The taxation of an advance payment (zaliczka) and a deposit (zadatek) for VAT and PIT (personal income tax) is one of the more complicated areas of the Polish tax system. Even if you know the basic rules for settling these forms of prepayment, situations requiring a deeper analysis of the rules often arise in practice. The differences in how an advance payment and a deposit are treated when a contract is not performed, when the money is refunded or when it is kept by the seller are particularly important.
It is essential to understand the fundamental differences between an advance payment and a deposit, which affect how they are taxed under personal income tax and value added tax. These differences concern not only the tax point, but also the tax consequences in unusual situations, such as withdrawal from a contract or its non-performance by one of the parties.
Definition of an advance payment and a deposit in tax law
An advance payment is a form of prepayment that the buyer pays towards a future purchase of goods, a product or a service. Its characteristic feature is that it may represent either part or all of the value of the future transaction, provided that the transaction goes ahead. With an advance payment, if the contract is not performed, the money is refunded to the buyer.
An advance payment may represent the entire price of future goods or a future service, which is an important difference compared with a deposit. If the buyer withdraws from the contract, the seller is as a rule obliged to refund the whole advance paid, regardless of the reason why the contract was not performed — an advance payment does not have the securing function of a deposit under Article 394 of the Civil Code
A deposit is also an amount of money paid by the buyer towards a future transaction, but its legal nature is different. Like an advance payment, a deposit will form part of the value of the future service, product or goods if the contract is performed. The key difference is that a deposit cannot represent the entire price of the future product, goods or service.
A deposit serves to secure performance of the contract and cannot represent the whole amount of the future transaction. If the buyer fails to perform the contract, the seller may withdraw from the contract without setting an additional deadline and keep the deposit paid as compensation for the losses incurred (Article 394 § 1 of the Civil Code). If the contract is terminated, or the non-performance results from circumstances for which neither party is responsible or both parties are responsible, the deposit must be returned (Article 394 § 3 of the Civil Code)
The differences between an advance payment and a deposit are fundamental to how they are treated for tax purposes. An advance payment is purely a prepayment and as a rule is refunded if the contract is not performed, whereas a deposit has an additional securing function, which affects how it is taxed in disputed situations.
Taxation of advance payments and deposits for PIT
For personal income tax, neither an advance payment nor a deposit received gives rise to taxable revenue at the time it is paid. The legal basis for this is Article 14(3)(1) of the PIT Act, which provides that amounts received towards future supplies of goods or services to be performed in subsequent reporting periods are not treated as revenue. An exception is provided in Article 14(1j) of the PIT Act: for payments towards supplies and services recorded on a cash register, the taxpayer may choose the day the payment is received as the date of revenue (applying this choice for the whole tax year).
Receiving an advance payment or a deposit does not give rise to taxable revenue for the seller in the month of payment. Revenue for the full value of the order arises only when the final invoice is issued or the service is performed
For PIT, the date taxable revenue arises is the day the service is performed or the goods are sold, but no later than the day the invoice is issued or the amount due is paid. This means that the seller's revenue does not arise in the month the advance payment or deposit is received, but only when the transaction is actually completed.
Likewise, no cost arises for the buyer in the month the advance payment or deposit is paid. Tax-deductible costs may be recognised only when the goods are received or the service is performed, in line with the principle of matching revenue and costs.
There are, however, exceptions to these rules that may affect when revenue arises. If a payment is final, definitive and non-refundable, it may exceptionally give rise to revenue for the seller as soon as it is received. In such a case the advance payment or deposit loses its basic nature as a prepayment.
Unspecified payments, not allocated to a specific future supply of goods or services, do not give rise to revenue for the seller. Such payments also have no VAT consequences, because advance payments and deposits must be specified as to the purpose of the payment
Special cases of PIT taxation
Practice shows that there are situations in which the standard rules for taxing advance payments and deposits for PIT may be modified. This applies above all where the payment becomes final and non-refundable, which may happen in various circumstances.
The first case is definitive payments that from the outset are not intended for a specific supply of goods or service. Such payments may be treated as revenue as soon as they are received, because they do not meet the criteria of an advance payment or deposit within the meaning of the tax rules.
The second case is where the parties to the contract expressly state that the payment is non-refundable regardless of whether the contract is performed. Such a payment cannot then be treated as an advance payment or deposit, but as immediate taxable revenue.
