Amendments to corporate income tax (“CIT”) legislation
Tax Alert, March 2014
Thin capitalization rule
On 19 December 2013 amendment to the Article 8 of the CIT Act, relating to thin capitalization rule, came into force.
According to previous provisions of the CIT Act, thin capitalization rule was applicable to the loans received from a non-resident direct shareholder, which is not a private individual and which holds at least 25% share in equity capital or voting rights in the taxpayer. Loans received from third party and guaranteed by such direct shareholder also had to be considered under the thin capitalization rule. Respective rule provided that if mentioned loans at any point exceed by fourfold the shareholder’s share in the equity capital or voting rights in the taxpayer (“the 4:1 ratio”), the amount of interests expense on the portion of the loan exceeding the mentioned ratio is to be treated as tax non-deductible expense for CIT purposes.
New amendments of the CIT Act broadened the application of the rule to loans received from any related party of the shareholder. Following this, as of 19 December 2013, loans received from related parties of the direct shareholder, which holds at least 25% share in equity capital or voting rights in the taxpayer, should also be considered when determining tax deductibility of interest expenses under the thin capitalization rule.
The thin capitalization rule does not apply when loan is provided by a financial organization, acting as a direct shareholder, related party or a third party.
Impairment of long term assets
Amendments to the CIT Regulations, which came into force on 31 December 2013 resulted with clearer provisions on impairment of long term assets. As of 31 December, the CIT Regulations clearly state that taxpayer which records impairment of long term asset (and in accordance with the Act, treats respective expense as tax non-deductible) may, as a tax deductible expense, include the amount of depreciation which would be calculated by using the prescribed tax depreciation rates on such asset. Following this, the difference between impairment of long term asset and the amount determined as a difference between depreciation used for accounting purposes (depreciation calculated on the net book value of the asset after the impairment), and the depreciation calculated for tax purposes (depreciation calculated on the on the purchase cost of the asset), would be included in CIT return as a CIT base increase.