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The creditor will not always recover the pre-litigation costs in excess of the flat rate

It is common practice in business transactions to use the services of professional debt collectors in order to avoid costly and lengthy court proceedings. The legislator, meeting the needs of entrepreneurs, made it possible to claim from debtors the costs of such services, pursuant to Art. 10 sec. 1 and 2 of the Act of March 8, 2013 on counteracting excessive delays in commercial transactions (ie. Journal of Laws of 2021, item 424). In the first place, the creditor, pursuant to Art. 10 sec. 1 creditor is entitled to a flat rate in the amount of the equivalent of 40, 70 or 100 euro, respectively. The flat rate is due by operation of law and without any additional actions on the part of the creditor. Flat rate claims are not a major subject of controversy in the jurisprudence of courts.

However, ambiguities arise with claims regarding the costs of recovery in excess of the statutory flat rate, the return of which may be demanded by the creditor pursuant to Art. 10 sec. 2 of the above-mentioned act. The key wording in par. 2 is the phrase “in reasonable amount”. This means that the creditor must meet certain conditions in order to be able to recover the incurred expenses in excess of the flat rate. First of all, it is a claim for damages (for example, the Supreme Court in the resolution of December 11, 2015, file number III CZP 94/15, and the District Court in Warsaw in the judgment of February 24, 2017, file number XXIII Ga 111 / 17), with all the consequences, so the creditor must prove the damage suffered, secondly, to prove the debtor’s guilt and the causal link between the debtor’s fault and the damage suffered by the creditor. Therefore, it is necessary to prove not only the fact of incurring costs, but also the legitimacy, i.e. both the amount and the fact that the costs were justified in the circumstances of a given case. Compliance with the above requirements often causes many problems for creditors and their attorneys. In one of the last cases of this type, in which our law firm represented the debtor, the court dismissed the creditor’s claim for reimbursement of pre-litigation costs in excess of the flat rate. The court rightly drew attention to several issues which the creditor failed to prove. First of all, the amount of the debt collector’s remuneration may not be arbitrarily determined by the creditor together with the debt collection company in percentage terms, the circumstances of a given case should be included in the calculation of the remuneration, including the duration of the debt collector’s operation, the scope of activities undertaken, and the difficulty of the case. Subsequently, the creditor should prove not only the fact of payment as a result of the actions of the debt collector, but also what actions the debtor undertook and whether they resulted in the payment of the debt by the debtor. The court also confirmed that activities such as sending a request for payment or contacting by phone fall within the scope of activities for which a flat rate is due, but they cannot be considered as extraordinary activities justifying the award of remuneration exceeding the flat rate – reference number of the case – X GC 294/21 judgment of 1 July 2021 in the District Court Poznań Stare Miasto in Poznań, 10th Commercial Division.  

In our practice we have had numerous cases, in which the courts refused to compensate creditors pursuant to Art. 10 sec. 2 of the Act of March 8, 2013 on counteracting excessive delays in commercial transactions, if these costs were not justified and were not properly demonstrated. It is also worth paying attention to another judgment, also issued by the Poznań Stare Miasto District Court, in which the Court indicated an additional circumstance limiting the possibility of seeking compensation above the lump sum, namely that the debt collector’s remuneration should not exceed half of the costs of a professional attorney’s remuneration for conducting a court case: “As a rule, it should be assumed that the costs of debt collection proceedings should be lower than the remuneration of a professional attorney for court proceedings. Initiating and conducting court proceedings requires a greater amount of work than taking standard actions in debt collection proceedings. In the case of a trial, apart from sending a request for payment or telephone contact with the debtor and a general substantive assessment of the merits of the request, it is also necessary to prepare a statement of claim. Of course, determining the amount of the reasonable costs of debt collection proceedings depends on the circumstances of a particular case. In the present case, the justified remuneration should amount to (…) PLN, that is about 50% of the costs of any possible court proceedings ”(reference number XII GC 1398/20). To sum up, debtors are not defenseless against unjustified claims related to pre-trial recovery costs. If the additional costs are not justified and duly proven, these claims can be effectively challenged.

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Why should you consider setting up a limited liability company if the changes planned in the “Polish Deal” are implemented?

The announced program called the “Polish Deal” includes a proposal that entrepreneurs will pay a health insurance premium of 9% of their income, while the health insurance premium will not be tax deductible.

Such a significant change in the conditions of running a business will certainly affect the profitability of many enterprises in the country and is a good opportunity to rethink the form of business. According to the planned changes, the new higher health premium will be paid by entrepreneurs running sole entrepreneurships and partners in partnerships who are also treated as entrepreneurs.

