Legal and Tax Regulation of Bonuses and Discounts in Commercial Contracts

 

May 11, 2025

BRACE Law Firm ©

 

In the current business environment, the practice of suppliers accruing incentive payments to their buyers in commercial contracts (bonuses, premiums) for achieving specific sales volumes, reaching procurement targets, and fulfilling other conditions has become widespread.

Such terms are characteristic of both distribution agreements and other contracts where a buyer acquires a supplier’s goods for subsequent resale in its own name while indicating the supplier’s means of individualization. As a rule, these agreements stipulate the conditions under which the buyer may claim incentive payments (bonuses, premiums), as well as the grounds for refusing to accrue or pay them. In addition to incentive payments, discounts from the standard price may also be granted in various cases.

However, when establishing incentive payments, the parties to a contract face certain tax and antimonopoly requirements and restrictions, which are discussed in this article.

What is the Difference Between Incentive Payments (Bonuses, Premiums) and Discounts?

At present, there are no legal definitions for the terms "discount", "bonus", or "premium", even though they are used in various regulatory legal acts. For example, subclause 19.1 of clause 1 of Article 265 of the Tax Code of the Russian Federation (the "Tax Code") classifies expenses in the form of a premium (discount) paid (granted) by a seller to a buyer for fulfilling certain contract conditions, specifically purchase volumes, as non-operating expenses.

Sales incentives may be applied in two main forms:

• discounts, where the cost of supplied goods is reduced by the amount of accrued bonuses;
• a bonus or premium, paid directly to the buyer as remuneration for achieving a specific procurement volume.

Bonuses and premiums are intended to reward the buyer for complying with specific cooperation terms (for example, for the regularity of purchases, large order volumes, or timely payment of invoices). Such payments aim to maintain long-term relationships and develop a mutually beneficial partnership. Discounts reduce the price of a product or service and take effect immediately upon the transaction. Their goal is to attract the client’s attention, increase sales volume, accelerate settlements, and enhance the product’s appeal to the consumer.

Bonuses and premiums are accrued based on the results of a specific period (month, quarter, year) once pre-agreed conditions are met. Bonuses are most often cumulative and depend on the history of the parties’ relationship. Conversely, discounts are provided immediately upon the conclusion of a transaction and may depend on current circumstances (size of the order, promotion period, type of goods, etc.).

Furthermore, in accordance with clause 1 of Article 252 of the Tax Code, only justified (economically justified) and documented costs are recognized as expenses. The justification of expenses accounted for when calculating the tax base must be assessed considering circumstances that testify to the organization’s intent to obtain an economic effect as a result of real entrepreneurial or other economic activity.

To recognize the amounts of discounts and premiums granted to a buyer as non-operating expenses, the seller must meet the conditions for economic justification and documentary confirmation of these operations:

• discounts and premiums must have a business purpose; that is, their provision must aim to increase the organization's income;
• the system of applied discounts and premiums, as well as the terms for their provision, must be reflected in the enterprise's local regulatory act: its marketing (commercial), pricing, or accounting policy;
• the supply agreement or an additional agreement thereto must contain the conditions under which the buyer will be granted a discount (premium);
• the fact that the buyer fulfilled the conditions for the discount (premium) must be documented.

To properly draft terms regarding bonuses and premiums in a contract, it is important to consider the following points:

• the formulation of the terms "bonus" and "premium" and the procedure for their calculation. It should be explained what is meant by these terms (for example, a special payment for achieving specific indicators);
• the grounds for accrual. The criteria for calculating incentive payments should be stipulated;
• the calculation procedure and the form of payment for bonuses and premiums. The methodology for calculating the premium or bonus amount (a percentage of the total procurement amount, a fixed sum per unit of goods, etc.) and the form of issuance (money, goods, services) should be indicated;
• periodicity; that is, the frequency of bonus payments (monthly, quarterly, annually);
• the transfer period within which the remuneration is paid;
• sanctions for violating the settlement and remuneration payment rules.

