When will Income Tax Act amendment become effective?
An amendment to the Income Tax Act, already signed by the president, is set to come into effect on the fifteenth day of its publication in the Collection of Laws. According to unofficial sources from the Ministry of Finance, the publication will be timed to ensure effectiveness from 1 July 2017. It has been a while that an amendment to the Income Tax Act came into effect mid-year and its timing naturally adds greater importance to transitory provisions and their interpretation. For example, when will it be possible to depreciate technical improvements made by sub-lessees? Answers to such questions can be found in the Ministry of Finance’s interpretation of the transitory provisions presented to the professional public.
The amendment’s transitory provisions contain a total of 22 points. The first general rule prescribes that the new regulation will apply to taxable periods started during the time of the amendment’s effectiveness, i.e. most often the 2018 taxable period. A number of amended rules are additionally governed by an individual transitory provision, for example, the new depreciation rules may only be applied to fixed assets and technical improvements put into use after the amendment’s effectiveness. According to the ministry, both rules apply simultaneously, which in practice means that a sub-lessee will be allowed to depreciate technical improvements put into use after 1 July 2017 but will be allowed to utilise related depreciation charges only in the taxable period started after this date, i.e. usually from 2018.
According to the ministry, the same interpretation of effectiveness should be applied to the extension of the period over which intangible assets are depreciated. In the 2017 taxable period, taxpayers must depreciate intangible assets over the periods prescribed by law. It will not be possible to extend the depreciation periods - and thus reduce depreciation charges - in respect of intangible assets put into use after the amendment’s effectiveness earlier than in the 2018 taxable period. From 2018, intangible assets will be depreciated on a straight-line basis using their net book values.
The Ministry of Finance’s conclusions as to the application of the new withholding tax rules are also surprising. These will mainly affect non-profit entities and unit owners associations as well as financial institutions paying interest income to these entities. The amendment extends the scope of the 19% withholding tax to interest on deposits. Arguing that withholding tax is just another income tax collection method applied in a respective taxable period, the ministry concludes that the effectiveness of the new regulation shall be governed by the taxable period of the interest recipient, and not by the moment the interest is paid. Thus, in these cases, withholding tax is not likely to be applied earlier than from 1 January 2018. This interpretation imposes additional requirements on banks and savings and credit cooperatives. According to the new provisions, these entities will have to ascertain the taxable periods of selected entities. For the sake of completeness, we point to the fact that the new withholding tax rules should also apply to the gratuitous income of non-residents.