Summary of the 10th International Factoring Congress - legal panel

The 10th anniversary International Factoring Congress is behind us, so one may be tempted to summarize it. Due to the theme of the Blog, the summary will focus on the legal aspects discussed at the first panel of the Congress. The event has already been comprehensively summarized by PZF here - I encourage you to read on. I, on the other hand, will focus in the summary on what I know best - that is, the legal aspects of factoring.

1. Legal changes in 2019 + PZF Almanac.

Legal developments in the factoring industry, of course, you can keep up to date on the Blog. As every year, each Congress participant received a set of materials including the Almanac of the Polish Factors Association. In this year's edition, I was responsible for compiling the articles in the section on legal changes. I encourage you to read both articles:

• Factoring fraud - mechanisms and trends;
• Legal changes affecting the factoring business.

This final article is a summary of the most important legal changes for the factoring industry in 2019.

2. Panel discussion

This year the panel discussion on legal changes was the first panel of the Congress. As for me, it could have lasted all day, because this year we are dealing with a very large number of significant legal changes that directly affect the factoring industry. Significantly, some of the changes have already entered into force (e.g. White List) despite the fact that all technical and legal aspects of the new regulations have not been resolved. Time for a full discussion of the changes was a bit lacking, we managed to discuss primarily the topics of White List, Split Payment, hint at the issues of the law on congestion. But one by one.

White List

• Virtual accounts. On 17.09.2019, it was published HERE at taxes.gov clarification according to which: "We would like to remind you that the so-called virtual accounts are not included in the list, as they are not actual checking accounts reported to the tax office or CEiDG. However, the list, after entering the number of a virtual account, displays the information that it is an account associated with the settlement account of a specific entity and provides the details of that entity. In addition, in November, we plan to make available a tool whereby it will be possible to streamline the verification, by means of information systems (including financial and accounting systems), of whether a virtual account is associated with an account that is listed. If so, payment to such a virtual account will not result in negative tax consequences." The above should solve the problem of virtual assignment accounts. As the MF representative (Mr. Dyr. Z. Makowski) assured during the Panel - these accounts to the US do not need to be reported. Thanks to the fact that White List supports the so-called account mask, i.e. the part of the trading account number that is repeated, typing the data of this technical account into the White List search engine will show us positive feedback (positive verification). According to information from the Ministry of Finance and ZBP, most Banks have positively reported account masks to STIR. There are still some problems related to technical issues related to downloading the printout or the fact that this account mask shows up after checking the account on the White List. - But these are issues to be further addressed towards improving the system.
• Assignment accounts / technical accounts / self-management accounts. Intensive legislative work is currently underway to clearly regulate their status before January 1, 2020. (the start date of the sanctions) in such a way that these types of accounts do not have to be checked by White List payers. Self-economy and technical bills are not to be reported to the White List, as they are generated in thousands.

The above means that the problem of virtual accounts should be resolved immediately, while the issue of banks' own accounts (non-virtual cession accounts) has not yet been resolved.

• The moment of verification of the account on the White List. According to a statement by a representative of the MF - that moment in the case of transfers made with a date later than the date of the transfer order will be the moment of the order, with details to be described in clarifications planned for publication in October.
• Bank accounts of foreign entities registered for VAT in Poland. According to the MF representative, the White List regulations apply to domestic transactions, i.e. between entities with headquarters in Poland, without the need to verify whether such an entity also operates abroad. It is about one specific transaction settled by a given invoice. This issue, however, is yet to be further regulated under the MF's amendment package.
• White List vs. Dealing with Factoring Recipients. I have already written in part about this issue HERE and in the Panel itself, I mentioned recipients' inquiries about the reasons for the absence of an assignment account on the White List - which inquiries had already occurred since 2.09.2019. (WL was published on 1.09.2019). From this angle, I encourage factoring companies to apply a reasonable policy of informing recipients about the rules of use of the White List, possibly preparing a model for responding to recipients' inquiries, considering newsletters or even subtle modifications of factoring clauses to avoid doubts related to to whom the account from the VAT invoice on the White List is assigned. Such a practice would relieve the burden on operations departments / account managers, and one gets the impression that it is also welcomed by MFs indicating demands for recipient awareness.
• White List vs. silent factoring. Today, silent factoring has undoubtedly become a more difficult and risky product:

1. With a silent assignment on a restricted account (escrow) - the account will not be visible on the White List, and what is more, a possible Split Payment transfer will be rejected - this practically makes this product useless for large recipients.
2. With a silent assignment on a factor's checking account - silent factoring will "cease to be silent" due to the possibility of verifying that the account belongs to the factor on the White List;
3. With a silent assignment on the factor's settlement account (visible on the White List) - such a solution is still possible, but requires a creative approach and good security (automatic transfer orders / broad power of attorney for the factor / limited access for the factor / limits on own withdrawals). Due to specific technical solutions - it is to be expected that such opportunities will be mainly available to bank factoring entities.