It is essential to define the nature of the payment precisely in the contract between the parties. The payment must be clearly linked to a specific future supply of goods or service in order to be treated as an advance payment or deposit within the meaning of the tax rules
The third case concerns partial payments towards long-term projects or services settled in stages. In such situations each payment may be treated as an advance towards a specific stage of the work, which affects when revenue arises.
VAT taxation rules
Value added tax treats advance payments and deposits differently from income tax. Under Article 19a(8) of the VAT Act, receiving all or part of the payment before goods are supplied or a service is performed gives rise to a tax point when that payment is received, in respect of the amount received. A related issue, when VAT has to be refunded or corrected, is unjust enrichment and VAT liability.
Paying an advance or a deposit gives rise to a VAT tax point in the month it is received, regardless of when the service is performed or the goods are supplied. This also applies to prepayments, instalments and building or housing contributions
The rules list a number of forms of prepayment covered by this obligation, including prepayments, advance payments, deposits, instalments and building or housing contributions paid before a cooperative right to a residential or other unit is established. All these forms are treated in the same way as regards the VAT tax point.
There are, however, important exceptions to this rule that apply to certain types of services. Paying an advance or deposit does not give rise to a VAT tax point in the month it is received in the case of supplies of electricity, heating or cooling and piped gas.
The exception also covers the following services:
- Telecommunications services
- Rental, lease, leasing or similar services
- Personal protection services and property protection, security and storage services
- Ongoing legal and office services
- Distribution of electricity, heating or cooling and piped gas
- Water treatment and supply services
- Sewage treatment and disposal services
- Waste-related services
- Street sweeping and snow removal services and other sanitation services
The exception does not apply to services to which Article 28b of the VAT Act applies and which constitute an import of services (Article 19a(5)(4) of the VAT Act). This means that an advance paid to a foreign service provider for such services gives rise to a tax point under the general rules, when it is paid, even though for a domestic purchase of the same services the advance does not give rise to a tax point
Taxation of different types of transactions
The VAT treatment of advance payments and deposits differs depending on the type of transaction they relate to. An advance on an import or export of services is subject to the standard taxation rules, which means the tax point arises in the month it is received (for an import of services — when it is paid). Advances on exports of goods are treated in the same way. The position is different for imports of goods and intra-Community acquisitions of goods: the tax point arises, respectively, when the customs debt is incurred (Article 19a(9) of the VAT Act) and when the invoice is issued, but no later than the 15th of the month following the supply (Article 20(5)), so the advance itself does not give rise to it.
Particular attention should be paid to advances relating to services subject to the reverse charge. In such cases the tax point also arises in the month the advance is received, which may require it to be reported accordingly in the VAT return.
Exceptionally, an advance towards an intra-Community supply of goods does not give rise to a VAT tax point. This is an important exception to the general rule that prepayments are taxed when they are received
Applying these rules in practice requires particular care when documenting transactions. Every advance payment or deposit must be properly documented, with a clear description of the subject of the future supply or service. A lack of precision may lead to interpretation problems and potential errors in the VAT settlement. Where the settlement shows excess input VAT, one option worth considering is transferring excess VAT to PIT advances.
Consequences of non-performance of the contract by the buyer
A situation where the buyer withdraws from an ordered service or goods after paying an advance requires different tax treatment depending on the type of prepayment. With an advance payment, the seller must refund the amount paid, which means the tax settlement has to be corrected.
Refunding an advance payment involves issuing a corrective invoice to the advance invoice issued earlier, and then refunding the advance received by bank transfer or in cash. This correction affects the VAT settlement; for income tax, the advance received as a rule was not revenue (Article 14(3)(1) of the PIT Act), so refunding it does not require revenue to be corrected. Advances are usually settled in the end by issuing and settling a final invoice.
Refunding an advance payment requires a corrective invoice if an advance invoice was issued earlier. The seller corrects the VAT taxable amount; it corrects revenue for income tax purposes only if it treated the advance as revenue (for example, having made the choice under Article 14(1j) of the PIT Act)
The situation is different with a deposit. When the buyer withdraws from the service or goods, the seller keeps the deposit paid, which in this situation is no longer part of the future price and takes on the nature of security for the contract.
For VAT purposes, a retained deposit is a kind of compensation that is not subject to this tax. This means the seller does not have to account for VAT on the deposit kept, which is an important difference compared with a situation where the contract is performed.
