The Cabinet of Ministers’ amendments to Cabinet Rule No. 677 of 14 December 2017, Application of provisions of the Corporate Income Tax Act, were published on 7 May 2020. The Cabinet Rule prescribes how a non-resident entity should report income from real estate leases, explains the calculation of income for a permanent establishment, and adjusts the treatment of corporate reorganisations.
The income of a permanent establishment (“PE”)
There used to be confusion about the prescribed 10% rate of expenditure deductible in calculating a PE’s taxable base. The amendments explain that the 10% is to be calculated from –
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any expenses the non-resident head office (HO) has in fact paid, whether wholly or partly, as long as those expenses are directly linked to the PE’s business; and
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the value of goods the HO has supplied to the PE.
Of course, any indirect expenses within the 10% must be excluded from the cost of goods or services supplied by the HO to the PE or attributed to the PE as related expenses.
A new condition for reorganisations
A deemed dividend will arise in the course of a reorganisation from any assets that are included in the acquiring company’s share capital, with a CIT liability being deferred until the share capital is reduced.
Thus, if a company is split up and a share capital is established according to a valuation of the business activity transferred, then the value of assets included in it could represent a deferred CIT liability when the share capital is reduced.
Similarly, the value of assets transferred in a merger will represent a deemed dividend and attract CIT if the share capital is reduced by that amount in the future.
Charging CIT on income from real estate leases
The Cabinet Rule now lists details to be filed and procedures for completing the form. This will enable non-residents to file an assessment of their rental income and any directly related expenses. Gross profit in this case will attract a 20% CIT. If a 5% CIT has been withheld on the rental income earlier, then an overpay could arise, which the non-resident will be able to recover.
