22 August 2025

Commercial Credit in Business Contracts: Conditions and Risks

August 22, 2025

BRACE ©

When concluding a business transaction, one may encounter a contract condition providing for the collection of interest as a fee for a provided commercial credit. This condition is neither typical nor standard. Therefore, such credit is sometimes perceived as an additional penalty or as a fee for the unlawful use of another's funds. In the event of a conflict, the counterparty often attempts to object to the credit interest, viewing it as unfair double liability. Commercial lending is a specific contractual tool. For effective implementation, one must understand its nature and consider the specifics of its application.

The Concept of Commercial Credit

Only one article in the Civil Code of the Russian Federation (the "Civil Code") is dedicated to commercial credit. If the performance of a contract involves the transfer of ownership of funds or generic things to the other party (the counterparty), such a contract may contain a condition on lending (Art. 823 of the Civil Code). The following may act as credit:

Advance or prepayment: In this case, credit is granted to the party that received the advance and must provide counter-performance (supplier, contractor, or executor).
Deferral and installment payment for goods, works, or services: In this case, credit is granted to the party obligated to make payment with a deferral or by installments (customer or buyer).

The rules on loans apply to commercial credit unless otherwise established in the contract or contradictory to the essence of the obligation itself.

Thus, commercial credit may arise when the moment of payment (transfer of funds) and the moment of performance (acceptance-transfer of goods, works, or services) do not coincide in time under the contract terms. Moreover, payment may be made both before performance (advancing) and after it (deferral or installment payment). The main condition is that a party uses the funds or thing received from the counterparty for a certain period without performing the counter-obligation. In such a situation, the desire to receive interest from the counterparty for the use of money or property is entirely justified.

Commercial credit is not a standalone transaction; it exists as an additional condition within a specific contract (this may be supply, contracting, lease, or another type of obligation). Therefore, it should not be confused with a credit or loan agreement, which represents an independent type of contract involving the transfer of money or things to a counterparty with their subsequent return and the collection of interest.

Commercial credit should be distinguished from commodity credit (Art. 822 of the Civil Code). Commodity credit is a type of loan where the subject is not money, but things with generic characteristics (such as water, fuel, grain). The borrower returns goods of the same kind and quality to the lender. Unlike commercial credit, commodity credit is recognized as interest-free by default unless interest is explicitly specified in the contract (Cl. 4 Art. 809 of the Civil Code). Another distinction of commodity credit is that (like a loan or bank credit) it represents a separate contract, whereas commercial credit is not an independent transaction but merely one of the contractual conditions.

Formulating Commercial Credit Conditions in the Contract

A characteristic feature of commercial credit is that it does not apply by default. Such lending works only if the parties have agreed upon it in the contract. Furthermore, the wording must be so clear and unambiguous that the parties do not have the opportunity to subsequently challenge the fact of the credit agreement itself. In a conflict situation, commercial credit is often interpreted as a condition on a penalty (neustoika), as an alternative liability measure, or as interest under Article 395 of the Civil Code. Using this tactic, the dissenting party claims the application of double liability and objects to the interest accrued on the credit. Therefore, if the parties have decided to agree on commercial credit, to avoid disagreements when drafting the contract, it is recommended to:

Use the official term "commercial credit" in the text.
Specify what acts as the credit: the prepayment amount, the supplied goods, or the performed work. For example, "upon supply of goods with payment deferral or installment, the goods are transferred to the buyer on commercial credit terms" or "the advance payment is transferred as a commercial credit."
Agree in the contract on the interest rate for the commercial credit or refer to the general rules of Articles 809 and 823 of the Civil Code. One can simply state that interest is accrued in accordance with the rules of applicable law — in this case, the Key Rate of the Bank of Russia will apply.
Concretize the period for which interest on the credit is accrued (as a general rule, accrual covers the entire period of actual use starting from the moment the credit is granted up to the receipt of counter-performance, but there may be other options).

When drafting the contract, an important rule must be observed: the condition on commercial credit should not be placed in the contract section regarding liability. This is a fairly common mistake: the text of the contract may clearly state that the interest constitutes commercial credit. However, the conditions dedicated to lending are contained in the section of the contract titled "Liability of the Parties", "Penalties and Fines", or similar. In such a situation, there is a high probability that the court will qualify such interest as a penalty (neustoika), and even the use of the term "commercial credit" in the contract text will not save the situation.

