, are automatically replaced by a 60-day payment term. This replacement triggers penalty interest from the 61st day up to the payment day on top of the standard interest from the 31st to the 60th day, as well as claims for potential damages and/or a public apology available under the unfair competition regime).
Action steps required:
Payments delayed by more than 90 days after the payment date will increase taxable income for buyers and decrease it for sellers. All affected tax submissions will have to be amended.
Each seller (also non-SME) has a right to unilaterally terminate the agreement with the buyer if the payment term exceeds 120 days: (i) in the Asymmetrical Transaction or (ii) it is not expressly provided in the agreement or it is grossly unfair.
All payments under such terminated agreements are due within 7 days of termination and the penalty interest applies from the 8th day up to the payment date.
The default penalty interest arising from commercial transactions will be increased up to 11.5%, while the maximum penalty interest will remain at 14%.
Additional enforcement costs will depend on the amount due and will be increased to EUR 70 for each claim between PLN 5k and 50k and EUR 100 for each claim exceeding PLN 50k.
Action steps required:
Prepare a memorandum on the tax consequences of the new law and provide training to the in-house tax team.
Assess the risk arising from particular agreements with payment terms exceeding 120 days.
Prepare a memorandum on practical issues related to the interest and additional costs calculation.
Please get in contact with us if you require assistance with any of the recommended action steps above.