From 1 January 2018, signficant changes in Corporate Income Tax (CIT) law come into force. The changes are a part of changes taxation principles that affect several taxes referred to as “Tax Reform”. According to the new CIT law loans issued to related parties may be treated as conditional profit distribution and taxed at the rate of 25% from the amount transferred in the month of transfer.
According to Clause 11 (1) of the CIT law, loans issued to related parties is considered as conditional profit distribution and is taxes at the rate of 25% from the amount transferred as loan.
Clauses 11 (3) and 11 (4) provide several exceptions from this rule.
To the companies that plan to issue loans to related parties we recommend to run each loan through the list of the exceptions in order to understand if such loans should be taxed.
The list of exceptions is as follows:
- loans issued by a shareholder [Clause 11(3)1)];
- loans issued to the company’s representative office abroad [Clause 11(3)2)];
- loans issued by a company in the amount equal to the amount received by the company from a non-related party [Clause 11(4)1)];
- loans issued in the year when the company does not have undistributed prior year’s undistributed profit [Clause 11(4)2)];
- loans issued in the reporting year in the amount which does not exceed registered share capital at the beginning of the reporting year less total amount of loans issued and not received in the prior years, excluding loans mentioned in Clauses 11(4)1), 11(4)4) and 11(4)5). [Clause 11(4)3)]
- loans with maturity less than 12 months [Clause 11(4)4)];
- loans issued by a company that received a Social company status that comply to certain conditions [Clause 11(4)5)].