When considering such disputes, courts always pay attention to the structure of the contract: if the condition on lending is located outside the liability section, this serves as additional evidence that the parties intended to agree specifically on commercial credit, and not on a penalty.[1]

For instance, in one dispute regarding the recovery of interest on commercial credit, the court construed this condition as an additional liability measure. The contract text stated that the advance payment is recognized as commercial credit at a rate of 0.2%. Lending applies to the contractor only in the event of a delay in performing works. In the same section of the contract, an adjacent clause was dedicated to a penalty: for violation of the work deadline, the contractor must pay a penalty in the amount of 0.1% for each day of delay. The court noted that both conditions were contained in the contract section on liability, and in both cases, interest was accrued subject to a violation of the obligation. The court qualified such lending as interest for the unlawful use of funds under Article 395 of the Civil Code. In this case, the court applied the ban on double liability: when a penalty is fixed in the contract, interest under Article 395 of the Civil Code is not recoverable (Cl. 4 Art. 395 of the Civil Code).[2]

Therefore, the condition on commercial credit should be included in that part of the contract which does not speak of liability or sanctions. For example, lending can be established in the sections "Contract Price," "Payment Procedure," or "Other Conditions."

How to Calculate Interest on Commercial Credit

Since commercial credit is not an independent loan agreement but a contractual condition, by its nature, it cannot be interest-free. However, there is an exception to this rule. If a contract is concluded between citizens for an amount not exceeding 100,000 rubles and is not related to the entrepreneurial activity of at least one of the parties, such credit is gratuitous by default. Consequently, in commercial contracts, any mention of commercial credit implies the accrual of interest (Cl. 3 Art. 809 of the Civil Code, paragraph five of Clause 12 of the Resolution of the Plenum of the Supreme Court of the Russian Federation No. 13, Plenum of the Supreme Arbitration Court of the Russian Federation No. 14 dated October 8, 1998, "On the Practice of Application of the Provisions of the Civil Code of the Russian Federation on Interest for the Use of Another's Funds" (the "Plenum No. 13/14")).

The calculation of interest on commercial credit is regulated by the rules of a loan agreement (Cl. 2 Art. 823 of the Civil Code):

The amount of interest and the procedure for its accrual may be established in the contract. Given the principle of freedom of contract and the will of the parties, the magnitude of this interest is not limited by law in any way, and unlike a penalty, this interest is not subject to reduction.
If the interest rate is not fixed in the contract, it is calculated based on the Key Rate of the Bank of Russia, taking into account the dynamics of its changes (the so-called calculation "by periods") (Cl. 1 Art. 809 of the Civil Code).

Interest payment is made monthly, but this rule is also dispositive: the contract may establish a different periodicity of payments (Cl. 3 Art. 809 of the Civil Code).

The commencement of interest accrual on commercial credit (Cl. 12 of Plenum No. 13/14):

From the moment of receipt of goods, works, or services (when interest is accrued on deferred payment).
From the moment of transfer of funds (when interest is accrued on an advance).

Termination of interest accrual on commercial credit:

When the party that received the credit has fulfilled its obligations (for example, the supplier transferred the advanced goods).
When the party returned what was received as commercial credit to the counterparty (for example, return of an unworked advance).

It should be remembered that the dates for the start and end of interest accrual specified in Plenum No. 13/14 are dispositive, meaning the parties in the contract may agree on a different period and terms of onerous lending. In practice, cases are not uncommon where interest on credit is accrued by analogy with a penalty, i.e., not from the moment the credit is granted, but from the moment of delay in the obligation. For example, commercial credit on deferred payment may start accruing not from the date of delivery of goods, but from the day following the expiration of the payment term. Or commercial credit on a paid advance begins to "work" not from the date of its transfer, but from the moment of delay in the delivery of goods. Under such conditions, interest on commercial credit and the penalty for delay in performance begin to accrue simultaneously. Such a lending procedure is permissible and formally does not contradict the law. However, it can be difficult to distinguish such interest from a penalty for delay, and the lending itself in this case may look like a fee for the unlawful use of funds, since it begins to operate only subject to a delay in performance. Therefore, to reduce risks, it is desirable to avoid such contractual conditions and not equate the start date of credit interest with the first day of the obligation's delay. Accrual of interest in accordance with Clause 12 of Plenum No. 13/14 appears most safe and logical.

The amount of interest on commercial credit (unlike a penalty) cannot be changed by the court. It is known that a contractual penalty can be reduced by a court decision; such a possibility is explicitly enshrined in Article 333 of the Civil Code. This is the distinction between commercial credit and a penalty: if the credit interest rate is fixed in the contract, it is final and cannot be changed or reduced even through court. Commercial credit is considered part of the principal debt, is recovered in full, and Article 333 of the Civil Code does not apply to it.

An example is a case considered by the cassation court of the Ural District. The parties agreed in the contract on interest for the use of commercial credit at a rate of 0.2% per day. When the customer presented the supplier with a demand for payment, the counterparty decided that the rate was excessively inflated and attempted to challenge its amount in court. The rationale for the claims was analogous to the reasoning used to reduce a penalty: in aggregate, the rate amounted to 73% per annum and exceeded the average rates used by credit organizations for commercial lending to non-financial organizations by more than 7-8 times. The total amount of the commercial credit fee exceeded 27 million rubles; the supplier stated that such an amount was burdensome for him and obviously worsened his position. An excessively high percentage represents an abuse of right, as the customer enriches himself at the expense of the counterparty. However, the court rejected these arguments and preserved the contractual credit rate because the supplier did not express objections or declare disagreements when concluding the contract.[3]

A penalty may be charged for a delay in the payment of interest on commercial credit. As a general rule, the accrual of "interest on interest" is not permitted. That is, statutory or contractual interest as a fee for the use of funds cannot be accrued on similar interest for a previous period. However, this does not apply to commercial contracts (Cl. 2 Art. 317.1 of the Civil Code). In accordance with Clause 5 of Article 395 of the Civil Code, regarding obligations related to entrepreneurial activity, the application of compound interest is not permitted unless otherwise provided by law or contract.

