Accounting vs Tax Write-Offs of Unpaid Invoices Under Czech Law

Mgr. Daniel Půlpán
Mgr. Daniel Půlpán
19.3.2026 | ARROWS law firm

Unpaid invoices are a real part of doing business for every company. If a debtor fails to pay their obligation and the receivable becomes uncollectible, you need to know what legal options you have under Czech law and how to deal with it. This article clarifies the difference between an accounting write-off and a tax write-off, explains the strict conditions for recognising a loss as a tax-deductible expense in the Czech Republic, and outlines specific procedures to minimise risks.

The photo shows a lawyer consulting on the tax deductibility of written-off receivables.

Key takeaways
  • You are not entitled to arbitrarily claim a tax write-off for any unpaid invoice. The Czech Income Taxes Act recognises a write-off as a deductible expense only if you meet one of the conditions under Section 24(2)(y), or if a statutory allowance has been created for the receivable.
  • The difference between an accounting write-off and a tax write-off is fundamental. For accounting purposes, a receivable can be written off based on management’s decision, but it becomes a tax-deductible expense only once the statutory conditions are met. Without them, the Czech tax authority will not accept the write-off and will assess additional tax.
  • Statutory allowances (under the Czech Act on Reserves) are your tool for timing optimisation. They allow you to recognise an unpaid receivable as an expense gradually, even before its final write-off.
  • The limitation period for a receivable (generally 3 years from the due date) is risky. A time-barred receivable is tax-deductible only in very specific cases under Czech legislation. The mere fact that it is time-barred is not a reason for a tax write-off; on the contrary, it often prevents it.
  • Attorneys at ARROWS advokátní kancelář assist with debt recovery, creating allowances, preparing documentation for the Czech tax authority, and defence during a tax audit.

What an uncollectible receivable is and how it differs from an ordinary debt

An uncollectible receivable is not simply a receivable that the debtor has failed to pay for a long time. It is a receivable where it is clear that the debtor will not be able to perform, or where enforcement is legally impossible or economically inefficient. The key to understanding this is distinguishing between an accounting write-off and a tax write-off—two different concepts with entirely different impacts on cash flow and tax liability in the Czech Republic.

An accounting write-off means permanently removing the receivable from the balance sheet. In Czech accounting practice, this step is typically recorded by posting to account 546 with a corresponding entry to account 311. From an accounting perspective, this reflects a true and fair view—if you know you will not see the money, you write off the receivable so as not to overstate assets. However, this expense is not, by itself, tax-deductible under Czech law.

A tax write-off is significantly stricter. For a receivable write-off to be recognised as an expense reducing the tax base, it must meet the conditions of Section 24(2)(y) of the Czech Income Taxes Act. If you do not meet these conditions and still claim the receivable as an expense in your Czech tax return, you expose yourself to the risk of additional tax assessment and a penalty of 20% of the additionally assessed amount.

Practical example: You sell goods for CZK 100,000, recognise revenue (thereby increasing your tax base), but the debtor does not pay. If you then write off the receivable only for accounting purposes, you effectively pay tax on income you never actually received.

For the write-off to be tax-effective (i.e., to “reverse” the tax impact), you must either create statutory allowances or prove one of the statutory grounds for extinction or uncollectibility (e.g., completed insolvency proceedings in the Czech Republic).

Two pillars of a tax-effective solution under Czech law

To include an unpaid invoice in tax-deductible expenses in the Czech Republic, you essentially have two routes, which may overlap over time.

Allowances under the Czech Act on Reserves

An allowance is a tool that allows you to reduce the tax base temporarily while the receivable still exists but is risky. The creation of statutory allowances is governed by the Czech Act on Reserves for the Determination of the Income Tax Base (the “Act on Reserves”). These allowances may be created for non-time-barred receivables that are not against related parties.

The Act distinguishes several types of allowances:

1. Allowances for receivables in insolvency proceedings (Section 8 of the Act on Reserves): If the debtor enters insolvency and you duly and timely file your claim with the insolvency court in the Czech Republic, you may create an allowance of 100% of the receivable’s value (excluding accessories). This is the most tax-efficient route.

2. Allowances for other receivables (Section 8a of the Act on Reserves): If the debtor is not in insolvency but is in default, you may create allowances depending on time. More than 18 months after the due date, an allowance of up to 50% may be created. More than 30 months after the due date, an allowance of up to 100% of the value may be created.

3. Allowances for small receivables (Section 8c of the Act on Reserves): A very important provision for the B2B sector. If the receivable does not exceed CZK 50,000 and at least 12 months have passed since the due date, you may create a 100% allowance without the need for court enforcement. The condition is that you are not conducting other disputes with the debtor and the total value of receivables against the same debtor does not exceed CZK 50,000.

