Flat-rate collection cost - 2016

Ever since its introduction in 2013 (necessitated by an EU directive) the institution of flat rate collection cost has been a subject of controversy as far as its application under the Civil Code and co-existing tax and accounting legal framework concerned. In an effort to address the issue, the regulation was removed from the Civil Code as of 24 March 2016 and has been re-regulated in the Act IX of 2016 with retroactive applicability.

New regulatory logic

With the modification the logic of regulation has been reversed: while the Civil Code previously prescribed the unconditional obligation of the debtor, under the new regulation falling into arrears does not trigger automatically the debtor’s obligation for the payment of flat rate collection cost to the creditor. The debtor’s payment delay merely establishes the right for the creditor to demand the flat-rate collection cost, but the delay as an objective fact, in itself, does not trigger an obligation any more from 24th March, 2016. Customers being late with their payment shall only be obliged to pay the flat-rate collection cost when the creditor explicitly states its claim in this regard (in the absence of such statement the option of voluntary fulfilment is still available for the debtor). The legislation has also limited the time available for the creditor to make such claim to a period of one year, commencing from the due date of payment.
Application of the flat-rate collection cost is limited to commercial transactions only i.e. to the supply of goods and services between undertakings or between undertakings and authorities in contractual relationship and shall not extend to claims against individuals or to claims of authorities acting in their capacity as public authorities.
The new regulation represents a significant administrative simplification compared to the previous one as it takes into consideration the fact that the creditor is not necessary interested in enforcing its claim for the flat-rate collection cost on every occasion. The creditor will be elevated from the administrative burden of waiving its claim for the flat-rate collection cost shall it decide to refrain from expressing its demand through issuing a payment notification within one year. Following the one year window the legislator presumes the lack of creditor’s interest in pursuing his claim and exempts the debtor permanently from the sanction of flat rate collection cost.

Retroactive applicability

Due to its retroactive applicability the new regulation shall also be applied for payment delays arising from commercial transactions entered into before 24 March 2016, thus the new rules shall already be considered during the preparation of annual reports for 2015.
Further to this aspect, and in favour of the creditors, the one year limitation period for claiming the flat rate collection cost for already existing payment delays shall be counted from 24 March 2016 and not from the date when the debtor originally fell into arrears.

Accounting considerations

According to previous regulation, upon default, the debtor was supposed to immediately record the flat-rate collection cost in his books as a liability (towards the creditor) against other expense. On the creditor’s side, however, recording the claim as other income was bound to the date of the debtor’s financial settlement only, rather than to the date on which the claim arose. If the flat-rate collection cost was forgiven, the debtor was to book the derecognition of the liability against other income.
Under the new accounting rules the balance of flat-rate collection cost liabilities as of 24th March 2016, booked by the debtor but not recorded by creditor, shall be derecognised against other income with the above date.
As for existing but unrecorded liabilities as of 24 March 2016, there is no need to recognise them as liabilities in the books of the debtor as long as the creditor does not issue a payment notification or the debtor does not fulfil its obligation voluntarily.
Similarly, the obligations arising from payment defaults after 24 March 2016 shall not be registered on the debtor’s side as long as the creditor does not issue a payment notification or the debtor does not fulfil its obligation voluntarily.
As before, creditors will not be required to record anything in their books until the debtor’s financial settlement.

Tax consequence

Corporate income tax

Beyond the obvious impact on profit before tax resulting from the underlying accounting transaction, the flat rate collection cost is only going to affect the corporate income tax through the tax base increasing item resulting from the claimed and subsequently forgiven collection cost at the debtor (the same way as any debt forgiveness would).

Value added tax

The flat-rate collection cost is considered as indemnity in the scheme of VAT, therefore it is outside the scope of VAT law. This also implies that no invoice needs to be raised to document the transaction.

Stamp duty

It will still remain possible for the creditor to forgive his claim after issuing the payment notification. The debt forgiveness does not constitute a donation agreement under the Civil Code; rather, it shall be regarded as a discount granted on a business decision. Therefore the financial advantage gained by the debtor due to the forgiveness will not be subject of donation tax and as such debtors are not obligated to report it to the Tax Office, either.
In case no payment notification is issued by the creditor a waiver is conceptually impossible to conceive therefore the obligation to pay duties shall not even arise.