At first glance, the impression is created that in commercial relations, for the accrual of "interest on interest," such a possibility must be explicitly provided for in the contract; only in this case will it be effective. However, Clause 33 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated November 22, 2016, No. 54 "On Certain Issues of Application of General Provisions of the Civil Code of the Russian Federation on Obligations and Their Performance" (the "Plenum No. 54") interprets this dispositive rule in the opposite way: in case of a delay in the payment of interest, which is a fee for the use of funds, the creditor has the right to demand a penalty or interest under Article 395 of the Civil Code unless otherwise established by law or contract. Thus, in an economic contract, "interest on interest" may be accrued by default, and for the impossibility of such accrual, a direct prohibition must be established in the contract.

Therefore, if a party does not pay interest on commercial credit or transfers it with a delay, interest for the use of funds under Article 395 of the Civil Code may be claimed for such delay. Furthermore, in case of a delay in credit interest, a special penalty in the form of default interest (penya) may be enshrined in the contract — in such a case, the contractual penalty rate will apply, not Article 395 of the Civil Code. Liability for the delay in payment of credit interest may apply even if the counterparty fulfilled the main obligation in a timely manner, for example, supplied the goods without delay or transferred the deferred payment on time.

Commercial Credit and Penalty: Relationship Complexities

Commercial credit must be distinguished from other types of interest, including contractual penalties and fees for the unlawful use of funds (Clause 37 of Plenum No. 54). The fact is that by its nature, commercial credit is not a sanction in principle and does not perform a punitive function. Liability in the form of interest arises only if an obligation is violated, whereas interest on commercial credit is generally accrued even upon proper performance and is not directly related to the party's violation of the deadline for performing obligations. Lending can be made conditional upon non-performance, but this does not turn it into a penalty, and it will retain the character of a fee for use (this issue will be discussed in more detail below).

Therefore, Article 395 of the Civil Code does not apply to the conditions of such credit. This rule provides for the accrual of interest for the unlawful retention of funds, for example, if a party evades their return or has permitted a delay in payment. In this regard, when resolving disputes on the recovery of interest, courts must primarily ascertain the legal nature of the interest: commercial credit or a sanction for non-performance of an obligation (Cl. 4 of Plenum No. 13/14).

The Judicial Chamber for Economic Disputes of the Supreme Court of the Russian Federation defined this type of lending: "payment for the use of funds received in advance or retained until the payment due date after receipt of goods ... is in the economic sense a fee for legitimate actions regarding the use of financial or material resources, allowing the transaction price to be divided into a fixed constant sum and a variable sum calculated for the period of lawful use of goods and funds."[4]

Thus, interest on commercial credit is a fee for the use of funds, but this use is implied to be lawful and legal. Therefore, the mechanism of its application differs not only from a penalty but also from interest under Article 395 of the Civil Code. In practice, the greatest number of disputes arises when interest on credit is recovered simultaneously with a penalty. Let us consider the main aspects of this problem.

First, commercial credit and a penalty do not mutually exclude each other. A penalty (penya) for delay in performance may be enshrined in the contract simultaneously with a condition on commercial credit. Such a construction is permitted; it does not contradict the law and cannot be qualified as double liability.

Clause 33 of Plenum No. 54 states that in case of delay in payment of the principal debt, not only interest in the form of a fee for the use of funds (for example, interest under Articles 317.1, 809, 823 of the Civil Code) is accrued on the debt amount, but also interest that is a measure of liability (for example, interest under Article 395 of the Civil Code). Therefore, constructions in which interest is collected in the following manner do not raise questions:

Contractual penalty for delay + interest on commercial credit;
Interest under Article 395 of the Civil Code + interest on commercial credit.

Second, the rates of interest on credit and on penalty are not interrelated. It should be remembered that these types of interest exist in parallel; interest on credit is regulatory, and interest on a penalty is protective. Therefore, the credit interest rate does not affect the sanction interest rate in any way. For this reason, one cannot, for example, claim a reduction in the amount of the penalty by increasing the rate on the credit (unless the parties agree on this voluntarily). Also, one cannot avoid paying the credit on the grounds that the contract establishes too high a penalty (and vice versa). Often in court, the plaintiff-creditor attempts to recover both types of interest at once, and the defendant attempts to reclassify or challenge the payments on commercial credit and proposes limiting it to only the penalty. But credit, unlike a penalty, does not possess a compensatory character. Therefore, the amount of interest on credit does not affect the amount of the penalty and cannot serve as a reason for its reduction. Thus, the Ural District court rejected the defendant's arguments that the penalty paid by him fully compensated for the plaintiff's losses and expenses.[5]

Third, the possibility of agreeing on "triple interest" in the contract is not excluded. We are referring to a situation where a contractual penalty for delay, interest under Article 395 of the Civil Code, and interest on commercial credit are collected simultaneously. This follows from the aforementioned Clause 33 of Plenum No. 54, which permits accruing a fee for the lawful use of funds (e.g., commercial credit) on the principal debt together with interest in the form of liability. But a number of conditions are necessary for such "triple" recovery.