When applying discounts in a contract, it is important to provide for the following:

• the type of discounts (discount on the first purchase, discount for large procurement volumes, temporary promotions, special prices, etc.);
• the size of the discount — as a percentage or a specific sum of money—that the client will receive upon complying with the specified conditions;
• the conditions for receiving the discount (for example, a minimum order amount);
• the possibility of simultaneously using several types of discounts and cases where the application of one discount excludes the provision of another;
• discount expiration dates: establish timeframes within which a particular discount applies.

As illustrative formulations, the following examples of incentive payment terms in a contract are provided:

• "The Supplier undertakes to pay the Buyer a premium in the amount of 5% of the total purchase amount for a calendar month, provided that the Buyer complies with a minimum monthly procurement volume of 500,000 rubles and there are no violations of the terms of this Agreement. The premium shall be calculated and paid once every three months within 15 calendar days after the end of the quarter";
• "The Supplier shall grant the Buyer a discount of 8% of the cost of the goods for a one-time purchase exceeding 300,000 rubles. The discount applies only to products of the specified assortment group and shall not be combined with other types of discounts provided for in this Agreement. The granted discount shall be recorded by the parties by signing an additional agreement or a mutual claim offset certificate".

Antimonopoly Restrictions on Granting Discounts, Bonuses, and Premiums

Russian antimonopoly legislation contains several prohibitions for economic entities whose actions may restrict competition in a commodity market, including by establishing discounts, bonuses, or premiums during the sale of goods.

Thus, in accordance with Articles 11 and 11.1 of the Law on Protection of Competition, agreements between competing economic entities are prohibited if such agreements and concerted actions result in the establishment or maintenance of prices (tariffs), discounts, surcharges (additional payments), and (or) markups.

In addition, Article 10 of the Law on Protection of Competition prohibits actions by an Economic Entity holding a dominant position that result or may result in the prevention, restriction, or elimination of competition and (or) the infringement of the interests of other persons (economic entities) in the sphere of entrepreneurial activity or an indefinite circle of consumers, including the creation of discriminatory conditions and barriers to market entry or exit for other economic entities.

The provision of discounts, bonuses, or premiums may fall under clause 6 of part 1 of Article 10 of the Law on Protection of Competition, according to which it is an abuse for an entity holding a dominant position in the market to establish different prices (tariffs) for the same product that are not economically, technologically, or otherwise justified. Implementing such a pricing policy may lead to the creation of discriminatory conditions for buyers purchasing similar goods at a higher price under otherwise equal conditions.

Furthermore, clause 8 of part 1 of Article 10 of the Law on Protection of Competition establishes a prohibition on the creation of discriminatory conditions, which are defined as conditions for market access, production, exchange, consumption, acquisition, sale, or other transfer of goods where an Economic Entity or several economic entities are placed in an unequal position compared to others. The creation of discriminatory conditions implies the formation of an unequal approach to purchasers of goods that are identical in nature, content, and volume, where no proper justification for such unequal cooperation terms exists.

To determine the effect of the granted discounts and weigh the results obtained from providing such discounts, it is necessary to establish the company's share in a particular commodity market within defined geographic boundaries, as well as to assess the company's behavior in granting such discounts to its counterparties, distributors, or buyers.

It is important that economic entities holding a dominant position in the market do not create conditions for their buyers or counterparties where they are placed in an unequal position relative to each other; that is, they must not perform actions aimed at creating discriminatory conditions for granting discounts, including setting a different discount size for each individual buyer for the same product.

Marketing (Trade, Commercial) Policy of a Company Regarding Discounts, Bonuses, and Premiums

A discount in the form of a premium for fulfilling certain contract conditions must, like any other discount, have its own justification. Therefore, the provision of such discounts should be reflected in the marketing policy of the company, where the conditions for granting them must be clearly and explicitly stated. Furthermore, the possibility of granting a discount via the payment of a cash premium must be directly provided for in the sale and purchase agreement or fixed in an additional agreement thereto, while it must clearly follow from the agreement that the discount is not related to a reduction in the price of the goods.