In the event of the enactment and entry into force of new regulations, a change in the form of business activity may be considered in order to minimize the negative effects of this health contribution. One possibility is to run a business in the form of a limited liability company. In the case of this entity, if the company has more than one shareholder, and the share of the other shareholder is not symbolic (e.g. 1% to 5% of shares), the shareholders are not subject to the obligation to pay the health insurance premium. The management board of a limited liability company, if no employment contracts or contracts have been concluded with members of the management board, are also not subject to the obligatory health insurance contribution. The remuneration of the management board of a limited liability company, set out in the shareholders’ resolution, for performing functions in the management board is only subject to taxation under general rules.

The above means that in the event of the entry into force of the “Polish Deal”, the remuneration will be based on the tax-free amount of thirty thousand zlotys. In addition, this remuneration is settled according to the general tax scale, that is 17% and 32%, and the higher tax rate, in accordance with the proposed changes, will only apply to income above one hundred and twenty thousand zlotys. Summing up, the income from being member of the management board of a limited liability company, settled according to the tax scale up to the amount of PLN 120,000.00 per year, will be taxed at the rate of 17% and will be entitled to a tax-free amount, as well as to tax reliefs and joint settlement with the spouse. The remuneration of the management board is a tax-deductible cost for the limited liability company. The above option seems attractive compared to running a business unchanged, where the non-deductible 9% health insurance contribution will apply, the base flat tax rate is 19% and the lack of possibility to benefit from both reliefs and joint settlement with spouse. Additionally, it should be noted that the shareholders of the limited liability company and, partially, the management board are not liable with their private assets for the company’s obligations, so there is an additional benefit in the form of asset protection.

Considering converting a sole proprietorship into a limited liability company one should also take into account the fact that after the transformation itself, a one-person limited liability company will be created, with the transformed entrepreneur as the sole shareholder. In this form, the sole partner will be obliged to pay the health insurance premium. It will be necessary to carry out further actions, that is sell the shares to another entity, so that the company has at least two shareholders.

So how do you go from a sole proprietorship or partnership to a limited liability company?

Basically, there are two options: setting up a new limited liability company beside the entrepreneurship and then closing the business or partnership, or transforming the existing sole proprietorship partnership into a limited liability company.

Establishing a new company will be a reasonable solution only in the case if one’s conducting a small-scale business, having one contractor, limited business assets or a partnership. In such cases, the costs and time related to the transformation may be higher than registering a new entity, especially if we use the online registration of the company in the s24 system. In the event of establishing a new entity, it will be necessary to transfer the assets to the new entity and a possible assignment of contracts.

The second way to start a business in the form of a limited liability company is to transform existing activities. The undoubted advantage of using the transformation procedure is the fact that the limited liability company that will be created as a result of the transformation will be entitled to all the rights and obligations that the entrepreneur was previously entitled to. The company will automatically be a party to all contracts previously concluded by the entrepreneur, as well as all licenses and permits will be transferred to it. The law allows for transformation into a limited liability company of:
– sole proprietorship,
– civil law partnership,
– commercial partnerships (general partnership, limited partnership).

The conversion procedure differs quite significantly between a sole proprietorship and partnerships and civil law partnership, with a sole proprietorship being longer, more costly and more formalized.

Transformation of a sole proprietorship into a limited liability company requires the following actions:
– in the first place, the entrepreneur is obliged to prepare a transformation plan, which must be in the form of a notarial deed. The plan must obligatorily specify the carrying amount of the property of the transformed entrepreneur on a specific day in the month preceding the drawing up of the transformation plan. The Act indicates other necessary documents, which constitute attachments to the plan: draft of the entrepreneur’s declaration on the transformation, draft of the company’s memorandum of association, as well as the valuation of the company’s assets (assets and liabilities) and the report prepared for the purpose of the transformation on a specific day in the month preceding the date of preparation conversion plan;
– afterwards, the conversion plan with attachments is subject to an audit by a statutory auditor appointed by the registry court. The expert is obliged to examine the plan in terms of reliability and correctness within two months, and then submit an opinion to the registry court;
– after an opinion is submitted by a statutory auditor, the transforming entrepreneur submits, in the form of a notarial deed, a declaration of transformation into a capital company, the declaration should contain, in particular, the type of company into which the transformation takes place, the scope of personal rights granted to the entrepreneur as a shareholder in the newly established company, the amount of capital in the company, personal data of the management board;
– in the next stage, the entrepreneur signs the limited liability company contract and appoints the management board;
– the last step is to submit an application to the National Court Register and register the company, upon entry of the transformed company into the register, the entrepreneur is obliged to delete the activity from CeiDG (the registry for sole proprietorship and civil partnerships);
– The transformed company is also required to announce the transformation in public announcement. Upon transformation, the entrepreneur becomes the sole shareholder of the limited liability company, with the registration as limited liability company also the obligation to keep commercial books arises.