The combination of commercial credit simultaneously with a penalty is lawful and does not raise doubts — this is confirmed by uniform judicial practice. In the absence of a contractual penalty, interest on credit may be claimed together with interest under Article 395 of the Civil Code, which acts as a measure of liability. regarding the simultaneous application of a contractual penalty and interest under Article 395 of the Civil Code, the situation is more complex. It is necessary to consider the basic rules of the penalty application mechanism, which do not exclude such a possibility but substantially limit it.

The first basic rule: if a penalty is established for a violation, damages are reimbursed only in the part not covered by the penalty. Such a form of penalty applies by default and is called set-off (zachetnaya) (Cl. 1 Art. 394 of the Civil Code). Besides set-off, three other types of penalties exist (Cl. 60 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated March 24, 2016, No. 7 "On the Application by Courts of Certain Provisions of the Civil Code of the Russian Federation on Liability for Breach of Obligations" (the "Plenum No. 7")):

Exclusive — when only the penalty applies, and damages are not subject to recovery;
Punitive (shtrafnaya) — when damages may be recovered in full in addition to the penalty (i.e., damages and penalty are summed up);
Alternative — when either the penalty or damages may be recovered at the creditor's choice.

In an economic contract, a penalty can be enshrined using any of the indicated methods. If the details of the interaction between the penalty and damages are not clarified, it will be considered a set-off penalty.

The second basic rule: inadmissibility of double liability for a single violation. If a penalty is enshrined in the contract, interest under Article 395 of the Civil Code is not subject to recovery (Cl. 4 Art. 395 of the Civil Code). But this rule is dispositive, as the article contains the proviso "unless otherwise provided by law or contract." That is, in the agreement, the parties may agree on a different procedure for applying interest.

Plenum No. 7 clarifies: if a penalty is enshrined in the contract according to the rules of the first paragraph of Clause 1 Article 394 of the Civil Code, then interest under Article 395 of the Civil Code is not recovered (Cl. 42 of Plenum No. 7). The first paragraph speaks only of set-off penalties; other forms of penalties (punitive, exclusive, and alternative) are mentioned in the second paragraph of Clause 1 Article 394 of the Civil Code.

On this basis, an approach has formed in law enforcement practice: contractual penalty and interest under Article 395 of the Civil Code may be claimed simultaneously if the penalty bears a punitive character, meaning it can be recovered in addition to the sum of damages.[6] At the same time, it is recommended not merely to name the penalty "punitive" but also to enshrine in the contract a clarification that damages may be recovered in full in excess of the penalty amount. Under such conditions, the parties may agree on the accrual of interest under Article 395 of the Civil Code simultaneously with contractual interest. There is a probability of successfully defending the lawfulness of such an agreement in court.

An example is the decision of the Twelfth Arbitration Appeal Court issued in 2022. The court recognized the legality of applying interest under Article 395 of the Civil Code together with a penalty, indicating that the fee for the use of another's funds (Art. 395 of the Civil Code) has a compensatory character. Since a punitive penalty was agreed upon in the contract, it can be recovered simultaneously with full compensation, i.e., with the fee for the use of another's funds. The court noted that this is not prohibited by current legislation, and the will of the parties was directed at the possibility of such simultaneous recovery. By signing the contract, the counterparty expressed consent to the application of the penalty in a punitive manner, which means they also agreed to pay interest under Article 395 of the Civil Code.[7]

It should be noted that there is also other practice which approaches the issue of double liability less flexibly. In some cases, even the party's arguments regarding the punitive character of the penalty are not taken into account, and the simultaneous recovery of contractual and statutory interest is recognized as unlawful.[8]

Thus, the possibility of enshrining a punitive penalty, interest under Article 395 of the Civil Code, and interest on commercial credit simultaneously in the contract is not excluded. An interesting example is a case considered in 2021 by the Thirteenth Arbitration Appeal Court. The contract stated that in the event of a delay in payment, the buyer pays a penalty in the amount of 0.1%, as well as interest for the use of another's funds under Article 395 of the Civil Code. Additionally, the contract enshrined lending subject to non-performance: in the event of a payment delay, the rules on commercial credit also apply to the buyer. The buyer permitted a delay, and the supplier claimed a penalty, payment of interest under Article 395 of the Civil Code, and also accrued interest on commercial credit. The buyer objected to the triple accrual of interest and stated that credit interest essentially covers up a double penalty, as it is collected only subject to delay. But the court supported the supplier and recognized all claimed demands. The court motivated this decision by stating that credit interest has a regulatory character and differs by nature from a contractual penalty and from interest for the use of another's funds. A penalty is a measure of contractual liability, and interest under Article 395 of the Civil Code is a measure of statutory liability. As for the credit, it is not a sanction at all and represents a possibility of novation into loan relations subject to a condition (such a condition being the delay in payment).[9]

