In modern consumer society, where a growing number of different products are offered for sale every day, there are frequent situations where a certain product (e.g. a used mobile phone) is purchased directly from an individual, who does not have a registered business activity for that purpose.
The question arises, whether the income that an individual achieves on the basis of such transaction is subject to taxation, and if so, whether in that case the liability to declare and pay tax arises for that seller – an individual or possibly for the buyer.
For tax treatment of income and determination of any obligations, it is important (i) whether an individual sells its personal property items occasionally or whether the sale is a permanent activity, as well as (ii) who are the buyers, other individuals or business entities.
Namely, according to the provisions of the Law on personal income tax (hereinafter: the “PIT Law”), income tax is paid by individuals who generate income, and it is paid on income from all sources except those that are specifically exempted by this law.
The PIT Law also stipulates, among other things, that every other individual who performs an activity, regardless of whether that activity is registered, is liable for tax on income from its independent activities, whereby tax on income from independent activity is paid on taxable profit.
In addition, the PIT Law regulates the tax treatment of other incomes, which are considered to be other incomes that by their nature constitute the income of an individual, especially income from the sale of goods realized by performing temporary or occasional tasks, if they are not taxed on another basis in terms of the PIT Law.
From the above, it follows that if an individual engages in sales as a permanent activity, where he/she earns income from the sale of goods, that income will be subject to personal income tax.
However, in previous years, the Ministry of Finance issued several official opinions in which it took the position that if an individual occasionally generates income based on the sale of personal property items, which he has the right to manage and dispose of, there is no obligation to pay personal income tax. This practically means that an individual sells its item for some fee and that this sale is of a sporadic (ad hoc) character. In such cases, it is necessary for an individual to present to the buyer appropriate ownership documentation (fiscal receipt, contract, etc.) proving that the subject of sale is an item from personal property. For example, it can be a certain electronic device that a person bought and sells it after a certain period of use, then some inherited thing/item, as well as some equipment, tools, machines and/or goods that remained after the liquidation of the company.
It is considered that sales in the form of a permanent activity exist if an individual continuously sells certain items, whether he/she acquires them for further resale, or produces them for sale, i.e. in order to generate income in that way. In this case, the entire income earned by an individual is subject to income tax, regardless of whether the performance of such activity is registered with the competent authorities. In addition, sales in the form of a permanent activity always exist when an individual sells certain products that, given the type and quantity of those items, cannot be considered by occasional sale of personal property items (e.g. continuous procurement/production of larger quantities of clothing or electronics for further sale).
Also, in the case when there is a tax liability, it is also important who is the buyer of the item, due to the very obligation to calculate and pay taxes, i.e. whether the buyer is another individual or a business entity. Namely, the PIT Law determines that when the payer of the income is a legal entity or an entrepreneur, the tax on other income is determined and paid by deduction from each individually realized income. The payer of the fee practically calculates, deduct and pays the tax for seller-individual and individually paid income at the time of income payment. In this case, the tax is calculated, deducted and paid by the customer (legal entity or entrepreneur) at a tax rate of 20%, which is applied to the basis of the difference between the gross income and the standard costs, which are recognized in the amount of 20% of the gross income.
On the other hand, if the buyer is another individual, the liability to calculate and pay tax is on the seller-individual. The tax rate and recognized standard costs are the same.
Having in mind all the above, a legal entity or an entrepreneur who often buys certain items from individuals, practically every time should assess what kind of sale it is, whether it is an occasional (ad hoc) sale of personal property item, or the sale is a permanent and at the same time unregistered activity of an individual. In the event of a wrong assessment on the part of a business entity that purchases certain items from an individual, there may be a justified risk of unplanned tax liabilities and related costs, since the Tax Administration has the authority to check similar transactions and determine all facts that have an impact on the tax treatment of income. The tax authority evaluates all circumstances such as: the frequency of purchases, the type and quantity of things/items, their value, the existence of credible documents and other important facts.
Authors: Dušan M. Jevtić i Goran M. Ćiraković
Photo: Unsplash.com | Raymond Perez