Allowances may be created only for non-time-barred receivables. Once a receivable becomes time-barred, the right to create an allowance ceases and any existing allowance must be released, which increases the tax base unless the conditions for a write-off are met. The general limitation period is 3 years under Czech law.

If you have created a statutory allowance (e.g., 100%) and the receivable is subsequently written off, the write-off is tax-neutral. In effect, you have already recognised the expense at the time the allowance was created.

One-off tax write-off

If you have not created allowances, you can write off a receivable as a one-off tax-deductible expense only in cases precisely defined by Czech law. The main ones include:

1. Court dismissal due to lack of assets: The court discontinued bankruptcy proceedings because the debtor’s assets are entirely insufficient.

2. Insolvency: Based on the outcome of insolvency proceedings (a repayment schedule or liquidation of the insolvency estate) for receivables that were duly filed. The portion not satisfied in the insolvency is a tax-deductible expense under Czech legislation.

3. Dissolution of a legal entity: The debtor (a legal entity) ceased to exist without a legal successor (was struck off the Commercial Register in the Czech Republic).

4. Enforcement: Enforcement was discontinued due to the debtor’s lack of assets, or the results of enforcement show that the receivable will not be satisfied.

5. Death of the debtor: The debtor died and the receivable could not be satisfied even by enforcement against the heirs.

6. Receivable up to CZK 50,000: It may be written off even without enforcement if 12 months have passed since the due date and the total amount of receivables against the debtor does not exceed this amount.

The difference between an accounting write-off and a tax write-off in practice

A fundamental mistake is the assumption that an accounting write-off automatically means a tax-deductible expense.

Accounting perspective

In accounting, you must follow the prudence principle. If a receivable is uncollectible, you must write it off. This expense will reduce your accounting profit (or loss). You then continue to record the receivable in an off-balance-sheet account so that, in the event of an unexpected payment, you can recognise it back as income.

Tax perspective

When preparing your corporate income tax return, you must exclude the accounting write-off from tax-deductible expenses (i.e., an add-back item) if it does not meet the conditions of Section 24(2)(y) of the Czech Income Taxes Act. If it does meet the conditions (e.g., you have a decision on the termination of enforcement proceedings), you will keep the expense in the return.

During a tax audit, the Czech tax authority (Financial Office) will require evidence. It is not enough to claim that the debtor is not paying. You must submit a court decision, a bailiff’s report, an extract from the Czech Insolvency Register, or evidence that the debtor has ceased to exist.

When a receivable becomes time-barred

Limitation (time-barring) is a legal concept that weakens the enforceability of a right. The general limitation period is 3 years from the due date. If you do not file a claim with the court within this period or obtain an acknowledgement of the debt, the debtor may raise a limitation defence in Czech court and the court will dismiss the claim.

What does this mean for taxes? As a rule, a time-barred receivable is not a tax-deductible expense when written off.

There are exceptions, but they are complex. If you created statutory provisions (allowances) for the receivable before it became time-barred, you may use them for the write-off. However, if you “missed the deadline”, the receivable became time-barred and you have no provisions, you lose the ability to claim it for Czech tax purposes.

You can prevent limitation by filing a lawsuit, which suspends the running of the limitation period. Another option is an acknowledgement of the debt by the debtor, which starts a new, longer limitation period.

Tax vs. accounting write-off: Where disputes with the Czech tax authority arise

The first common dispute is where a business writes off a receivable of CZK 80,000 without court enforcement and without provisions, believing it is a small amount. However, the statutory threshold for the simplified regime is CZK 50,000. Any amount above this limit without enforcement or insolvency is non-deductible for Czech tax purposes, and in such a case the Financial Office will assess additional tax.

The second issue is a premature write-off in insolvency. A creditor writes off the receivable at the moment the debtor is insolvent. The correct approach during insolvency proceedings in the Czech Republic is to create a 100% provision, not a direct write-off.

The third point of contention is missing documentation. A company writes off a receivable due to “unsuccessful enforcement”, but does not have a formal decision on the termination of enforcement proceedings—only information from the bailiff. For tax purposes, however, a formal decision is required.

New VAT rules: Adjusting the tax base for uncollectible receivables

For VAT payers, the option to recover remitted value added tax is also important. The Czech VAT Act (Section 46 et seq.) allows an adjustment of the tax base in the case of an uncollectible receivable. VAT can be reclaimed, for example, where the debtor is subject to enforcement proceedings and these have not been successful even after 2 years, or where insolvency proceedings have been initiated.

By making the tax base adjustment, the creditor claims the VAT back from the state. The debtor, on the other hand, is obliged to reduce the originally claimed VAT deduction and repay it to the state.

This mechanism is administratively demanding, but for larger receivables it can recover 21% of the value. ARROWS advokátní kancelář recommends consulting this step, as the deadline for the adjustment is limited.