It should be noted that such practice is not numerous. Therefore, theoretically, one can enshrine all three types of interest in the contract, observing the following conditions:

The penalty must be named punitive (shtrafnaya). Also, the text should state that damages and compensation may be recovered in full in excess of the penalty amount.
The contract must clearly formulate the condition that in case of untimely performance of the obligation, interest for the use of another's funds under Article 395 of the Civil Code may be recovered from the counterparty in full in addition to the contractual penalty.
It should be stated that interest on commercial credit is subject to recovery in full in excess of the penalty amount and in excess of the amount of interest under Article 395 of the Civil Code.
When enshrining "triple" interest in the contract, one should understand that the practical application of such a construction contains risks. There is no guarantee that the court will recognize the contract as fair, and there is a high probability that the accrual of interest under Article 395 of the Civil Code simultaneously with the penalty will be refused. Therefore, such contractual conditions will primarily bear the character of psychological influence on the counterparty.

Commercial Credit Conditioned on Non-Performance

Accrual of interest on commercial credit may be made dependent on a delay in performance. This form of lending is applied only if the counterparty violates the obligation. Thus, with advancing, credit begins to operate not upon the payment of the advance, but only if the supplier violates the shipment term. And with deferred payment, interest is accrued not from the delivery date, but after the end of the deferral period if the buyer does not pay for the goods in a timely manner. In contractual practice, such a construction is encountered quite often and is the most conflicted; therefore, the conditions of such lending must be formulated in the text particularly carefully.

In judicial practice, a uniform approach has been developed: if lending is conditioned by the fact of a violation of the obligation, then credit interest and a penalty are recovered from the violating party simultaneously. At the same time, the date from which interest begins to be calculated may vary depending on the contract conditions:

Interest on credit may be accrued as recommended by Plenum No. 13/14: from the date of actual use of the credit (from the moment of transfer of funds or supply of goods). But since the lending condition begins to operate only after the delay, interest is accrued retroactively. For example: shipment of goods took place on August 1, payment deferral was granted to the buyer until August 31; in case of non-payment, lending begins to operate from September 1, but interest on the credit is accrued for the period from August 1. This approach appears most correct, as it corresponds to the character of commercial credit: a fee for the entire period of use.
The contract may enshrine that interest on credit is accrued from the date following the date of expiration of the contractual performance term, that is, only for the delay period. For example: shipment of goods took place on August 1, payment deferral was granted to the buyer until August 31, and interest on credit begins to be accrued for the period starting from September 1. Such a condition is less reliable: there is a high risk that interest will be qualified as a penalty, since it is collected not for the entire period of use.

A clear example is a precedent of the Far Eastern District related to a contract for service maintenance and repair of ships. This court case reflects the most significant aspects of commercial lending conditioned on non-performance of obligations. Under the contract terms, amounts of advancing were recognized as commercial credit. For the period of work performance, the contractor was granted the right to free use of the advance as a measure of economic stimulation. If the contractor does not complete the work on time, the right to gratuitous use of funds ceases, and the rules of commercial lending come into effect. Interest is accrued starting from the day following the transfer of the advance, i.e., for the entire period of use. Also, a penalty for delay in works is enshrined in the contract. Since the contractor violated the terms, the customer demanded payment of interest on the credit and the penalty. The court satisfied these requirements, reducing the penalty amount under the rules of Article 333 of the Civil Code. Making the decision, the court noted that the untimely handover of works was conditioned precisely by the contractor's violations. The effect of the grace period for using the advance ceased on the day the work performance term expired. Furthermore, the condition on commercial credit was present in the section of the contract regulating issues of price and mutual settlements, and not in the liability section. Therefore, lending should not be qualified as double liability.[10]

Another vivid example is a case on the recovery of interest under a metal products supply contract. The parties agreed in the contract simultaneously on a penalty for delay in payment for goods in the amount of 0.5%, as well as commercial credit interest in the amount of 0.5%. At the same time, the terms for accruing credit interest were analogous to penalty accrual: calculation began from the day following the day the payment deferral period ended. As a result, both credit interest and penalties were accrued for the same period of time, although logically commercial credit should operate from the moment of goods delivery. Additionally, the same percentage rate was used in the contract for credit and for the penalty: 0.5% for each day of delay. Under such contractual conditions, the credit could with a high degree of probability be mistaken for a penalty. The buyer permitted a delay, and the supplier demanded payment of the penalty together with interest on the credit. In court, the buyer proposed reclassifying the interest for the use of commercial credit into penal sanctions; however, this demand was rejected. The court drew attention to the legal nature of the accruals: interest on credit is a fee that ultimately increases the cost of goods. Whereas a penalty, being a measure of liability, does not affect the cost of goods. As a result, the claim for recovery of credit interest was satisfied along with the penalty.[11]

