Trading in receivables based on VAT

Service-Tax

Unpaid receivables negatively affect the economic condition of each enterprise. For this reason, companies often decide to sell their own debts, as well as those purchased from other entities. Debt turnover is an issue that raises many doubts when trying to classify and tax them properly. The following article presents the most important issues describing debt trading under the provisions of the VAT Act.

What is debt trading?

Trading in receivables should be understood as disposing of receivables in order to improve the company's financial liquidity. Trading in receivables is regulated by the provisions of the Civil Code. Pursuant to Art. 353 § 1 of the Civil Code, the obligation consists in the fact that the creditor may demand a benefit from the debtor, and the debtor should fulfill the benefit. Pursuant to Art. 509-516 of the Civil Code, the creditor may, without the consent of the debtor, transfer the claim to a third party (transfer), unless this would be contrary to the provisions of the Act, a contractual reservation or the nature of the obligation.

A debt assignment agreement concluded against the contractual stipulation is not automatically invalid, but its effectiveness depends on the behavior of the debtor. If the debtor agrees to the transfer, the concluded contract is valid and effective. If the debtor does not express such consent, then the transfer agreement is not effective against him and remains the debtor of the seller of the claim - stated the Court of Appeal in Katowice in its judgment of October 25, 2012 (reference number V ACz 810/12).

A claim is a property right and may be traded. The basic form of debt trading is a debt assignment agreement. It consists in the creditor transferring the debt from the property of the current creditor, without the consent of the debtor, to a third party under an agreement concluded between the seller of the debt (assignor) and its buyer (assignee). Along with the debt, all rights related to it, in particular the claim for overdue interest, pass to the buyer. On the other hand, the debtor is entitled to all allegations against the buyer of the claim that he had against the seller at the time of becoming aware of the transfer, including the claim for set-off.

Disposal of receivables - service or delivery

Activities subject to tax on goods and services are specified in art. 5 and 8 of the Value Added Tax Act. According to the wording of Art. 5 sec. 1 above Acts are subject to taxation:

  1. delivery of goods for consideration and provision of services for consideration within the territory of the country;
  2. export of goods;
  3. import of goods into the territory of the country;
  4. intra-Community acquisition of goods for consideration within the territory of the country;
  5. intra-Community supply of goods.

In addition, goods and their parts, as well as all forms of energy, should be considered as goods, which results from Art. 2 point 6 of the VAT Act. The legislator considered the activities referred to in Art. 8 of the VAT Act. In light of the provisions of Art. 8 sec. 1 of the VAT Act, the provision of services is understood as any service for a natural person, legal person or organizational unit without legal personality, which does not constitute a supply of goods within the meaning of Art. 7, including:

  1. the transfer of rights to intangible assets, regardless of the form in which the legal transaction was performed;
  2. an obligation to refrain from performing an action or to tolerate an action or situation;
  3. provision of services in accordance with an order of a public authority or entity acting on its behalf or an order arising from the law.

When analyzing the above provisions, it should be pointed out that the transfer of receivables is an intangible property right that does not fall into the category of recognizing it as a commodity. Consequently, the sale of receivables under the provisions of the Value Added Tax Act constitutes a service.

The correctness of the above thesis is confirmed in the judgment of the Supreme Administrative Court composed of seven judges, ref. No. I FPS 5/11, March 19, 2012:
It should be emphasized that in order to decide whether we are dealing with a paid service, it is necessary to determine whether - apart from the purchase and sale of receivables - the service was provided by the buyer of the receivables to the seller for direct remuneration received, importantly, by the buyer. In the discussed situation, when there is only payment of the price for the debt, it is difficult to conclude that the provision of such a service takes place. Therefore, it must be concluded that any purchase transaction at its own risk of a troubled debt, at a price lower than its nominal value, may not be classified as a service provided by the buyer of the debt within the meaning of Art. 5 sec. 1 point 1 of the Act”.

Taxation of trade in receivables

In the jurisprudence, there is a distinction in the taxation of trade in receivables depending on whether we are dealing with a debt:

  • own taxpayer,
  • acquired from another entity.

In a situation where the taxpayer sells his own receivables, it is considered that trading in it is not subject to taxation of receivables on goods and services. Arguments for this statement can be found in the individual interpretation of tax law provisions issued by the Director of the Tax Chamber in Katowice on May 10, 2013, ref. No. IBPP2 / 443-74 / 13 / WN, which clearly indicates that:
an action consisting in the sale of own receivables cannot be considered a delivery of goods, because the liability is a property right that does not fall within the scope of Art. 2 point 6 of the Tax Act, defining what should be understood for the purposes of tax on goods and services, under the concept of goods. The sale of receivables also does not constitute the provision of a service, as it is only a manifestation of the exercise of the ownership right in relation to the receivable arising from another title (delivery of goods or provision of a service). As a consequence, the transaction the subject of which is the sale of own receivables remains outside the scope of taxation with the tax on goods and services”.

A similar position is presented, for example, in the judgment of the Supreme Administrative Court of October 4, 2011, ref. No. I FSK 537/11.

In the case of trading in receivables purchased from other entities, it is considered a service that is taxable. Pursuant to Art. 43 sec. 1 point 40 of the VAT Act, services in the field of cash deposits, maintenance of cash accounts, all kinds of payment transactions, money orders and transfers, debts, checks and bills of exchange, as well as intermediary services in the provision of these services are exempt from VAT.

The director of the Tax Chamber in Poznań indicated in the individual ruling of November 12, 2012, ref. No. ILPP1 / 443-286 / 09/12-S / NS (judgment still valid):
[...] the activities performed by the Company consisting in the sale of overdue receivables previously purchased from the original creditor constitute financial intermediation services which benefit from the exemption from tax on goods and services pursuant to Art. 43 sec. 1 point 1 of the Act In the case at hand, we are dealing with a typical debt assignment agreement, and not a debt collection service”.

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Factoring and trade in receivables

This type of activity is considered a professional form of debt trading, in which the factoring company provides at least two of the following activities:

  1. finances undisputed and unmatured receivables,
  2. keeps reporting and billing accounts of recipients,
  3. conducts activities to recover receivables,
  4. takes over the risk of the recipient's solvency.

[...] as a rule, factoring consists in the fact that the factorer transfers the receivable to the factor, and the factor undertakes to pay the factorer its nominal value less the discount taking into account the factor's remuneration and to provide additional services to the factor. This authority emphasized that the effect of the factoring agreement is a change of the creditor"- following the interpretation adopted by the Director of the Tax Chamber in Poznań in the individual interpretation of July 26, 2016, ref. No. ILPP2 / 4512-1-350 / 16-2 / MW.

The factoring service pursuant to art. 43 sec. 15 point 1 of the VAT Act does not benefit from VAT exemption. Bearing in mind Art. 29a paragraph. 1 of the VAT Act, the provision of factoring services is subject to tax on goods and services at the basic rate (23%), i.e. the entire remuneration received from the contractor in connection with the service provided, which includes both the amount of commissions, fees and the amount percentage.