In Focus

The Published Law on Amendment and Supplementation of the Corporate Income Taxation Act

September 28, 2016

Law on Amendment and Supplementation of the Corporate Income Taxation Act (CITA) has been published in State Gazette No 75 of 27 September 2016. The present newsletter aims to introduce the major changes in the legal regulations.

Tax on the expenses in kind related to personal use of business assets

Effective as from 1 January 2016 the amendments of CITA introduce a tax of 10% on the expenses in kind related to own, leased or provided for use assets granted for personal use to employees or persons in management contracts, as well as partners and shareholders exercising personal labour.

The expenditure tax on the costs associated with the operation of vehicles used for management purposes has been abolished by the amendments.

1. Definitions

Definition of "expenses in kind" has been introduced for the purposes of the amended provisions (§ 1, p. 83 of the Supplementary Provisions of CITA):

• “Expenses in kind” for the purposes of Art. 204, para. 1, item 4 is the part of the accounting expenses which are associated with own, leased or provided for use assets and/or personnel, used both for business and for personal use, corresponding to the personal use. These expenses do not include expenses falling under Art. 204, para. 1, items 1-2 (expenses on representation and social benefits in kind).

• The tax depreciation shall be taken into account when determining the expenses in kind in case the assets represent tax depreciable assets.

2. Taxable persons

Through the adopted regime, the tax burden has been shifted to the tax liable entities - employers or contracting entities under management contracts, as well as legal entities where partners/shareholders exercise personal labour.

3. Taxable amount

The taxable amount for determining the expenditure tax according to Art.204, para. 1, item 4 of CITA is the amount of the expenses in kind related to the personal use of assets, for the calendar year.

The amendments provide for allocation of the assets into three categories whereas the way for determining the tax amount varies depending on the category:

• means of transportation: the expenses related to the personal use shall be determined based on:

1. the ratio of the mileage / hours of personal use to the total mileage / total hours of use;

or

2. 50 per cent of the total expenses (in case the ratio cannot be calculated or documentation, such as road sheets or other similar reports is not available)

• real estate: the expenses related to the personal use shall be determined based on the ratio of the area / duration of the personal use of the immovable property to the total area / total time of use (if the expenses could not be measured otherwise);

• other assets (other than those of the first two categories): the taxable base amounts to 20 per cent of the total costs associated with the corresponding asset (if other amount could not be supported by documents).

4. Option right

The transitional and final provisions of the Law on Amendment and Supplementation introduce new paragraphs 3 and 4 of Art.24 of the Individuals’ Income Taxation Act (IITA). The amendments provide an option right of taxable persons to choose whether the costs in kind to be taxed by expenditure tax under CITA or to be treated and taxed as income in kind of the individuals under IITA. The option right could not be exercised for separate individuals.

Taxable persons declare their choice for the current year in the annual tax return under CITA for the previous year whereas the choice made remains in force throughout the year.

At the same time the income received by individuals in the form of expenses related to the personal use of company assets, should not be included in the taxable income of the individual, in so far as they are taxed under CITA.

Concerning 2016, taxpayers declare their choice in the annual tax return for 2016. If until now the approach was taxation of expenses in kind as income of individuals, taxpayers have the option right to choose whether to continue to apply this approach till the end of 2016 or to continue with implementation of the new rules and therefore expenses taxation under CITA.

5. Documentary substantiation

No explicit requirements have been set for the way of documentary substantiation of expenses in kind related to the personal use of assets. The ratio of costs incurred for the personal use of assets to the total cost should be demonstrated by sufficient documentation. For example, regarding cars, taxpayers should maintain documents for measuring distances travelled such as road sheets or other similar reports, whereas the same should contain information on particular routes and destinations associated with the activity. In the absence of reliable documentation about the way of determining the ratio, the revenue authorities could assign personal use of 50 per cent of the total expenses associated with the vehicle.

Other amendments

The Law on Amendment and Supplementation of the Corporate Income Taxation Act introduces a requirement to foreign entities operating in the country through a permanent establishment, to indicate in their annual tax returns identification data of the owners, shareholders or members and their contribution rate if this rate exceeds 10 per cent.

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