Often the debtor attempts to challenge such a method of lending in court, motivating it by its similarity to a sanction: since interest is conditioned on non-performance, it is essentially a measure of liability. But if the contract is formulated clearly and unambiguously, and the possibility of double interpretation is absent, the court recognizes such interest as credit, notwithstanding its dependence on the fact of delay. The period of time until the expiration of the obligation performance term is qualified as a grace period of lending. If the party that received such credit fulfills its duty on time, it will use the credit for free.[12]

An important point should be considered: when lending is made dependent on a violation, interest accrual occurs not only based on formal criteria but taking into account all circumstances of the parties' interaction. Such commercial credit is by its nature much closer to a measure of liability. And if the party proves that its delay is conditioned by violations on the part of the counterparty, neither sanctions in the form of a penalty nor interest on credit should apply to it. This is the difference from ordinary "classic" credit, which is not conditioned by violations and begins to operate simply by virtue of the very fact of transfer of funds or goods (performance of work, provision of service).

A clear example is a dispute under a contract for the construction of a production workshop in the Sverdlovsk Region. The customer demanded interest on commercial credit on the advance amount from the contractor. Under the contract terms, lending applied only subject to a delay in works. The court studied the interaction of the parties and found that the reason for non-performance of works was the bad faith behavior of the customer. The construction permit was granted untimely, there was a dragging out of the technical inspection of the object after conservation, and the construction site, design estimates, and working documentation were also transferred to the contractor with a delay. Furthermore, the customer regularly initiated the introduction of substantial changes regarding the types and volumes of works. Under such conditions, the contractor was deprived of the opportunity to perform construction within the established term. At the same time, the contractor repeatedly declared to the customer the suspension of works, i.e., behaved in good faith.

Despite the fact that in this contract commercial credit is dependent on the violation of obligations, interest on credit is accrued only in the case where the contractor bears responsibility for the delay. Otherwise, the customer would derive an advantage and receive enrichment at the expense of his bad faith behavior, provoking dragging out and delay in the performance of works. The court concluded that the contractor retained his right to free use of the advance and refused the customer's claim for recovery of interest on the credit.[13]

Taxation and Accounting of Commercial Credit

In accounting and tax accounting, interest on commercial credit and the direct cost of goods (works or services) are accounted for differently:

The cost of goods, works, or services is generally reflected by the supplier (executor) as income from sales, and by the buyer as expenses. Tax calculation is performed depending on the applied taxation regime. If the supplier is a VAT payer, they are obliged to charge this tax and issue a VAT invoice (schet-faktura).
Interest on commercial credit is a fee for the use of funds. Therefore, it should be accounted for not as payment for goods (work or service), but as interest on debt obligations, for example, credit or a loan. Loan operations are exempt from taxation, so VAT is not charged on commercial credit interest (Subcl. 15 Cl. 3 Art. 149 of the Tax Code of the Russian Federation). But this rule concerns only the interest on the credit, not the payment amount itself on which it is accrued. The transferred advance is taxed in the usual order. The Ministry of Finance of Russia explained that commercial credit is not a separate transaction of a loan type but is included in the composition of obligations under another contract. Therefore, advance payments, in relation to which the contract establishes a condition on commercial lending, are not exempt from VAT taxation.[14]

Details of accounting and tax accounting depend on the form of commercial credit (advancing, deferral, or installment payment), the term of lending, and also on whether interest on the credit is directly specified in the contract.

If commercial credit is granted in the form of deferred (installment) payment, it should be clarified:

Whether interest on the credit is specified separately in the contract;
Whether the lending is long-term. Deferral or installment for a period exceeding 12 months will be considered long-term, but the organization's internal accounting policy may establish a shorter term recognized as long-term for these purposes.

If interest on credit is not specified in the contract or the lending is long-term, it will be necessary to calculate the present value independently.

The customer is obliged to reflect accounts payable to the supplier in accounting. The amount of such debt corresponds to the cost of goods, works, or services "in pure form": this is the price the buyer would pay the supplier subject to immediate payment without deferral or installment. To do this, the present (discounted) value of accounts payable (the "present value") is calculated, which does not take into account the increase in the cost of goods due to deferral or installment payment.[15]

The supplier must perform a similar operation. They also need to reflect the customer's accounts receivable in accounting, which is defined as the present value and does not include the price increase conditioned by the deferral (installment).

The present value in aggregate with undiscounted VAT will constitute the amount of initially recognized accounts payable for the customer, and for the supplier—the initially recognized accounts receivable. The customer and the supplier account for the difference between the present value and the payment amount (excluding VAT) as interest on commercial credit.