Silent factoring can survive, it will require an individual approach. I think I will still write about it in the future as part of a separate article. I have some ideas on how to preserve this product despite difficult times (RODO and White List).

Split Payment

• Statistics. The Panel mentioned MPP statistics over the past year - about 10% of all transactions were completed using MPP, which means that the number of such transfers is increasing, and this trend will undoubtedly continue and even progress due to the extension of mandatory Split Payment from 1.11.2019, in addition to White List sanctions.
• Introduction. The change from Nov. 1, 2019, for some industries means a switch from reverse charge to MPP, meaning VAT will return to invoices where it didn't exist in many places at the moment. This will include the construction industry, electronics suppliers, suppliers of car or motorcycle parts (new) and several others. I wrote about this HERE. Many entities are in the process of preparing for the mandatory version of split payment, and have two choices here : (1) either they will identify which invoices should be paid under MPP, (2) or adopt a simplification - pay all purchase invoices under MPP (this is what the MF seems to be encouraging).
• PKWiU classification. From the point of view of factoring, an important problem is the risk of misclassification of the product covered by the invoice to PKWiU and the associated risk of erroneous application of the VAT rate. The problem is significant because of the existence of tax and statistical interpretation (and the often different practice of tax authorities from statisticians) which means in extreme cases the necessity to refer to the opinion of the Central Statistical Office. Among other things, the Panel pointed out the example of car tires - classified differently for wholesale. According to the MF, the buyer of goods / services is responsible for correctly identifying what is the subject of the transaction , regardless of what the supplier declares. What's more, from the statement of the MF representative, it appears that as of today the MF recognizes the factoring company as such an entity despite the fact that the factoring company de facto acquires the receivable and not the goods / service. The MF believes that the responsibility lies with the factoring company, which means the appearance of another risk factor on a significant scale and may involve the need to shift it contractually to the factoring company - I am signaling such an issue here on the occasion of possible changes in contractual models.
• MPP bulk payments. The Split Payment Law "2" introduces the long-awaited ability to make bulk payments. However, there are still technical problems here and clarifications from the MF are to be expected.

"Free Invoices" project

During the panel, Attorney Artur Krzykowski presented the legal rationale for the "Free Invoices" campaign. Attention was paid to the historical approach; the incompatibility of the current model in the case of global assignment of hundreds or thousands of monetary receivables; the onerousness of verifying the existence of an assignment prohibition; the abuse of legal protection arising from the assignment prohibition by unreliable debtors; the need to move away from the primacy of debtor protection and to balance the protection of the interests of the three entities involved in the assignment; the trading of monetary receivables as an instrument to combat payment congestion; the special status of monetary receivables in trading; the need to distinguish monetary receivables as a special subject of transfer; the need to introduce by law the validity of the transfer of monetary receivables against a contractual prohibition on transfer; proposals for legislative changes regarding contractual prohibitions on transfer of monetary receivables, following the example of modern solutions successfully adopted outside Poland. The project can be followed at http://wolnefaktury.faktoring.pl/ - I think I will not be wrong if I conclude that the entire industry is keeping its fingers crossed for the success of the Project.

Payment congestion

I have already written about the Congestion Act on the Blog several times, including. HERE. Toward the end of the Panel, I had the opportunity to mention some of the little-noticed risks to factoring companies arising from the new regulation. In particular, I pointed out the implications associated with accepting a statutorily shorter maturity date should the payment date on an invoice conflict with the law. This represents a risk for factoring companies: especially when acquiring already existing and seemingly unmatured receivables (which in fact may turn out to be due) - this includes, for example, (1) new factoring with part of the invoices already issued on the margin, (2) tripartite agreements related to the factor's change of factor, (3) agreements with insurers in contracts with assumption of risk on the client's own policy. In addition - there may be problems with effective reporting of insurance claims to the FP - it will be possible to miss the due date, late reporting, etc.; In contact cases, it may also turn out that the statute of limitations occurred faster than we thought, because the statute of limitations is calculated from the due date. Thus, lawsuits for payment will have to be filed with more time than before. There may be problems with interest accrual, including inconsistencies in business books and balances. An additional risk is the creditor's statutory right of rescission / termination of the contract with the recipient. I also mentioned changes related to compensation for recovery costs - both its amount and the introduced prohibition on transferability of the compensation claim.

At the same time, I congratulate PZF on the organization of the jubilee Congress and join in the wishes and thanks, especially to Mr. Tomasz Biernat - a person of outstanding merit for Polish Factoring. I would also like to thank all the participants of the Legal Panel for a substantive discussion on important changes for the factoring industry.