The development and publication of a transparent pricing policy by a company that is uniform for all buyers and contains specific economic, technological, or other objective criteria directly affecting the price will reduce the risk of being held liable in the event of claims from FAS Russia.

Restrictions on Incentive Payments for Food Products Established by Trade Legislation

Russian trade legislation establishes incentive payments for economic entities purchasing food products.

Clause 4 of Article 9 of Federal Law No. 381-FZ dated December 28, 2009, On the Fundamentals of State Regulation of Trade Activities in the Russian Federation (the "Law on Trade") provides for remuneration paid to an Economic Entity engaged in trade activities for purchasing a certain quantity of food products from an Economic Entity that supplies food products, as well as fees for sales promotion services, logistics services, and services for preparing, processing, and packaging these goods, and other similar services, which cannot exceed 5% of the price of the acquired food products. The period and deadline for the accrual (payment) of the remuneration and the service fees are determined by the parties in the relevant supply and service agreements.

The Government of Russia has approved a list of socially significant food products for the purchase of a specific quantity of which no remuneration may be paid:

• chicken meat (chicken carcasses, chicks, broiler chicks) under GOST 31962-2013 with a shelf life of less than 10 days;
• pasteurized drinking milk with 2.5–3.2% fat content under GOST 31450-2013 with a shelf life of less than 10 days;
• bread and bakery products made from wheat flour, rye flour, or a mixture of rye and wheat flour with a shelf life of less than 10 days;
• first and second category table chicken eggs under GOST 31654-2012;
• butter with a fat mass fraction of 72.5% under GOST 32261-2013.

This restriction is aimed at protecting the end consumer of the supplied goods. The goal of such a prohibition is to prevent an increase in the sales volume of perishable and therefore unsafe food products to a single buyer by reducing the price. Other similar restrictions on granting discounts in supply relationships based on the consumer properties of the goods are intended to prevent commercial organizations selling such goods from conducting discriminatory policies against specific entities or entire categories of persons on any grounds.

When calculating the aforementioned total amount of remuneration and service fees, the amount of VAT charged by the Economic Entity supplying the food products to the Economic Entity engaged in trade activities for the purchase of these goods is not included, and for excisable food products, the amount of excise tax calculated in accordance with tax legislation is also not included. For example, in Case No. A09-10458/2019, when calculating the total remuneration for the buyer, the defendant, who was not an excise taxpayer, unlawfully deducted the excise amount, which led to the plaintiff receiving less remuneration than was due under the terms of the additional agreements and the provisions of the Law on Trade.

As the courts stated: "the calculation of tax is possible only if there is a taxable base for the person performing such calculation, namely the seller who is an excise taxpayer. Wholesale organizations selling alcoholic products are not excise taxpayers. The defendant is such an organization. Excise is not an expense that the defendant incurred or will have to incur, and it is not actual damage or lost profits".

It is important to note that the payment of other types of remuneration not provided for by the Law on Trade, or the execution (realization) of such a contract in the relevant part, is not permitted (part 6 of Article 9 of the Law on Trade).

The decisive factor in establishing compliance with the restriction provided for in Article 9 of the Law on Trade is the price at which the counterparty actually acquired the food product. According to Article 485 and Article 424 of the Civil Code, a sale and purchase agreement may provide for a fixed price for the goods or a price determined based on its terms. Thus, civil legislation allows for the inclusion of terms in an agreement regarding the method and procedure for determining the price. Furthermore, an agreement may establish a method for determining the price or its component.

The parties to a supply agreement may provide for the granting of a discount or discounts by the Economic Entity supplying food products to the Economic Entity engaged in trade activities that reduce the price of the goods in the ways and on the grounds agreed upon by the parties to that agreement.

