You’re probably aware that you’re entitled to lump-sum taxation on an annual turnover of 6 million dinars or less.

This limit is stated in the Individual Income Tax Law.

A question that frequently comes up in light of this is what happens when an entrepreneur exceeds this annual limit. In this post, we’ll be discussing the consequences of exceeding the lump-sum tax limit and the ensuing procedures.

Referring back to the Individual Income Tax Law, Article 42 defines the terms for the termination of the right to lump-sum taxation as follows:

“A self-employed taxpayer who has a right to lump-sum taxation will be entitled to this taxation method until it is confirmed that the justifying conditions have ceased, that is to say, that a change of conditions has removed the right to lump-sum taxation.”

Should the limit be exceeded, you’re required to inform the Tax Administration.

Given the free flow of information between commercial banks and the Tax Administration, in some instances, the Tax Administration will issue a resolution without having been informed by the entrepreneur.

The Law goes on to state:

“In the case from Paragraph 5 of this Article, the appropriate tax authority will issue a resolution ordering the taxpayer from Paragraph 5 of this Article to begin keeping business records starting with the second half of the current year or the beginning of the following year.”

Therefore, if you’ve stopped meeting the criteria for lump-sum taxation by exceeding the 6 million dinar limit in a calendar year, the Tax Authority will require that you keep business records.

If you exceed the limit in the first half of the year, you will have to begin keeping records starting on July 1st. If you surpass the limit in the second half, you’ll be mandated to start keeping records on January 1st of the following year.

Until then, you are still considered to be a lump-sum taxpayer and should act accordingly, unless you qualify for entry into the VAT system.

If you exceed 8 million dinars of annual turnover, you will likely be liable for Value-Added Tax. Should that happen, the very fact that you become a VAT payer excludes you from lump-sum taxation. In this case, you will be required to start keeping records the very next day.

The day after you exceed a taxable income of 8 million dinars, you are no longer a lump-sum taxpayer — you become a VAT taxpayer. Your responsibilities as such begin immediately.

Should this happen, don’t wait for a resolution from the Tax Administration, start keeping business records at once.

When you are no longer entitled to lump-sum taxation, a few important changes happen that will have an impact on your business:

• You’re required to keep detailed business records
• You begin paying tax on your actual income
• You cannot dispose of your assets without documentation as to their purpose

One of the very first steps you should take is to find an accountant. You can read about the kinds of services and information you can expect to receive from your accountant here.