Macedonia's new law on corporate income taxation includes a number of changes relating to the payment of profit tax, the treatment of carrying-forward of losses, the definition of related parties, and transfer pricing, amongst others. The following article covers these changes in more detail.
The new Law on Corporate Income Tax (CIT Law), which was enacted on July 23, introduces several amendments in the taxation of generated profit in Macedonia. This new law came into force on January 1, 2015, but it applied to the profits generated during 2014 as well. The most important developments focus on:
- the obligation to pay profit taxes regardless of the distribution of profits,
- losses carrying forward, and
- the broadening of the definition of related parties for transfer pricing purposes.
Before the introduction of the new CIT Law, legal entities had an obligation to pay profit taxes on profits distributed to the shareholders only. Following the introduction of the new Law the taxpayers are required to pay income tax regardless whether the profits have been distributed or not.
The CIT Law provides that the taxpayers who reinvested their net profits in business-related assets that will remain in the company's ownership for at least five years may use a tax exemption for reinvested profits.
In addition, losses evidenced in a taxpayer's income statement, may be carried forward to up to three future tax years after the reporting of the subject loss
in the annual financial records. Before the new CIT Law, there was a possibility to carry forward losses to up to five future periods.
The new CIT Law broadens the definition of related parties (hitherto, related parties were the parties considered related according to the corporate laws), so that from now all entities from preferential tax system jurisdictions have the status of related parties of Macedonian taxpayers (regardless of whether they are related through capital or similar).
In general, the introduction of the new CIT Law impacts large investors that would have to pay significantly increased amounts of income tax due to the expansion of the tax base. In addition, the amendments to the CIT Law tend to make the transactions tax haven companies less attractive from the tax perspective.
The simplified tax regime for small companies remains in force so that companies with annual turnover up to 3 million Macedonian denars (approx. 50,000 euros) may be exempted from payment of income tax.
Companies with annual turnover between 3 million and 6 million denars (approx. 100,000 euros) may opt to pay income tax under the general rules set in the CIT Law by 10% tax rate, or to pay income tax to the taxable base which is their overall turnover under the 1% tax rate.
The tax rate was not changed, so that Macedonia still remains the country with the very low corporate income tax rate of 10%.
Aside the significant changes related the tax base, we herewith provide a short overview of the novelties introduced by the new Law on Profit Tax, as well as its amendment introduced in July 2015.
Tax Exemption for Reinvested Profits
The CIT Law provides that the tax base in a current year may be decreased for the amount of the investments made out of the profit generated in the previous
In order to deduct the reinvested profit from the tax base the taxpayer should invest in tangible assets (immovable property, plant and equipment), as well as in intangible assets (computer software and patents). Investments in passenger cars, furniture, carpets, audiovisual devices, appliances, pieces of fine and applied art and other investments that serve administrative purposes would not qualify as an investment for the purpose of deduction from the taxable base.
The reinvestment of the generated profit has to be made for purpose of expanding of the business activity of the taxpayer. The burden is on the taxpayer to prove the character of the investment, and in case that it fails to prove this to the Macedonian Tax Administration (''TA''), the TA may assess the tax for the amount of the reinvested profit that does not qualify as such an investment.
However, the CIT Law does not provide the definition of the ''investment for purpose of expanding of the business'', so it is left to the discretion of the TA to decide whether the conditions for decrease of the taxable base are met in each particular case. Primarily, the CIT Law does not provide whether the assets have to be paid in order qualify as the investment, or it is enough that the assets are evidenced in the taxpayer's accounting records before payment. Also, it is not clear whether the investment in the property under construction would qualify as investment at the moment of payment, or in the tax period in which the investment is finished. In addition, it is not defined what is meant by expanding of the business.
The lack of clear definitions or even a closer description of the investments that would qualify for tax exemption may lead to the misunderstandings between taxpayers and the TA, and may expose taxpayers to assessment of additional tax obligations by the TA. Even if the taxpayer's investment would qualify for the tax exemption, the taxpayer may have to endure the timeconsuming process of proving the character of the investment.
If the taxpayer alienates acquired assets within five years of their purchase, it shall be obliged to pay the tax that would have been paid if the tax exemption was not claimed. Again, there is no clear definition of alienation but it appears that any transfer of property under the assets (including transfer in the process of the merger or division), will oblige the taxpayer to pay the tax that was not paid in the period of reinvestment.
Losses Carried Forward
Losses incurred by the taxpayer and evidenced in a taxpayer's income statement, may be carried forward up to three tax years following the tax year in which the loss was disclosed. The amount of losses disclosed in the income statement is decreased by the same as the amount of expenses that are not deductible for tax purposes as evidenced in the taxpayer's tax return.
Companies going through mergers, acquisitions, divisions and other types of transformation are not allowed to carry forward losses incurred before
The CIT Law also provides that the taxpayer may carry forward incurred losses only if losses are previously covered by the rules set by the Law on Trade Companies (e.g. by capital increase). In order to carrying forward the losses, the taxpayer has to submit a written request to the TA by March 31 in the year following the year in which the losses are incurred. Under the CIT Law, the TA has to approve that the taxpayer is entitled to carry the losses forward. However, the deadline is not specified by which the TA has to issue the approval. In this regard the consequences if the TA do not issue the resolution on approval or denial for carrying losses forward at all
are not clearly defined. As a consequence, this may lead to legal uncertainty regarding carry forward of the losses.
Transfer Pricing Rules
The new CIT Law significantly broadens the definition of related entities by defining all nonresident legal entities registered in low-tax jurisdictions as related, irrespective of whether these entities have control or are of significant influence to the taxpayer. Considering that there is no published list of such low-tax jurisdictions yet, the applicability of this provision and its interpretation by the TA in practice still remains unclear.
Under the general rule of the CIT Law, expenses incurred in transactions with related parties that are not set in accordance with the arm's length principle are not deductible in tax purposes. Having this in mind, broadening of the definition of the related parties will most definitely lead to the additional income for the Macedonian state budget, but it remains unclear what would be the actual benefit.
The amendments of the CIT Law enacted in July 2015 prescribe a new method for calculation of fines for the tax misdemeanours that may be imposed to the tax-payer who breaches their tax obligations. Fines are now calculated based on several elements, as opposed to being pre-defined as was previously the case.
The new method of calculation takes in consideration revenue, the number of employees, as well as the previous behaviour of the offender as relevant in the
process of determining the amount of the fine.
The fines for providing inaccurate and false information in the tax balance sheet remains tenfold of the unpaid profit tax which was due by the legal entity while the amendments introduce a fine for the authorized person of the taxpayer in the amount of 30% of the fine imposed to the legal entity.