Tax Authorities’ Opinion: News on the implementation of the tax relief for reinvested profit in 2015
In the Opinion dated 14/10/2015 the Tax Administration provided more details on the conditions with respect to the application of the tax relief for reinvested profit for 2015. The amendments to the Corporate Profit Tax Law in 2014 prescribed two additional conditions for application of the tax relief: the obligation of investment in the long term assets that meet certain criteria and the obligation to retain existing jobs.
The tax relief for reinvested profit can be achieved on the basis of investment in long term assets for which the expenditures are entirely tax deductible in accordance with the provisions of the Law. Therefore, investment cannot relate to cars, vessels, helicopters, planes, etc.. used by managers or other employees (irrespective of the personal income tax treatment of such usage). In case of passenger cars or means of personal transportation that are used to carry out business activities, tax relief for reinvested profit is allowed (since expenses are fully recognized for such vehicles). Also, the taxpayer will determine the possibility of using the right to reinvest profit after checking the possibility to recognize depreciation expenses arising from the use of vessels, aircraft, apartments and resting houses (subject to special conditions for recognizing depreciation expenses). This means that asset can be recognized for the purposes of reinvested profit only if, during that period, it fulfils the conditions laid down in relation to revenue level prescribed by Article 12, paragraphs 16 and 19 of the Law.
For the recognition of the tax relief, long term assets should be activated by the end of the tax period, or later if the investment is in progress (but under the terms of Article 12a, paragraph 7 of the Bylaw).
Although the investment in land is tax-deductible expense (irrespective of the fact that the land is not subject to depreciation), investments in land for certain future activities cannot be the basis for the tax relief. Exceptionally, the tax relief is recognized if the land is an integral part of a certain investment and the taxpayer started investment on that land and it is in progress. For example, investment in land that will be used for the production of agricultural products is ongoing, or the taxpayer acquired the land and started the construction of office buildings and investment tracks parallel with investing in the building).
Furthermore, for recognition of the tax relief, long-term assets may be bought from related parties, but they must be acquired at market conditions. Also, for the purpose of using the relief, assets cannot be acquired by construction or own making, but must be purchased from a third-party or associated businesses.
Finally, the Opinion states that the tax relief for reinvested profit is aimed to encourage investment, employment or retention of existing jobs. Therefore, the taxpayer who reinvested profits is required to keep the same number of workers (as at the beginning of the tax period for which the tax relief is used) for at least two following years.