The process of transforming a civil law partnership or partnership contains the same elements, but is generally simpler and shorter. Pursuant to the amendment to the Commercial Companies Code of March 2020, the transformation of general partnerships and civil partnerships may take place in a simplified procedure, provided that all partners of the company handle its affairs. Simplified transformation requires the following steps:
– the first stage is the preparation of a resolution on transformation, which must be signed by all partners, the legislator resigned from the need to prepare a transformation plan and audit it by a statutory auditor;
– next, the only document determined by the legislator as necessary is the financial statement prepared for the purposes of the transformation;
– the last stage is signing the agreement of the transformed company and submitting the application to the registry court, conclusion of the limited liability company agreement requires the form of a notarial deed.

The simplified procedure allows to transformation of a general partnership or civil partnership in a much shorter time than the transformation of a sole proprietorship. The time needed for the transformation is shorter by approx. 2-3 months. Moreover, the cost of the procedure is significantly reduced as the audit by an auditor is one of the most significant costs when transforming a sole proprietorship. Transformation of an entrepreneur or partnership into a limited liability company unfortunately it does not come only with benefits. There are some drawbacks as running a business in the form of a limited liability company is subject to corporate income tax (CIT), the so-called full accounting, is mandatory. The above drawbacks might increase the day to day costs of running a business. It is also worth noting that the transformed entrepreneur is liable with personal assets for three years from the date of transformation. The decision to transform should be preceded by a comprehensive analysis of the potential benefits and risks related to the transformation.

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How to deal with excessively long payment terms?

The vast majority of entrepreneurs operating in Poland, especially from the SME sector, encounter the problem of excessively long payment terms. Extending payment terms is a common practice used by contracting parties, whether in construction services, transport or the supply of goods. Ordering parties often use contract templates with payment dates after 90 or 120 days. Often you can also find provisions extending the already long payment date by another month in the event of failure to comply with some minor formalities.

How to deal with such challenges? Since the beginning of 2020, the legislator has made available several tools that may be helpful. One of the amended regulations contained in the Act of March 8, 2013 on counteracting excessive delays in commercial transactions (ie Journal of Laws of 2021, item 424) is Art. 7 sec. 2a, which indicates that “The payment deadline specified in the contract may not exceed 60 days, counted from the date of delivery of the invoice or bill to the debtor, confirming the delivery of goods or the performance of a service, unless the parties expressly agree otherwise in the contract and provided that is not grossly unfair to the creditor, with the exception of paragraph 2a “. Wherein paragraph 2a applies to transactions where the debtor of the micro, small or medium-sized entrepreneur is a large entrepreneur. In such a situation, a large entrepreneur cannot set a payment period longer than 60 days. How to assess whether a contract clause is not grossly unfair indicated in Art. 11a of the Act, according to which, when assessing, the entirety of the circumstances of the case should be examined, in particular:

“1) flagrant departures from good commercial practices that violate the principle of good faith and the principle of fairness;

2) the nature of the goods or services that are the subject of the commercial transaction, in particular the time usually needed for the sale of the goods by the debtor to third parties, or

 3) adjusting the schedule for the delivery of goods or performance of the service in parts to the schedule of meeting the corresponding parts of the cash benefit. “

Translating the above general guidelines into the realities of business situation that were conducted by our Law Firm and in which the courts recognized payment terms longer than 60 days as violating the Act and, as a result, ruled that our Law Firm’s clients were entitled to payment after 60 days for the service provided, for example the following particular provisions were considered grossly unfair:

 – “the date of payment of the amount of a single freight set on (…), i.e. more than 3.5 months after the actual performance of the contract by the carrier meant that the carrier credited the defendant’s business activity, who could freely dispose the funds allocated to the payment of remuneration for the carrier during this period, when he had the remuneration paid by the entity ordering the transport ”;

