The introduction of the cash method of accounting for income tax was one of the announcements made in the current Prime Minister's exposé. We now know the draft bill introducing the cash method of accounting for personal income tax.
The cash method of tax settlement is intended to address the pain of entrepreneurs struggling with payment bottlenecks. Once implemented, income tax will be calculated solely on payments received. This is a significant change. Under the current accrual method, entrepreneurs are required to pay income tax on all invoices issued, regardless of whether they are paid or not.
The proposed bill allows the cash method of accounting only for personal income tax payers who earn income from independent business activity. Therefore, it will not be available to companies subject to corporate income tax (CIT), nor to partners in general or civil partnerships. Furthermore, the cash method will only be available to taxpayers who are starting a business or who generated income from business activity up to €250,000 in the previous year. Furthermore, regardless of income, entrepreneurs who maintain accounting records will not benefit from the cash method of accounting.
The accrual method will continue to be used for settlement of transactions with consumers (B2C), as well as with related entities and entities based in countries that practice harmful tax competition. Tax on the sale of fixed assets and intangible assets will continue to be settled under the current rules.
Taxpayers meeting the above criteria will be able to voluntarily choose to settle their taxes using the cash method. To this end, they will submit a declaration to the tax office. This declaration will be valid until revoked or until the end of the year in which the taxpayer meets the conditions for the cash method.
Due to the recognition of revenue upon receipt of payment, the bill also provides for special regulations regarding the recognition of costs of obtaining revenues. The principle will be to recognize costs in the tax year in which the revenue is generated, i.e., the year the payment is received.
Choosing the cash accounting method will entail additional recordkeeping obligations. The taxpayer will be required to maintain special records, which will include invoices documenting revenues accounted for using the cash accounting method.
The project envisages that the cash accounting method will be available starting next year. Similar regulations are in force in countries such as Austria, the Czech Republic, and Estonia.
This article is for informational purposes only and does not constitute legal advice.
Legal status as of May 10, 2024
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