Domestic payment operations – Compensation

June 23, 2022by Stefan0
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Under the condition of minimum market disruption, one of the ways to solve liquidity issues is compensation. In terms of the domestic payment operations, the term ‘compensation’ refers to a set-off conducted by business partners related to due invoices.

 

If you own money for a delivery of goods to your business partner and at the same time, that partner owes to you a certain amount of money for a service provided by you, you can compensate that money under the condition that certain requirements are met.

 

First of all, the accounts of your company and your partner’s company must not be frozen. According to Article 5 of the Law on the Execution of Payments of Legal Persons, Entrepreneurs and Natural Persons Not Performing Commercial Activity, companies, whose bank accounts are frozen, cannot be part of compensation process.  In this case, the so-called unilateral compensation is not possible either. This operation implies that the company whose accounts are not frozen issues a compensation statement to its partner whose account is temporarily frozen. The idea is to thus bypass the Article 5 of the Law. However, the Law has not foreseen any exceptions and a unilateral compensation does not make this operation legal.

To be able to set-off the money you owe to your partner against the amount your partner owes to you, debts and receivables shall be due. They will become due on the contracted overdue date (defined by the contract, listed in the offer, (pro forma) invoice). Owing expenses cannot be set off.

 

 

Mutual invoices shall be positively booked in the business records of both partners. If your cooperation with your partner is intense, it can be useful to reconcile your business books before you contract compensation (check if all your invoices have been positively booked in your partner’s business records and if you have recorded all the invoices issued by your partner to your company). This procedure is conducted by sending ledger accounts or an open item statement.

Once all the set-off conditions are met, the partners shall make a Compensation Statement because receivables and expenses cannot be payed automatically. The compensation statement contains a list of invoices to be set-off and it shall be signed by both parties.

 

If the amount that you owe to your partner equals the amount you claim against him, the expenses can be completely set-off. However, if the amounts are not equal, a smaller amount is compensated. In that case, next to the account in the Compensation Statement that is partially set-off shall be added the word “part” and the amount of the invoice that is subject to set-off shall be written (instead of the full invoice amount).

 

You are not obliged to inform your bank or the Tax Administration about the completed domestic compensation. The Compensation Statement shall be kept as a company business document in case of an audit.

Compensations can also be multiparty processes when several mutually associated companies are part of the expenses and receivables set-off process.

If you would like to find out if you and your business partner meet the conditions for paying mutual expenses and receivables through the compensation process, the Creative Finance team is at your disposal.

 

Stefan


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