In the opinion of FAS Russia, granting a discount or discounts for goods previously supplied to an Economic Entity engaged in trade activities is not permissible, except in cases where the parties agreed to grant such a discount or discounts in the supply agreement.

In addition, when granting discounts, the provisions of Article 13 of the Law on Trade must be observed, which may be violated, including through the abuse of granting discounts on goods supplied or acquired in previous periods.

Thus, under Article 13 of the Law on Trade, economic entities engaged in trade activities are prohibited from:

• creating discriminatory conditions as defined in accordance with the Federal Law On Protection of Competition;
• creating barriers to market entry or exit for other economic entities;
• violating the price-setting procedure established by regulatory legal acts;
• imposing conditions on a counterparty such as: a ban on concluding supply agreements with other economic entities; liability for failing to supply food products on terms more favorable than those for other economic entities; requirements to provide the counterparty with information on concluded agreements; requirements to reduce the price to a level that, with a trade markup (markup) applied, will not exceed the minimum price when sold; requirements to return goods with a shelf life exceeding thirty days, except as allowed or provided for by Russian law; as well as other conditions unrelated to the subject of the agreement and (or) containing essential signs of the listed conditions;
• concluding a contract between each other for trade activities where goods are transferred for resale to a third party without ownership of the goods passing to that person, including commission, mandate, or agency agreements, or a mixed contract containing elements of one or all of the specified agreements, except for agreements within a single group of persons and (or) between economic entities forming a retail chain, or executing (realizing) such agreements;
• concluding an agreement between each other containing a term for the return of goods with a shelf life of up to 30 days inclusive, or for the replacement of such goods with the same goods, or for the reimbursement of their cost, except as allowed or provided for by Russian law.

Issues related to the method and procedure for determining the price of a food product are agreed upon by the parties to the supply agreement at their discretion, but in compliance with antimonopoly rules.

In addition, it is necessary to consider the restrictions provided for in part 12 of Article 9 of the Law on Trade, which prohibit including terms in a food supply agreement for actions related to sales promotion services, preparation, processing, and packaging services, or other similar services, as well as terms for changing the price for performing these actions.

At the same time, part 12 of Article 9 of the Law on Trade does not restrict the inclusion of terms in a food supply agreement allowing the supplier to determine (change) the price of food products due to the performance of the supply agreement terms, nor does it restrict terms where the supplier reduces the price for an Economic Entity engaged in trade activities for a specific period, provided that the latter sells the goods to retail consumers at a price reduced by no less than the same amount during the agreed period. Such a price determination or change procedure, according to the Law on Trade, does not fall under the restriction provided for in part 4 of Article 9 of the Law on Trade.

If a trade entity demands a price reduction (i.e., a discount) from a supplier but sells the goods to retail consumers without a price reduction or with a smaller reduction (without passing the discount to the end consumer), this falls under the restriction in Article 9 of the Law on Trade. In this case, in the opinion of FAS Russia, for the purposes of applying Article 9 of the Law on Trade, the total remuneration and service fees cannot exceed 5% of the price of the food products established in the supply agreement. When calculating this total remuneration, the difference between the price in the food supply agreement and the price of the goods actually supplied (the supply price considering the discount) is included.

It should be noted that a premium (trade discount) as such cannot represent an independent obligation, since it does not arise in isolation from the obligations to supply and pay for the goods. "This link between mutual obligations under a contract exists at two levels: genetic and functional. At the genetic level, it is expressed in that one obligation cannot arise without the other. At the functional level, it means that a demand to perform a contract obligation is possible as long as the performance of the mutual obligation remains possible, and one can demand mutual performance only after beginning one's own performance".

In Case No. A46-16183/2021, the courts established that: "having formally fulfilled the hypothesis of a contract term regarding the right to a premium (purchasing the agreed quantity of goods) but subsequently returning the goods to the supplier — thus failing to actually fulfill the purchase condition — a buyer acting as a defaulting counterparty demanded the cash equivalent of the premium, which is a price-setting element. Fulfilling this would clearly violate the balance of interests and principles of fairness, good faith, and reasonableness. In such a situation, demanding the premium may testify to a deviation from good faith and an attempt to gain advantages from one's own misconduct".

