Discounting of debt under loan/credit agreements: tax risks

This article examines the cases in which loan/credit agreement debt is subject to discounting under the national accounting standards, as well as certain situations where the obligation to perform discounting is, in fact, absent. In addition, we will address the most common claims raised by tax authorities regarding discounting and their practical interpretation.

What is discounting and when is it required?

Discounting is a method of measuring future cash flows by determining their present value, considering, in particular, the time value of money. Its application is based on the fact that the amount of funds to be received or paid in the future is not economically equivalent to the same amount of funds available at present.

The measurement of liabilities at their present value (i.e., the discounted amount of future payments) is required only if such liabilities qualify as long-term liabilities – namely, liabilities that are due to be settled more than 12 months after the balance sheet date or within a period exceeding the entity’s operating cycle.

If a loan/credit agreement provides for repayment of the liability within a period of less than 12 months from the balance sheet date or within the entity’s operating cycle, such debt qualifies as a current liability and is not subject to discounting.

Current liabilities: certain issues

Although there is no obligation to discount current liabilities, the qualification of liabilities as current rather than long-term most frequently becomes the subject of tax disputes. In practice, tax authorities often attempt to demonstrate that current liabilities have acquired characteristics of long-term liabilities due to certain circumstances and, therefore, should have been subject to discounting.

The most common situations in this regard are the following, for which certain favorable court practice has already been developed:

• Overdue current liabilities

One of the controversial situations may arise where a borrower fails to repay funds within the term established by the agreement (which was less than 12 months from the balance sheet date).

In such cases, tax authorities often rely on formal criteria: if, as a result of the overdue status of the liability, the debt remains unpaid for more than 12 months, it should be treated as long-term and, accordingly, be subject to discounting.

However, this approach fails to recognize that a borrower’s failure to repay the loan/credit within the prescribed period does not change the nature of the liability.

Thus, in its resolution dated December 15, 2023, in case No. 640/11526/19, the Supreme Court reached the following conclusion: “An overdue liability cannot be regarded as a long-term liability, as the date for its repayment has already become due. The fact that the debt under the liability has not actually been repaid as of the balance sheet date (before the expiry of the statute of limitations) does not grant it the status of long-term debt, since the creditor is entitled to demand repayment of the entire amount of such debt at any time”.

The Supreme Court also expressed a similar position in its resolution dated August 9, 2023, in case No. 160/12804/21.

• Extension (prolongation) of current liabilities

Another category of disputes concerns the extension of the repayment period for funds.

In such cases, tax authorities generally take the position that the extension of an agreement itself indicates the long-term nature of the respective liability. This is particularly relevant where the loan repayment period is extended multiple times or where the overall period of use of funds, considering all extensions, significantly exceeds 12 months.

At the same time, the key factor in this situation is the period for which the performance of the current liability has been extended. The term of each extension may affect whether the debt retains the status of a current liability or acquires characteristics of a long-term liability subject to discounting.

Courts, in particular, support taxpayers’ position that the extension of a current loan liability for a period not exceeding 12 months should be reflected in accounting as a current liability (resolution of the Supreme Court dated December 15, 2023, in case No. 640/11526/19).

A similar approach was applied in case No. 320/6200/23. By the resolution of the Sixth Administrative Court of Appeal dated December 10, 2024, which was subsequently upheld by the Supreme Court, it was established that neither the initial repayment period of the loan nor the periods of its subsequent extensions exceeded 12 months. Under such circumstances, the court concluded that there were no grounds to qualify the relevant liability as long-term and apply the discounting mechanism thereto.

• Repayment of a loan “upon demand” of the lender

Another controversial issue concerns the qualification of debt under loan agreements pursuant to which funds are repayable “upon demand” of the lender.

In cases where the lender does not submit a repayment demand for more than 12 months from the date the funds were received, tax authorities attempt to reclassify current debt as long-term debt, referring to the long-standing period during which the debt has remained unpaid.

At the same time, the fact that no repayment demand was made during this period does not, by itself, make the liability long-term. This is because, as of each balance sheet date, the borrower has no grounds to believe that the loan will definitely be repaid after more than 12 months.

Thus, in its resolution dated December 11, 2025, in case No. 320/30577/23, the Supreme Court stated that only long-term monetary liabilities involving future payments are subject to discounting as of the balance sheet date, and only for the period remaining until their repayment in accordance with the terms of the agreement.

Since it is unknown when the demand for repayment will be submitted, it is impossible to determine the period remaining until settlement of the liability and, consequently, to perform discounting thereof.

This approach was also confirmed by the Supreme Court in its resolution dated February 15, 2023, in case No. 640/24292/21: “Otherwise, the claimant has the right to demand early repayment of the financial assistance at any time; therefore, such receivable debt cannot be considered long-term”.

Therefore, as a general rule, the above-mentioned circumstances do not automatically change the nature of debt from current to long-term debt requiring discounting. At the same time, each particular situation should be assessed individually, considering its specific circumstances.

Long-term interest-bearing liabilities: does the obligation to discount always arise?

While disputes regarding current liabilities primarily arise because they may be reclassified as long-term liabilities, in relation to long-term interest-bearing loans and credits, the key issue is whether discounting the amount of the liability always affects the measurement of such a liability under the agreement. 

In particular, if the interest rate established by the agreement corresponds to market conditions, the present value of such a liability equals its nominal value, and the discount amount is effectively equal to zero.

This is because, when discounting interest-bearing liabilities, the calculation does not consider the entire market interest rate but only the difference between the market rate and the rate established under the agreement.

This approach is also supported by established case law. In particular, in its ruling dated August 24, 2023, in case No. 320/4950/19, the Supreme Court concluded that if the interest rate under a credit agreement corresponds to market conditions, there are no grounds for discounting the respective debt. A similar conclusion was reached by the Supreme Court in its resolution dated November 14, 2024, in case No. 640/13251/19.

Therefore, even if a loan or credit meets the criteria of a long-term interest-bearing liability, the obligation to determine the discount amount is absent if the contractual interest rate corresponds to market conditions.

In conclusion, not every liability arising under a loan/credit agreement is subject to discounting. This mechanism applies only to liabilities that simultaneously meet the following key criteria: they are long-term liabilities, provide for future payments (the repayment period of the liability is determined), and, in the case of interest-bearing loans or credits, where the contractual interest rate does not correspond to market conditions.

In general, the issue of discounting requires a comprehensive analysis of the following factors: the terms and conditions of the relevant agreement, the repayment period of the monetary liability (and, consequently, whether such liability is current or long-term), the existence and amount of the interest rate, as well as the actual circumstances of the performance of the agreement. Such a comprehensive approach allows for a proper determination of whether a particular liability is subject to discounting and enables a company to prepare for potential disputes with tax authorities effectively.

Contributors to this article:

1. Viktoriia Bublichenko, Partner at GOLAW, Head of Tax, Restructuring, Claims and Recoveries practice, Attorney at law
2. Tetiana Fedorenko, Senior Associate at Tax, Restructuring, Claims and Recoveries practice at GOLAW, Attorney at law
3. Anna Kostsova, Junior Associate at Tax, Restructuring, Claims and Recoveries practice at GOLAW