For income tax purposes, the seller keeping the deposit has different consequences. The deposit then takes on a compensatory function, but it is not compensation in the strict legal sense. Keeping the deposit meets the criteria of an amount that is definitive, final and non-refundable.
For PIT, the amount of a retained deposit will be subject to personal income tax and cannot benefit from an exemption. The deposit is not revenue from business activity, but is taxed as revenue from other sources
The buyer's perspective in the tax settlement
Analysing the taxation of advance payments and deposits from the buyer's perspective reveals further tax aspects that are important for a correct settlement. Where the buyer pays an advance and receives an advance invoice, the taxpayer may deduct VAT under the general rules.
At the same time, the advance paid cannot be a tax-deductible cost at the time it is paid. The cost arises only when the goods are received or the service is performed, in line with the principle of matching revenue and costs in income tax.
If the advance is refunded, the buyer reduces input VAT in the settlement for the period in which it received the corrective invoice (Article 86(19a) of the VAT Act). This correction will cover both the VAT deducted earlier and any tax-deductible costs, if they have already been recognised.
Paying a deposit is not a tax-deductible cost for the buyer either, because at the time of payment it is not definitive, final and non-refundable. A deposit may become a cost only after the contract is performed, as part of the price; losing it in connection with non-performance of the contract does not create a cost (Article 23(1)(54) of the PIT Act)
The treatment of a lost deposit from the buyer's perspective is particularly important. Article 23(1)(54) of the Personal Income Tax Act provides that losses resulting from the loss of prepayments made, including advance payments and deposits, in connection with non-performance of a contract are not tax-deductible costs.
This means that, regardless of the circumstances, a deposit kept by the seller will not be a tax-deductible cost for the buyer. This rule is intended to prevent a situation in which the buyer could deduct losses resulting from its own withdrawal from the contract.
Documenting and recording advance payments and deposits
Correct documentation of advance payments and deposits is essential for taxing them properly. Every payment must be properly documented, with a clear statement of its nature and the subject of the future transaction.
The basic document is the advance invoice, which should contain all the information required by the VAT rules. It is particularly important to define precisely the subject of the future supply or service, as this affects which tax rules can be applied.
Recording advance payments and deposits in the accounting books requires the use of appropriate accounts. Advance payments received should be recorded as liabilities to the counterparties, while deposits may require separate treatment because of their specific legal nature. We record settlements with counterparties, including advances and deposits, for clients who have chosen our accounting services.
The procedure for settling advance payments and deposits involves the following stages:
- Receiving the payment and issuing an advance invoice
- Recording the payment in the accounting books
- Settling VAT in line with the applicable rules
- Performing the contract and issuing the final invoice
- Settling the advance payment or deposit against the final invoice
If the contract is not performed, the accounting records must be corrected accordingly. Refunding an advance payment requires a corrective invoice, while keeping a deposit may require it to be transferred to the appropriate revenue account
Practical aspects of applying the rules
Applying the rules on taxing advance payments and deposits in business practice requires taking into account a number of factors that may affect the final tax settlement. It is essential to classify the payment correctly as an advance payment or a deposit, as this affects the tax consequences if the contract is not performed.
Business owners should pay particular attention to drafting contracts precisely, stating the nature of the amounts paid. A clear statement of whether the payment is an advance payment or a deposit helps avoid interpretation problems and potential disputes with the tax authorities.
| Aspect | Advance payment (zaliczka) | Deposit (zadatek) |
|---|---|---|
| Refund | As a rule, refunded | Kept if the buyer fails to perform |
| Amount | May be the whole price | Cannot be the whole price |
| VAT on refund | Correction of the advance invoice | No VAT obligation when kept |
| PIT when kept | Not applicable | Taxable |
It is also important to document properly all transactions involving advance payments and deposits. The documentation should make it possible to trace the cash flows clearly and their impact on the tax settlements.
Particular attention should be paid to meeting tax deadlines. The VAT tax point arises when the advance payment or deposit is received, which must be reflected in the VAT return for the relevant settlement period.
A construction company received a deposit of PLN 50,000 towards building a detached house. The investor abandoned the project after three months. The company kept the deposit as compensation for the design and organisational costs incurred. In its VAT settlement the company did not have to account for tax on the retained deposit, but the amount was subject to income tax as compensatory revenue.
