No sales tax applies on your sale of receivables.

The sale of receivables is a popular way of quickly creating liquidity and reducing your receivables management workload. But what is the tax situation when selling receivables? Whereas the seller is never liable for sales tax, there are a few things that the buyer needs to consider.

Liquidity management and sales tax: Businessmen having a discussion.

For the seller, the sale of receivables is exempt from sales tax.

Let’s start with the good news: As the seller, you are always exempt from sales tax when you sell your receivables. The assignment of non-distressed receivables is considered a service addition, which is exempt from sales tax in accordance with the German Sales Tax Law (UstG). Paragraph 4 Section 8 Sub-section c of the UStG also stipulates that distressed receivables are also not subject to sales tax, also frequently referred to as value-added tax, in the event of a sale of said receivables.

Liquidity management and sales tax: Businessman doing a calculation.

When is a receivable distressed?

In the German tax law relating to the sale of receivables, a distinction is made between distressed and non-distressed receivables. According to the tax authorities, a receivable is regarded as distressed, if, insofar as it is due, it has not been settled in full, or has only been settled to a minimal amount, for more than 90 days. A receivable is also distressed if the contractual arrangement has been terminated or the conditions for termination exist. In the banking sector distressed receivables are also referred to as non-performing loans (NPL). If these circumstances do not apply to the default the receivables are called non-distressed receivables or performing loans (PL).

Sales tax regime for the sale of receivables.

Whereas the seller of receivables is always exempt from sales tax, the imposition of tax on the buyer depends on the nature of the receivables involved. The determining factor is whether the difference between the nominal value and the purchase price paid represents remuneration for services provided by the buyer or not.

In this conjunction the tax legislation distinguishes between three types of receivables purchasing: the purchase of non-distressed and distressed receivables and the acquisition of mixed receivables portfolios:

  • Purchase of non-distressed receivables.
    For the purchase of non-distressed receivables the sales tax law assumes that the purchase for less than the face value is offset by a paid service provided by buyer to seller, for example in the form of a fee for the recovery of the receivable or the assumption of the default risk. This form of receivables purchasing is used above all in the context of factoring and results in a sales tax liability for the purchaser. The amount of the service subject to sales tax is calculated based on the difference between face value and purchase price of the receivables.
  • Purchase of distressed receivables.
    Under German taxation law, a different regulation applies to the assignation of distressed receivables. Since 2015 the German Ministry of Finance has no longer regarded the purchase of these receivables or of non-performing loans to be a paid service. It is important that the difference between the face value of the receivables and the purchase price reflects their actual commercial value. If this is the case this difference does not represent a payment designed to directly recompense the buyer for a service rendered. The buyer of the receivables is therefore not performing an economic activity; the purchase of the receivables is exempt from sales tax for the buyer.
  • Acquisition of mixed receivables portfolios.
    If the receivables package being negotiated contains both distressed and non-distressed receivables, these are separated from one another and evaluated according to the above criteria.
Liquidity management and sales tax: Evaluation of data.

What is the difference between factoring and traditional receivables purchasing?

Factoring providers, also known as factors, specialize in buying non-distressed/performing receivables to then recover them for their clients. This allows factoring clients to quickly turn outstanding but not overdue invoices into cash flow. In return, the factor levies a commission at a rate of around three percent of the invoice amount. Factoring is therefore a service in nature and for this reason is subject to sales tax.

Traditional receivables purchasing, on the other hand, is about the purchase of distressed receivables, for example through a debt collection company like EOS. The purchase price is determined on the basis of the nominal value of the receivables less a risk premium. The seller transfers the overdue invoices and loans to the buyer in their entirety, and in return receives the agreed liquid funds. Under taxation law, the sale of distressed receivables is exempt from sales tax from the perspective of the seller.

For more information please go to: What is the sale of receivables?


Learn more about selling receivables:

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    Learn here how the sale of receivables works and what different kinds of receivables there are.

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  • Receivables sale and costs: A couple of staff members look at a calculation for a receivables purchase.

    Sell your receivables completely free of charge.

    It costs nothing to sell your receivables to EOS. All that matters is the purchase price. Read here how it is calculated.

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  • Legal aspects of selling receivables: Businessman signs a receivables purchase agreement.

    The legal aspects of selling receivables.

    From assignment agreement to lack of recourse: All you need to know about the legal aspects of selling receivables.

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