Split payment mechanism

On 1 July 2018 the split payment mechanism was introduced into the Polish VAT system as another measure against VAT fraud. The mechanism can only be used in business to business (B2B) transactions.

The essence of this mechanism is that the payment in PLN of a VAT invoice via wire transfer shall be automatically separated into two parts and credited to two of the seller’s bank accounts. The net amount of the invoice goes to the seller’s 'regular' bank account and the VAT amount shown on the invoice goes to his so-called VAT bank account (a sub account). The funds in the VAT account are not easily accessible to the seller. This means the seller may only use those funds to:

• pay his VAT liability to the tax authorities
• pay the VAT amount to his seller under the split payment mechanism, or
• have the funds transferred to the regular bank account upon a prior consent of the tax authority.

Though the mechanism is available to every VAT payer, making use of it is not obligatory. In fact, the customer has the right to opt for the split payment.

Using the split payment method gives the customer who pays the invoice the following advantages:

• it makes him eligible to an earlier return of VAT (within 25 days) from the tax authority
• the customer shall not be liable for VAT liabilities of its seller.

Nevertheless, the seller may insist on excluding the split payment, given that it affects his cashflow. Thus contracting parties may even expressly exclude the mechanism in a contract.

However, using this method can lead to many formal obstacles.

Our recommendation

In light of the above, a transaction by transaction analysis on possible advantages for Polish companies of the effects of the split payment is recommended. If the analysis shows that split payment may harm Polish subsidiaries we recommend renegotiating the contracts to secure against the undesirable effects.