Installment sale and tax obligations


Many entrepreneurs decide to sell in installments, which is a good way to attract new customers and contractors. However, the question arises - when does such a sale arise a tax obligation in income tax and VAT?

Installment sale - what is it?

An installment sales contract is one of the forms of sales contracts. It consists in releasing a movable property to a natural person for a price payable in specific installments. The price specified in the hire purchase agreement often also includes interest and commissions for deferred payment of receivables.

The date of sale is the date the goods are released to the buyer. The goods are usually released when the contract is signed and the first installment is paid. It is important that with the signing of the contract and the release of the goods, the ownership of the goods is transferred.

Installment sales - when should you show revenue?

In the case of income tax, doubts may arise from the fact that the entrepreneur does not receive the entire amount due at once, and therefore it may be thought that when selling in installments, the revenue should be shown at the time of receiving it in full. Nothing could be more wrong.

Pursuant to Art. 14 sec. 1 of the Personal Income Tax Act, income from activity is the amounts due, even if they have not been settled by the client. It arises (with the exceptions listed in the above-mentioned Act) on the date of delivery of the item or performance of the service or partial performance of the service, but no later than on the date:

  • issuing an invoice or

  • payment of receivables.

In the case of installment sale, this moment may be equivalent to the date of signing the contract.

Therefore, for installment sales, the legislator did not provide for any special date for the emergence of the tax obligation in the income tax. This moment does not depend on the full payment by the buyer for the goods.

Installment sale and VAT

In a situation where the entrepreneur is a VAT payer, a second question arises - when should VAT be accounted for?

At this point, it is worth noting that the current link between the moment of the tax obligation and the date of issuing the invoice has been abandoned. As a rule, the tax obligation in the tax on goods and services arises currently when the goods are released or the service is provided. If, however, before the release of the goods, part of the payment was received (in particular, prepayment, advance payment, down payment, installment), the tax obligation arises in this part upon its receipt.

Again, the legislator did not provide for any special treatment of installment sales. Therefore, the spread of the payment into installments does not in any way affect the date when the VAT obligation arises.

Installment sale and invoice

The taxpayer is required to issue an invoice no later than on the 15th day of the month following the month in which the goods were delivered or the service was performed (with some exceptions specified in the Act). If all or part of the payment has been received prior to the delivery of the goods or the provision of the service, the invoice should be issued by the 15th day of the month following the month of its receipt. It is also possible to issue an invoice in advance - even before the delivery - but not earlier than 30 days before the delivery or the service.

To sum up, entrepreneurs selling in installments are, in principle, obliged to issue invoices and settle taxes on the same terms as in the case of sales with the traditional form of payment.