How to Account for Paid Bonuses and Premiums When Calculating VAT?

The procedure for calculating VAT when granting premiums and bonuses generally depends on whether they change the price of the goods (works, services) under the contract terms or not.

When a cash premium is paid, no sale of goods occurs; therefore, the supplier has no base for calculating VAT; that is, the payment of cash in the form of a premium to a buyer is not subject to VAT. The VAT base is not adjusted in this case. If the price is reduced, the VAT base must then be adjusted. The difference between VAT before and after the cost reduction can be claimed as a deduction (Articles 154, 171 of the Tax Code), for which the buyer must be issued a corrective tax invoice (Articles 168, 169, 172 of the Tax Code).

If the remuneration is granted after the buyer has paid in full, the supplier may either return the difference or, by agreement, recognize it as an advance against future supplies. In the latter case, VAT must be calculated on the advance in the quarter the remuneration was granted (Articles 154, 167 of the Tax Code). If the remuneration is granted before the payment date, then the buyer's debt is reduced.

It must be remembered that a premium (incentive payment) paid by a seller to a buyer for fulfilling certain supply agreement terms, including purchase volumes, does not reduce the cost of shipped goods (performed works, rendered services) for VAT calculation purposes (and applied tax deductions for the buyer), except in cases where the reduction in the cost of shipped goods by the amount of the premium is provided for by the specified agreement. This may lead to a dispute with the tax inspectorate.

Thus, in Case No. A29-14874/2019, a company challenged a tax authority's decision on VAT arrears, penalties, and fines, which found that the company had improperly included premiums received from a car supplier for meeting certain supply agreement conditions in non-operating income. The courts established that: "the size of the premiums paid to the dealer depended directly on the amount of discounts provided to the end buyer when selling new vehicles and was calculated per unit of specific goods. Thus, the premium is directly linked to the discount received by the end buyer". These premiums were accrued for specific cars sold at reduced prices and represented partial compensation for the dealer’s losses (unreceived revenue). In its tax accounting, the company treated these rewards as non-operating income, and VAT was not calculated on them.

The tax authority correctly concluded that: "these premiums are, by their legal nature, amounts received for sold goods and represent compensation for the company's unreceived revenue. They are linked to the payment for vehicles sold to end buyers at a lower price; therefore, the taxpayer’s classification of these premiums as non-operating income was unlawful".

An exception is made for premiums and bonuses for food products that represent a buyer's reward for purchasing a certain quantity of goods. Such premiums (bonuses) cannot change the price of the goods; therefore, adjusting the contract price and the VAT base is unlawful.

When providing a bonus in the form of goods, works, or services, it must be considered that a taxpayer's transfer of items to a counterparty as a supplement to the main product (souvenirs, gifts, bonuses) without a separate fee is taxable under Article 146 of the Tax Code as a gratuitous transfer, unless the taxpayer proves that the price of the main product includes the cost of the additional items and the tax calculated on the main transaction covers their transfer.

How to Account for Granted Bonuses and Premiums When Calculating Corporate Profit Tax?

A cash premium is included in expenses for Corporate Profit Tax purposes under subclause 19.1 of clause 1 of Article 265 of the Tax Code. It should be noted that for profit tax purposes, only those expenses that meet the conditions of Article 252 of the Tax Code—namely justified and documented costs incurred for income-generating activities—are considered.

The justification of expenses must be assessed considering circumstances that testify to the taxpayer's intent to obtain an economic effect as a result of real entrepreneurial or other economic activity.

