Barter contract

What it means

A barter contract is an agreement in which the parties exchange items, such as goods for goods, property for property or a machine for another asset, without a money price. It is governed by the Civil Code, which applies the rules on the purchase contract to it as appropriate.

In a barter, each party is both seller and buyer. If the values of the items differ, the parties often agree on a cash top-up, creating a combination of exchange and sale. In business practice the term barter is commonly used.

Although no money changes hands, for accounting and tax purposes there are two separate transactions: a supply and an acquisition. A value must be determined for both, since revenue, expense, the valuation of the acquired asset and the tax base all depend on it.

How it works in practice

In the accounts, a barter is recorded as a sale of one's own item and a purchase of the other party's item, with the mutual receivable and payable settled by set-off. Under the no-offsetting rule, revenue and expense must not simply be netted without being recorded.

For VAT, each supply in a barter is a separate taxable transaction and each VAT-registered party must issue an invoice. Where consideration is not in money, the tax base must be determined correctly, and the usual market price rules also play a role.

Between related parties, barter values must reflect the arm's length principle under transfer pricing rules. For property it is wise to have an expert determine the value so that the valuation stands up in a tax audit.

What to watch out for

The tax side of a barter is easy to underestimate because no money changes hands. Yet income, expenses and VAT arise just as in an ordinary sale. Missing invoices or an incorrect valuation can lead to additional tax.

When exchanging property, formal requirements such as written form and registration in the land register must be met. If the values differ significantly and no top-up is agreed, part of the transaction may be a gift with its own tax consequences.