Tax Alert, January 2019
Rulebook on Amendments to the Rulebook on classification of fixed assets by groups for tax depreciation purposes
On 28 December 2018 Minister of Finance has adopted Rulebook on Amendments to the Rulebook on classification of fixed assets by groups for tax depreciation purposes (hereinafter: “Rulebook”), published in “Official Gazette of RS”, No.104/18. The main reason behind adoption of the Rulebook was harmonization of Rulebook on classification of fixed assets by groups for tax depreciation purposes (“Official Gazette of RS”, No. 116/04 and 99/10, hereinafter: “Rulebook on depreciation”) with Law on Amendments of Corporate Income Tax Law (“Official Gazette of RS”, No.113/17), which came into force on 1 January 2018, and is applicable on determination of corporate income tax liability starting from tax year 2018.
Pursuant to the Rulebook, all fixed assets which are not explicitly enumerated in groups from II do V, should be classified into III depreciation group. In addition, two new templates are integral part of the Rulebook: OA/I – for depreciation of fixed assets classified into I depreciation group and OA/N – for depreciation of intangible assets.
Main changes introduced by this Rulebook relate to depreciation of intangible assets and subsequent investments made to fixed assets, as well as depreciation of assets acquired through reorganization.
The Rulebook shall enter into force on 1 January 2019. Its provisions are applicable to determination of tax depreciation starting from tax year 2018.
Tax depreciation of intangible assets
The Rulebook prescribes a new method for intangible assets depreciation (concessions, patents, trade and service marks, designs, licenses, franchises).
Namely, for intangible assets which started to be used after 1 January 2018, depreciation is done by using the straight - line method, whereby the depreciation rate is determined on the basis of useful life of a particular intangible asset. Tax base is purchase value (cost) of each asset separately. Consequently, tax depreciation of intangible asset is equal to its accounting depreciation.
When it comes to intangible assets that have already been classified into II depreciation group, as at 31 December 2017, tax depreciation continues to be determined using declining base method, by applying rate of 10% on tax depreciation group balance.
Depreciation of fixed assets acquired through reorganization
According to previous rules, when the asset classified into I depreciation group (immoveable asset) is acquired through reorganization, tax base of such asset, for taxpayer – acquirer, is its net value as at reorganization date, which equals to initial cost of the asset reduced by tax depreciation determined by previous owner. Hence, the asset acquired in this way was depreciated by the acquirer in the next 40 years, i.e. using depreciation rate od 2.5%.
This is changed by the Rulebook, which prescribes that, for immoveable asset acquired through reorganization, taxpayer – acquirer continues to depreciate asset in the same way as it was done by its previous owner, during remaining depreciation period (for example, if previous owner has depreciated asset for 10 years, taxpayer – acquirer will continue to depreciate asset by applying rate of 2.5% on initial cost of the asset, in the next 30 years).
The same rule applies to depreciation of intangible assets acquired through reorganization.
If all assets are transferred to only one acquirer through reorganization process, taxpayer – acquirer should increase closing balance of tax depreciation group at the end of previous tax period by the appropriate balance of group of assets acquired through reorganization.
Tax depreciation of assets acquired through reorganization prior to 31 December 2017 is determined applying provisions of Rulebook on depreciation.
If, due to initiation or completion of liquidation proceedings, tax period is shorter than calendar year, depreciation of fixed assets classified into groups from II to V is to be determined in proportion to the number of days in tax period for which tax return and tax balance sheet should be prepared. The same rule applies to the bankruptcy proceedings.
Subsequent investments made on fixed assets
For fixed assets which are, in accordance with Rulebook on depreciation, classified into one of the group from II to V, and on which subsequent investments will be made starting from 1 January 2019, provided that these investments are higher than 10% of net book value of each respective asset, tax depreciation will be calculated in accordance to provisions of article 10b of new Corporate Income Tax Law that came into force in December 2018. It is expected that new rulebook will be adopted, in order to regulate the application of latest changes of Corporate Income Tax Law, including abovementioned treatment of subsequent investments.
Existing tax depreciation rules are applicable to fixed assets acquired until 31 December 2018 (i.e. on the last day of tax period that begins during 2018), and for fixed assets classified into groups II-V such provision are applicable on tax depreciation calculation until 31 December 2028, i.e. until the last day of tax period that begins in 2028. If closing balance is: for II group lower than 10%, for III group lower than 15%, for IV lower than 20%, and for V group lower than 30% in comparison with closing balance as at 31 December 2018 (i.e. on the last day of tax period that begins in 2018), total closing balance of the respective group is recognized as depreciation expense.