Additional taxation of old liabilities

When compiling a tax return and paying income tax you also need to pay attention to the structure of your liabilities. A very important area is overdue liabilities which in certain cases can increase the tax base, and therefore we will be looking at them in the following paragraphs.From 1 January 2015 the Income Tax Act states that the tax base is increased by the amount of an outstanding debt recorded in the debtor's accounts corresponding to a debt that is 30 months overdue or that has become statute-barred. A similar obligation applies to business entities that do not keep accounts.

Although the retroactive additional taxation of unpaid liabilities might seem absurd, there is a certain logic to it. If this institute were not implemented, the debtor would immediately get three advantages from an unpaid liability. Firstly, from its point of view it would get free goods/services from the seller. Secondly, it would still have available the funds that it did not have to spend on buying these goods/services. And thirdly, it would have to reduce its tax base and consequently also the resulting income tax. In contrast, the consequences for the creditor would be negative and opposite.

So the additional taxation of overdue liabilities aims to at least eliminate the claiming of a liability for a reduction in the tax base in the past. However, there exist a number of exceptions where the additional taxation of liabilities is not necessary. It does not apply to a debtor that is bankrupt under a special law. The conditions for a debtor's bankruptcy stipulated by the Insolvency Act must be met by no later than the end of the relevant taxation period. For other taxpayers additional taxation does not apply to liabilities arising from securities or investment instruments, performance in favour of equity capital, payment of a business corporation's loss, credits, loans, advances, contractual fines, etc. However, the exception only applies to loan principals and not to liabilities arising from interest. Furthermore, the provision on additional taxation does not apply to liabilities that were not claimed as an expense to achieve and maintain taxable income. Liabilities that are subject to arbitration, judicial or administrative proceedings are also exempt. This exemption is conditional upon the debtor's proper participation in these proceedings and timely action as required by the court. Estimated liability items and reserves are not considered liabilities.

If a liability is paid the tax base can again by reduced by the relevant amount. So the additional taxation of overdue liabilities is only intended as a temporary tax measure and as a punishment for long-term debtors.