In domestic trade in Serbia, the term kompenzacija (compensation, or set-off) usually refers to offsetting receivables and payables between business partners on the basis of mutual invoices that have fallen due. In other words, an obligation is settled without the use of money (without payment).

If you owe a business partner money for goods they delivered, and at the same time they owe you an amount for a service you provided, you can carry out a set-off, provided certain conditions are met.

Conditions for a set-off

First of all, neither your company nor your partner’s company may have a blocked bank account. Businesses whose bank accounts are blocked cannot take part in a set-off, under Article 5 of the Law on Payment Transactions of Legal Entities, Entrepreneurs and Natural Persons Not Engaged in Business Activity. In this case, a so-called unilateral set-off is not possible either. This involves the company whose account is not blocked issuing a set-off statement to a partner whose account is temporarily blocked, with the idea of getting around Article 5 of the Law. However, the Law provides for no exceptions, and a unilateral set-off does not make such a transaction lawful.

To set off your obligation to a partner against the amount they owe you, both the payables and the receivables must be due. An amount falls due when the agreed payment term expires (as set out in the contract, offer, pro forma invoice or invoice). Amounts that are not yet due cannot be set off.

The mutual invoices must be recorded in the books of both partners. If you do a lot of business with a partner, it can help to reconcile balances before agreeing a set-off: check that all your invoices have been posted in your partner’s books, and that you have recorded all invoices the partner issued to your company. This is done by sending a ledger card or a statement of open items (IOS).

The Set-off Statement

Once all the conditions are met, the partners need to draw up a Set-off Statement (Izjava o kompenzaciji), since mutual receivables and payables are not closed automatically. The Set-off Statement lists the invoices being closed by the set-off and is signed by both parties.

If the amount you owe your partner is the same as the amount they owe you, the obligations can be set off in full. If the two amounts differ, the set-off is made for the lower amount. In that case, the Set-off Statement shows the word “part” next to the invoice being partly set off, together with the amount being set off (not the full invoice amount).

Partial set-off – an example

For example, if your supplier issued an invoice for goods worth RSD 120,000, and your company provided services worth RSD 85,000, the set-off can cover the lower amount, RSD 85,000. Your company’s invoice is settled in full, and your partner’s only in part. RSD 35,000 remains outstanding on your supplier’s invoice. You can pay this amount in money or, if you agree, set it off against a future invoice.

Open items (unpaid invoices) can be closed in the books only after you deliver the signed Set-off Statement to your accountant.

Do you need to notify the bank or the Tax Administration?

Set-offs used to be processed through the company’s bank account, but this requirement has been abolished. You do not have to notify your bank or the Tax Administration of a set-off in domestic payments. The Set-off Statement is kept with the company’s business records in case of an inspection.

Settling a loan through supplies of goods and services – VAT

Finally, a word of caution for VAT-registered businesses that decide to settle a previously received loan through future supplies of goods and services. A business sometimes lends money to someone, or borrows it, and after some time the borrower offers to supply goods or services of the same value instead of repaying the money. Lenders often accept settlement in goods and services, especially when the borrower has liquidity problems and repayment is uncertain.

If you take this step, keep in mind that the loan you received earlier is treated as an advance payment for the goods and services you will supply to the lender. You must charge VAT on the advance received. Since this usually relates to a VAT period long past, you must amend the VAT return for the period in which you originally received the money, to report the VAT on the advance.

You can download a sample Set-off Statement here (in Serbian).