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trAre repair expenses for immovable property not recorded on the company’s balance sheet subject to taxation?
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Are repair expenses for immovable property not recorded on the company’s balance sheet subject to taxation?
An enterprise has leased a non-residential property (building) for use in its business activities. Under the terms of the agreement, the costs of repair work carried out on the property are neither offset against the rent nor reimbursed by the lessor.
In accordance with the requirements of Article 115.6-1 of the Tax Code, these repair expenses are capitalized separately for each year, amortized proportionately, and treated as expenses deductible from income. They are reported in line 1.1.8 of Appendix No. 1 to the enterprise's corporate income tax return (“Capitalized expenses incurred for the repair of leased fixed assets”).
The leased immovable property in question is not recorded as a fixed asset on our enterprise's balance sheet (account No. 01). According to Article 198.2 of the Tax Code, the taxable base for property tax applicable to enterprises is solely the average annual residual value of fixed assets recorded on their balance sheets.
In view of the above, we would like to know whether the repair expenses reported in line 1.1.8 of the corporate income tax return, which are capitalized and amortized solely for corporate income tax purposes, constitute a taxable base for property tax for our enterprise. Is the lessee required to submit a property tax return and pay tax in respect of these expenses?
The State Tax Service under the Ministry of Economy has stated that, pursuant to Article 115.3 of the Tax Code, the deduction of repair expenses relating to leased fixed assets is determined in accordance with Articles 115.4 and 115.6-1 of the Tax Code.
Under Article 115.6-1 of the same Code, expenses incurred for the repair of fixed assets that are not recorded on the lessee's balance sheet and are neither offset against the rent nor reimbursed by the lessor are deductible from income through amortization in proportionate amounts over the term of the concluded agreement, but for no less than five years. Expenses incurred for the repair of leased fixed assets are capitalized separately for each year and amortized in accordance with the procedure established by this Article.
Furthermore, pursuant to Article 197.1.3 of the Tax Code, fixed assets recorded on the balance sheets of enterprises and individual entrepreneurs, except for the assets specified in Article 197.1.1 of the same Code, are subject to property tax.
Based on the above, the taxable base consists of fixed assets recorded on the balance sheets of enterprises, and property tax is calculated based on the average annual residual value of those fixed assets.
In response to the inquiry, it was stated that where leased property is not recorded on an enterprise's balance sheet, it is not included in the taxable base for property tax.
Legal basis: Articles 115, 197 and 201 of the Tax Code.
An enterprise has leased a non-residential property (building) for use in its business activities. Under the terms of the agreement, the costs of repair work carried out on the property are neither offset against the rent nor reimbursed by the lessor.
In accordance with the requirements of Article 115.6-1 of the Tax Code, these repair expenses are capitalized separately for each year, amortized proportionately, and treated as expenses deductible from income. They are reported in line 1.1.8 of Appendix No. 1 to the enterprise's corporate income tax return (“Capitalized expenses incurred for the repair of leased fixed assets”).
The leased immovable property in question is not recorded as a fixed asset on our enterprise's balance sheet (account No. 01). According to Article 198.2 of the Tax Code, the taxable base for property tax applicable to enterprises is solely the average annual residual value of fixed assets recorded on their balance sheets.
In view of the above, we would like to know whether the repair expenses reported in line 1.1.8 of the corporate income tax return, which are capitalized and amortized solely for corporate income tax purposes, constitute a taxable base for property tax for our enterprise. Is the lessee required to submit a property tax return and pay tax in respect of these expenses?
The State Tax Service under the Ministry of Economy has stated that, pursuant to Article 115.3 of the Tax Code, the deduction of repair expenses relating to leased fixed assets is determined in accordance with Articles 115.4 and 115.6-1 of the Tax Code.
Under Article 115.6-1 of the same Code, expenses incurred for the repair of fixed assets that are not recorded on the lessee's balance sheet and are neither offset against the rent nor reimbursed by the lessor are deductible from income through amortization in proportionate amounts over the term of the concluded agreement, but for no less than five years. Expenses incurred for the repair of leased fixed assets are capitalized separately for each year and amortized in accordance with the procedure established by this Article.
Furthermore, pursuant to Article 197.1.3 of the Tax Code, fixed assets recorded on the balance sheets of enterprises and individual entrepreneurs, except for the assets specified in Article 197.1.1 of the same Code, are subject to property tax.
Based on the above, the taxable base consists of fixed assets recorded on the balance sheets of enterprises, and property tax is calculated based on the average annual residual value of those fixed assets.
In response to the inquiry, it was stated that where leased property is not recorded on an enterprise's balance sheet, it is not included in the taxable base for property tax.
Legal basis: Articles 115, 197 and 201 of the Tax Code.