Possible issues

How ARROWS helps (office@arws.cz)

Write-off without a statutory basis – The Financial Office will not recognise the expense, will assess additional tax + a 20% penalty + interest.

Analysis of your receivables portfolio and determination of which receivables can be written off for tax purposes and which only for accounting purposes.

Receivable becomes time-barred – Loss of the ability to enforce in court and to claim a tax write-off.

Monitoring deadlines, preparing debt acknowledgements, timely filing of a lawsuit or an insolvency claim.

Incorrect creation of provisions – Creating provisions for a time-barred receivable or in an incorrect amount.

Setting up a system for creating provisions in line with the Czech Act on Reserves.

Failure to reclaim VAT – The company unnecessarily loses 21% of the invoice value.

Preparation of corrective tax documents and implementation of the tax base adjustment under Section 46 of the Czech VAT Act.

Missing documentation – Lack of a court or bailiff decision during an audit.

Securing legal documentation for the Financial Office.


Summary of practical steps: How to safely write off a receivable

  1. Phase 1: Monitoring and prevention (0–12 months after due date). Actively pursue collection (reminders, pre-action demand letter). If the receivable is up to CZK 50,000, after 12 months consider creating a 100% provision (Section 8c of the Czech Act on Reserves).
  1. Phase 2: Creating provisions (18–30 months after due date). If the debtor does not pay and is not in insolvency, create a provision of 50% after 18 months. After 30 months, increase it to 100%. Unlike in the past, for your own receivables you no longer need to initiate court enforcement to create a 100% provision—meeting the 30-month time test is sufficient.
  1. Phase 3: Insolvency or enforcement. If the debtor enters insolvency proceedings in the Czech Republic, immediately file the receivable and create a 100% provision. After the insolvency or enforcement proceedings end (termination due to lack of assets), release the provision and carry out the tax write-off.
  1. Phase 4: Write-off. If you have a relevant document in hand (death, dissolution, court decision), carry out the tax write-off. Do not forget to assess the possibility of reclaiming VAT (tax base adjustment).

If you are unsure about the correct timing or type of write-off, it is safer to consult experts. The Czech legal team at ARROWS advokátní kancelář has experience in tax and insolvency law and will help you set up the process so that it withstands scrutiny by the Financial Office.

Link between receivable write-offs and tax losses

A tax-effective write-off of a receivable reduces the tax base. If this step generates a tax loss, you can apply it in the following 5 taxable periods, or retroactively in the 2 immediately preceding periods (so-called loss carryback), up to a maximum of CZK 30,000,000.

This means that writing off an old uncollectible receivable can realistically result in a refund of tax you paid in the previous two years.

Conclusion

Unpaid B2B receivables represent both a cash-flow shortfall and a hidden Czech tax risk. A mere internal decision on an accounting write-off is not sufficient—the Financial Office requires that strict statutory conditions under Czech law are met. 

The key is timely action: ongoing creation of statutory provisions, monitoring the limitation period, reclaiming VAT, and securing documentation from enforcement or insolvency proceedings. A loss from unpaid invoices should not mean a double penalty—missing funds and unnecessarily remitted tax. 

Attorneys from ARROWS, a Prague-based law firm, will help you set up a secure receivables management process, ensure debt recovery, and prepare documentation for a tax audit in the Czech Republic. If you are dealing with unpaid invoices, contact us at office@arws.cz for an effective solution.

FAQ – Most common legal questions

1. Can I write off a receivable for tax purposes based only on an affidavit stating that the debtor is not paying?
No. The Czech Income Taxes Act requires objective reasons (enforcement proceedings, insolvency, death, dissolution of the company). A creditor’s mere statement is not sufficient. An exception applies to small receivables up to CZK 50,000, where the conditions are more lenient, but even there you must meet the time test (12 months) and other requirements.

2. Do I have to sue the debtor in order to create tax-deductible allowances?
For your own (non-assigned) receivables, court enforcement is not required for Czech tax purposes. Under Section 8a of the Czech Act on Reserves, you may create an allowance of 50% (after 18 months) and 100% (after 30 months) even without filing a lawsuit. However, filing a lawsuit is crucial to interrupt the limitation period so that the receivable does not become time-barred before you qualify for a 100% write-off.

3. What if the debtor pays after I have written off the receivable for tax purposes?
If the debtor pays a receivable that has already been written off, you must record the amount as income and tax it in the year the payment is received.

4. Is VAT payable on a written-off receivable?
You accounted for VAT when the invoice was issued. If you write off the receivable, the VAT is not automatically refunded. You must take a separate step—adjust the tax base under Section 46 et seq. of the Czech VAT Act and deliver a corrective tax document to the debtor.

Notice: The information contained in this article is of a general informational nature only and is intended for basic guidance based on the legal status as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we maintain professional liability insurance with a limit of CZK 400,000,000. To verify the current wording of the regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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