February 25, 2020

When is the loan subject to VAT?

People who run their business and settle on the basis of VAT often have doubts about the conditions for using the loans. Although there is currently no problem with obtaining financial support for entrepreneurs, and non-bank loans are granted on an easy basis, the problem may be their settlement. Is such a loan subject to taxation and in what situations should VAT be paid from it?

Providing business loans

Providing business loans

Entities conducting activity based on the provision of financial services are required to pay VAT. The granting of interest-bearing loans is a form of capital enrichment, which is why tax must be paid on such activities. However, problematic issues arise when an entity grants a loan, although it does not operate in this area. According to the position of tax authorities, in this case, VAT also applies

“Granting a loan is a benefit for another entity, consisting of making capital available for the period indicated in the contract. The act of granting a loan, therefore, constitutes a supply of services for consideration, as a rule, subject to VAT ‘.

This means that the entrepreneur granting the loan is obliged to pay VAT. However, the available case-law in this regard is not unequivocal, so before making money available to another entity, it is worth submitting a request to interpret the legal basis of a particular case.

One time loan grant and VAT

One time loan grant and VAT

Based on the position issued by the tax authorities, the frequency of granting loans is not important to them. Regardless of whether these are occasional or continuous benefits, these activities are subject to VAT:

“In the opinion of the tax authorities, the fact that there is no entry on conducting business activities in the field of granting loans in the business register or the National Court Register does not matter for such VAT transactions. What is important – in their opinion – the frequency of granting loans is also irrelevant. “

Employee loan and VAT

An employer who wants to grant a loan to an employee may benefit from a special tax exemption pursuant to the provisions of Art. 43 paragraph 1 point 38 of the VAT Act. This means that despite the fact that such an act is subject to taxation, legal regulations are in force that allows the use of tax exemption.

Interest paid on the loan and VAT

The use of interest-bearing loans is an act in which capital is used. Both the grant and use of the loan must be properly accounted for in the company’s settlement. Interest should, therefore, be recorded and confirmed by a VAT invoice. It should be remembered, however, that this only applies to interest already paid, and not arising from the entire commitment.

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