In Case No. A40-284214/2021, it was established that a petitioner and its buyers signed additional agreements providing for premiums (bonuses) by reducing the buyer's debt for supplied goods, contingent on purchasing a certain amount of goods. The courts agreed with the tax authority that these bonuses, treated as non-operating expenses, represented costs in the form of a gratuitous transfer (of property rights) and, under clause 16 of Article 270 of the Tax Code, were not to be accounted for tax purposes. The courts found that: "the granting of premiums (bonuses) did not actually serve as an incentive to obtain more revenue and was not aimed at increasing the number of buyers or the plants' revenue but actually had a different economic meaning and justification than that stated in the additional agreements".

If a buyer receives a premium (discount) for fulfilling contract terms (particularly purchase volumes) not related to a change in the unit price, these premiums (discounts) are accounted for as non-operating income under Article 250 of the Tax Code. Specifically, under clause 8 of Article 250 of the Tax Code, non-operating income includes income in the form of gratuitously received property (works, services) or property rights, except as specified in Article 251 of the Tax Code.

A discount granted by changing (reducing) the price of goods is not recorded as income when determining the Corporate Profit Tax base. In this case, the buyer records the acquired goods in its tax accounting at the price considering the discount.

Thus, the use of incentive payments (bonuses, premiums, commissions) does not contradict civil legislation; since, guided by the principle of freedom of contract, parties may agree on any terms that do not violate the law. At the same time, parties may face difficulties calculating the Corporate Profit Tax and VAT bases. To minimize risks, the contract should describe in detail the procedure and conditions for applying incentive payments and their impact on the price of the supplied goods.

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References

[1] Letter of the Ministry of Finance of Russia dated October 6, 2017, No. 03-03-06/1/65423.

[2] Sokurenko V.V. Discounts, Premiums, Bonuses: Accounting and Taxation. U-Soft Information and Service Company website.

[3] Resolution of the Government of the Russian Federation dated July 15, 2010, No. 530, On Approval of the Rules for Establishing Maximum Permissible Retail Prices for Certain Types of Socially Significant Food Products of Primary Necessity, the List of Certain Types of Socially Significant Food Products of Primary Necessity for Which Maximum Permissible Retail Prices May Be Established, and the List of Certain Types of Socially Significant Food Products for the Purchase of a Specific Quantity of Which an Economic Entity Engaged in Trade Activities Is Prohibited from Receiving Remuneration.

[4] Chelysheva N.Yu. The Legal Nature of Bonuses to the Buyer Under a Supply Agreement and Their Place in the System of Methods for Terminating Obligations. Notarius Journal, 2022, No. 6.

[5] Resolution of the Arbitration Court of the Central District dated May 27, 2020, No. F10-1514/2020 in Case No. A09-10458/2019.

[6] Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation dated January 24, 2000, No. 51.

[7] Clarifications of FAS Russia dated June 9, 2017, No. AK/39035/17, On Certain Issues of Application of Federal Law No. 381-FZ dated December 28, 2009, On the Fundamentals of State Regulation of Trade Activities in the Russian Federation.

[8] Ibid.

[9] Ibid.

[10] Resolution of the Arbitration Court of the West Siberian District dated May 31, 2022, in Case No. A46-16183/2021.

[11] Ibid.

[12] Letter of the Ministry of Finance of Russia dated September 7, 2012, No. 03-07-11/364.

[13] Letter of the Ministry of Finance of Russia dated August 31, 2012, No. 03-07-15/118.

[14] Resolution of the Arbitration Court of the Volga-Vyatka District dated January 19, 2021, in Case No. A29-14874/2019.

[15] Ibid.

[16] Letters of the Ministry of Finance of Russia dated September 18, 2013, No. 03-07-09/38617, and dated September 7, 2012, No. 03-07-11/364.

[17] Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated May 30, 2014, No. 33, On Certain Issues Arising for Arbitration Courts When Considering Cases Related to the Collection of Value Added Tax.

[18] Resolution of the Arbitration Court of the Moscow District dated October 13, 2022, in Case No. A40-284214/2021.