If interest on credit is highlighted in the contract or the lending is not long-term, the present value does not need to be calculated. Accounts payable will correspond to the contractual cost of goods, works, or services including VAT.

The cost of acquired goods, works, services is determined according to general rules based on initially recognized accounts payable (contractual value or present value excluding VAT).[16] For tax accounting purposes, the cost of goods, works, or services is determined based on their contractual value.

If commercial credit is granted on an advance amount, the supplier reflects accounts payable to the customer in the amount of received funds.[17] The customer also reflects in accounting the counterparty's accounts receivable regarding the actually transferred prepayment amount.[18]

Reflection of revenue depends on a number of factors:

Whether the amount (size) of interest on commercial credit is highlighted in the contract;
Whether the term of performance of contractual obligations by the counterparty exceeds 12 months (when the transfer of goods, works, or services must occur).

If interest on credit is not fixed in the contract or the term of performance by the counterparty exceeds 12 months – revenue is reflected on the date of transfer of goods (performance of works, provision of services) at the immediate sale price (the "immediate sale price"). The calculation methodology is embedded in the term's name: this is the cost of goods, works, or services that the supplier would receive subject to their immediate provision to the customer immediately after payment excluding VAT.[19] The accounting entry is made for the amount of the immediate sale price and VAT from the contractual cost of goods, works, or services to the debit of account 62 "Settlements with buyers and customers" and credit of account 90 "Sales", sub-account 90-1 "Revenue". VAT is charged on sales revenue based on the contractual cost of goods, works, or services (Subcl. 1 Cl. 1 Art. 146, Cl. 1 Art. 154 of the Tax Code of the Russian Federation). Interest on commercial credit is calculated as the difference between the contractual price and the immediate sale price.

If interest on credit is separately specified in the contract or the term of performance under the contract is less than 12 months – revenue is recognized in the amount of the contractual cost of goods, works, or services.

For tax accounting, the supplier does not include the received advance in income, and in income from sales, the contractual cost of goods, works, services is accounted for minus VAT (Cl. 1 Art. 248, Subcl. 1 Cl. 1 Art. 251, Clauses 1, 2 Art. 249 of the Tax Code of the Russian Federation). The customer applying the accrual method does not recognize the advance as an expense (Cl. 14 Art. 270 of the Tax Code of the Russian Federation).

Thus, three methods of reflecting interest on commercial credit in accounting can be distinguished:

Interest that is explicitly fixed in the contract;
The difference between the present value of accounts payable and the payment amount (excluding VAT). Applied for deferred (installment) payment in cases where interest on credit is not highlighted in the contract or the lending term exceeds 12 months;
The difference between the contractual price of goods, works, services (excluding VAT) and the immediate sale price. Applied for advance payments in cases where interest on credit is not highlighted in the contract or the term of performance of obligations by the counterparty exceeds 12 months.

In accounting, all indicated forms of interest are accounted for by the customer and supplier at the end of each reporting period and on the debt repayment date: the debtor reflects them in other expenses, the creditor – in other income. But for tax accounting purposes, only those interests on commercial credit which are explicitly specified in the contract are recognized. In tax accounting, the debtor includes this interest in non-operating expenses at the end of each month and on the debt repayment date, and the creditor – in non-operating income.

Final Conclusions

In conclusion, let us list the most characteristic distinguishing features of commercial credit once again:

Commercial credit is not a standalone transaction; it exists as an additional construction within an economic contract.
Commercial credit is not a measure of liability. Interest on credit has a regulatory character, whereas a penalty performs a protective and punitive function. Therefore, credit and penalty do not exclude each other and can be collected simultaneously.
Commercial credit does not apply by default; it works only if explicitly enshrined in the contract.
Conditions on commercial credit must be set out in the contract clearly and unambiguously, specifying the interest rate and accrual period. These conditions should not be placed in the contract section on liability; otherwise, the credit may be qualified as a penalty.
The operation of commercial credit by default is not related to violations by a party of its contractual obligations. Interest is accrued for the actual period of using the credit (for example, from the date of advance payment or delivery of goods). But an alternative option can be enshrined in the contract: interest is accrued only if the counterparty violates the performance term. In this case, two lending periods will operate: a grace period (until the performance term ensues without interest collection) and a paid period (from the moment of delay, interest is accrued). But even under such conditions, commercial credit is still not a penalty.
The parties have the right to enshrine any commercial credit interest rate in the contract. By default, credit is charged at the Key Rate of the Bank of Russia. Interest on credit cannot be reduced upon a party's motion or by a court decision; Article 333 of the Civil Code does not apply to it.
A penalty (contractual or statutory) may be charged for a delay in credit interest.
Whether interest on credit is specified in the contract and the duration of the lending term affects the reflection of commercial credit in accounting and tax accounting.

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References

[1] Resolution of the Seventeenth Arbitration Appeal Court dated September 21, 2021, No. 17AP-11165/2021-AK in case No. A60-8892/2021.

