A seller’s obligations do not end when the goods are handed over — statutory and contractual warranties give rise to complaint claims, which accounting reflects by creating a provision for warranty repairs. This provision is a book expense, not a tax-deductible one: only the actual cost of a repair, replacement or refund reduces the tax base, and the rules are broadly the same in Slovakia and the Czech Republic.
Why obligations do not end when the customer receives the goods
When a company sells a product, it takes on, together with the revenue, a future risk: the customer may file a complaint during the warranty period. From an accounting perspective this is a classic example of a liability that already exists at the time of sale but whose exact amount and timing are unknown. The prudence principle therefore requires the company to reflect this risk in its accounts in the period in which it earned the related revenue — not only when the complaint actually arrives.
The tool for this is a provision for warranty repairs and complaints. Its purpose is to match the expected cost of future complaints to the revenue from the sale that gave rise to them. In both Slovakia and the Czech Republic this is a book provision governed by the accounting rules, created on the basis of the company’s own experience.
When the duty to create a warranty provision arises
A provision is created when a company grants a warranty on goods or products sold and, based on experience, knows that a share of them will come back for repair or replacement. It is not set arbitrarily — the entity must have an internal rule defining the method of calculation. In practice the amount is derived from the historical complaint rate, for example as a percentage of revenue from goods under warranty or from the number of units sold.
Example: an electronics manufacturer knows from long-term statistics that complaints run at around 2% of annual revenue. If it sold warranted goods worth EUR 500,000, it creates a provision of roughly EUR 10,000, thereby reflecting in the year of sale the future costs that are yet to arise.
Why the warranty provision is not a tax-deductible expense
This is where mistakes most often happen. In Slovakia the provision for warranty repairs is not among the tax-deductible provisions listed in Section 20 of the Income Tax Act, so its creation is a non-deductible expense that increases the tax base. In the Czech Republic the logic is the same: a warranty provision is a book provision, not a statutory reserve under Act No. 593/1992 Coll. on Reserves, and is therefore likewise non-deductible for an ordinary manufacturer.
In both countries the actual tax expense arises only when the company actually incurs the cost of a repair, replacement or refund. The accounting provision thus affects the book profit already in the year of sale, but warranties hit the tax base only when complaints are genuinely handled. The release of an unused provision is excluded from taxable income so that the same amount is not taxed twice.
How to account for the complaint itself
How the complaint is recorded depends on how it is settled. For a repair, the company books the consumed material and labour into costs (covered by the provision). For a replacement, the original item is written off and a new one issued. For a refund or discount, the seller issues a corrective invoice (credit note) and adjusts the tax base and output VAT — under Section 25 of the VAT Act in Slovakia and Section 42 in the Czech Republic.
A complaint therefore touches VAT, not just costs. The timing of the correction of the tax base is crucial so that the company does not remit VAT on a supply that effectively did not take place. The corrective invoice must still carry the same mandatory elements as a regular one, which we cover in our guide on how to issue a domestic invoice, and for the practical detail of credit notes see our overview of proforma, final and corrective invoices.
How a provision differs from a valuation allowance
In practice provisions and valuation allowances are confused, although they are different tools. A provision is a liability of uncertain amount or timing — typically future warranty repairs. A valuation allowance, by contrast, expresses a temporary reduction in the value of a specific asset, such as a receivable or inventory. Warranties and complaints clearly belong to provisions, because they relate to a future obligation towards the customer, not to a decline in the value of an existing asset.
What to set out in the internal rule
Because the warranty provision is a book provision, its defensibility stands or falls on the internal rule. It should clearly state the base and percentage used for the calculation, how the complaint rate is verified, when the provision is released and how its use is documented. During a tax audit such a rule is the proof that the provision is not arbitrary but reflects the company’s real experience.
Not sure whether your company must create a warranty provision and how to reflect it in the tax return? We will help you set up both the internal rule and the correct accounting for warranties.
FAQ
Is creating a warranty provision a tax-deductible expense?
No. In both Slovakia and the Czech Republic a warranty provision is a book provision, not a tax-deductible one (it is not listed in Section 20 of the Slovak Income Tax Act, nor is it a statutory reserve under the Czech Act on Reserves). Its creation increases the tax base. Only the actual cost of a repair, replacement or refund is tax-deductible, at the moment the company incurs it.
How large a warranty provision should I create?
The amount cannot be set randomly. It is derived from the company’s historical complaint rate — most often as a percentage of revenue from goods under warranty or from the number of units sold. The method of calculation must be captured in an internal rule so that it is defensible during a tax audit. The provision should be reassessed each year and adjusted to the actual development of complaints.
What should I do with a provision that was not used?
The provision must be reassessed at the annual inventory count. If it is no longer justified — for example because the warranty period has expired or complaints did not materialise — the unused part is released into income. Because the creation of the provision was a non-deductible expense, its release is excluded from taxable income so that the same amount is not taxed twice.