– “the provisions (…) of the order, which authorized the defendant to extend the payment deadline by another 60 days in the case of any complaints or entries in the CMR document, – taking into account the behavior of the defendant who did not report any claims to the claimant related to transport – as gross unfair to the carrier (…) “and ” (…) the contractual provisions extending the payment period were grossly unfair to the creditor, and were contrary to the socio-economic purpose of the contract and the principles of social coexistence, and above all were objectively unjustified, taking into account the type of service and the duration of the contract (only 3 days elapsed between loading and unloading the goods). It should be noted that the approximately 4-month period for the payment of the unit freight amount de facto meant that the plaintiff was crediting the defendant’s business activity ”;

The cited opinions of the courts indicate that if the payment deadline is set for more than 60 days or is extended unilaterally by the debtor, such deadlines may most likely be considered grossly violating the creditor’s interest. In the event of a court dispute, it is the debtor who will have to prove that the special circumstances justified such a long payment period. This issue was also considered by the courts in cases conducted by the Law Firm, and as circumstances justifying the extension of the payment deadline, the courts indicated these might be, for example: “(…)the complexity of the order, the need to produce goods from unique elements as the basis for extending the payment deadline, and thus proving that the extended payment term will in no way infringe the interests of the creditor”.

Following the remarks of the courts presented above, it can be concluded that if the debtor has set a payment term longer than 60 days, it will not be relevant for the maturity of the creditor’s claim in most commonly concluded contracts in business transactions, and only in the case of atypical specific contracts, the deadline longer than 60 days will be justified. As a result, the creditor will be able to demand payment of the due amount already after 60 days from the date of delivery of the invoice or bill, even in the case of a payment deadline exceeding 60 days resulting from the contract between the parties. If the claim becomes due after 60 days, it will mean that the creditor will also be able to claim the lump sum costs of pre-trial debt collection after these 60 days.

The possibility of demanding payment from the debtor of the receivables after the statutory payment deadline and before the contractual deadline may contribute to the improvement of the creditor’s liquidity and avoid crediting contractors at his own expense.

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Remuneration for establishing a transmission easement and for non-contractual use of real estate vs. tax consequences

In most cases, the rules for a transmission companies’ use of land on which devices for the transmission of electricity, water and gas are located, are regulated through establishing transmission easements. According to Art. 305 (2) of the Civil Code, transmission easements are established for an appropriate fee.

Establishment of an easement involves the obligation of the owner to tolerate the existence of electricity, water or gas transmission facilities on his land, but also to receive a benefit in the form of one-off payment (usually) or periodic compensation. Should tax be paid on the remunaration received? Before October 4, 2014, the tax authorities took the position that the remuneration received by the taxpayer for establishing a transmission easement was taxable. This position was confirmed by issued general interpretations (interpretation of the Minister of Finance of July 10, 2013, DD3 / 033/101 / CRS / 13 / RWPD-48186 / RD-70022/1).

In 2014, an amendment to the Personal Income Tax Act entered into force, which determined that  income from remuneration received for the establishment of a transmission easement within the meaning of civil law became free from income tax. Therefore, at present, there should be no doubt, that in accordnace with the aforementioned amendedment, no tax is to be collected on the remuneration received for the establishment of the transmission easement.

When regulating the issue of transmission easement, the property owner and transmission company (in the absence of a consensus of the parties, this is done through the courts) often make mutual settlements with respect to the prior use of the property by the entrepreneur without legal title. On this basis, the owner is entitled to remuneration, for so-called non-contractual use of the property. Importantly, the remuneration due under Articles 224 § 2 and 225 of the Civil Code cannot be regarded as compensation for damage caused to the owner.  Therefore, renumeration is to be regarded exclusivley as payment for the use of owner’s property by the utility holder.  It should go without saying, but does not hurt to mention, that the full legal basis of the ownership for the property subject to the easement needs to be demonstrated prior the negotiation of the easement.

The amount received for non-contractual use of real property constitutes revenue from other sources, as referred to in Art. 10 sec. 1 point 9 in connection with with Art. 20 paragraph 1 on the Personal Income Tax Act, subject to taxation according to the tax scale referred to in Article 27 sec. 1 on the Personal Income Tax Act and should be disclosed in the tax return to be submitted to the competent tax office by 30 April of the fiscal year following the year in which the above-mentioned remuneration was received (e.g. the judgment of the Provincial Administrative Court in Łódź of 07-07-2016, case no. I SA / Łd 487/16; the judgment of the Provincial Administrative Court in Warsaw of 23-10-2014, case no. III SA / Wa 1666/14).

Therefore, revenue obtained as remuneration for non-contractual use of land does not benefit from the tax exemption enjoyed by the payment for the establishment of a transmission easement. The amount received as remuneration for the use of the real property must be subject to taxation according to the general rules, i.e.  the 17% or 32% scale.