[2] Resolution of the Seventeenth Arbitration Appeal Court dated September 29, 2020, No. 17AP-8551/2020-GK in case No. A60-58596/2019.

[3] Resolution of the Arbitration Court of the Ural District dated December 10, 2021, No. F09-9514/21 in case No. A60-8892/2021.

[4] Ruling of the Judicial Chamber for Economic Disputes of the Supreme Court of the Russian Federation dated October 10, 2024, No. 310-ES24-9642 in case No. A36-6042/2022.

[5] Resolution of the Arbitration Court of the Ural District dated August 11, 2021, No. F09-5226/21 in case No. A60-60980/2020.

[6] Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation dated April 28, 1998, No. 2784/97, Clause 34 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated June 28, 2012, No. 17, On Consideration by Courts of Civil Cases on Disputes on Consumer Rights Protection.

[7] Resolution of the Twelfth Arbitration Appeal Court dated June 9, 2022, No. 12AP-4968/2022 in case No. A12-37155/2021.

[8] Resolution of the Arbitration Court of the Moscow District dated September 13, 2019, No. F05-14973/2019 in case No. A40-233823/2018, Resolution of the Arbitration Court of the East Siberian District dated January 27, 2017, No. F02-7264/2016 in case No. A33-5735/2015.

[9] Resolution of the Thirteenth Arbitration Appeal Court dated June 22, 2021, No. 13AP-14850/2021 in case No. A56-91467/2020.

[10] Ruling of the Supreme Court of the Russian Federation dated December 2, 2020, No. 303-ES20-19166 in case No. A51-9897/2016, Resolution of the Arbitration Court of the Far Eastern District dated October 7, 2020, No. F03-3490/2020 in case No. A51-9897/2016.

[11] Ruling of the Judicial Chamber for Economic Disputes of the Supreme Court of the Russian Federation dated December 19, 2017, in case No. 306-ES17-16139, A12-50782/2016, Resolution of the Twelfth Arbitration Appeal Court dated March 14, 2017, No. 12AP-2001/2017 in case No. A12-50782/2016.

[12] Ruling of the Supreme Court of the Russian Federation dated April 7, 2022, No. 309-ES22-3025 in case No. A60-8892/2021.

[13] Ruling of the Supreme Court of the Russian Federation dated March 23, 2021, No. 309-ES21-1960 in case No. A60-58596/2019, Resolution of the Arbitration Court of the Ural District dated December 24, 2020, No. F09-7677/20 in case No. A60-58596/2019.

[14] Letter of the Ministry of Finance of Russia dated January 21, 2020, No. 03-07-11/2937.

[15] Recommendations to audit organizations, individual auditors, auditors on conducting the audit of annual accounting (financial) statements of organizations for 2014 (Annex to the Letter of the Ministry of Finance of Russia dated February 6, 2015, No. 07-04-06/5027), Recommendation R-10/2010 KpR "Valuation of Receivables and Payables with Significant Deferrals of Payments" (Fund "National Non-State Regulator of Accounting "Accounting Methodological Center", adopted by the Committee on Recommendations on November 26, 2010, approved on January 25, 2011) (Official Website of the Accounting Methodological Center, 2021).

[16] Clause 6.2 of the Order of the Ministry of Finance of Russia dated May 6, 1999, No. 33n, On Approval of the Accounting Regulation "Expenses of the Organization PBU 10/99" (Registered in the Ministry of Justice of Russia on May 31, 1999, No. 1790).

[17] Clause 12 of the Order of the Ministry of Finance of Russia dated May 6, 1999, No. 32n, On Approval of the Accounting Regulation "Income of the Organization PBU 9/99 (Registered in the Ministry of Justice of Russia on May 31, 1999, No. 1791), Clauses 2, 3 of the Order of the Ministry of Finance of Russia dated October 6, 2008, No. 107n, On Approval of the Accounting Regulation "Accounting for Expenses on Loans and Credits (PBU 15/2008)" (Registered in the Ministry of Justice of Russia on October 27, 2008, No. 12523).

[18] Clauses 3, 16 of the Order of the Ministry of Finance of Russia dated May 6, 1999, No. 33n, On Approval of the Accounting Regulation "Expenses of the Organization" PBU 10/99" (Registered in the Ministry of Justice of Russia on May 31, 1999, No. 1790).

[19] Clause 3 of the Order of the Ministry of Finance of Russia dated May 6, 1999, No. 32n "On Approval of the Accounting Regulation "Income of the Organization" PBU 9/99" (Registered in the Ministry of Justice of Russia on May 31, 1999, No. 1791), Subclause "a" of Clause 7.1 of the Order of the Ministry of Finance of Russia dated October 6, 2008, No. 106n, On Approval of Accounting Regulations (together with "Accounting Regulation "Accounting Policy of the Organization (PBU 1/2008), Accounting Regulation "Changes in Estimated Values" (PBU 21/2008)) (Registered in the Ministry of Justice of Russia on October 27, 2008, No. 12522).