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Investment Tax Deductions
In January 2018, a new Article 286.1, entitled "Investment Tax Deduction," appeared in Chapter 25 of the Tax Code. The term of this article is limited: it will expire in 10 years, on January 1, 2028. An income tax deduction for investments can be made for the amount spent on the acquisition, construction, or modernization of fixed assets.
Only that tax (or advance payment) paid to the regional budget (17% of 20%) is eligible for the deduction. The investment deduction is not applied when calculating income tax for a consolidated group of taxpayers.
The right to the income tax investment deduction is established by the legislative bodies of the subjects of the Russian Federation. That is, a company or its separate subdivision can use the deduction, if it is located in a region where the right to such a deduction is established. Each subject of the Russian Federation has the right to limit the right to this deduction for certain categories of taxpayers.
Please note: the application of the investment deduction is voluntary. This means that a company that has the right to a deduction by law has no obligation to exercise this right.
Who does not have the right to apply an investment deduction?
Participants of regional investment projects, free economic zones, special economic zone residents and participants of the Magadan Region special economic zone may not apply the deduction. In addition, organizations engaged in activities related to the extraction of hydrocarbons in new offshore hydrocarbon deposits are also prevented from using the deduction. The ban also applies to residents of the territory of advanced socio-economic development and residents of the Free Port of Vladivostok, participants in the Skolkovo Project and foreign companies who are tax residents of the Russian Federation (carrying out commercial activities in Russia through a permanent representative office).
Which fixed assets are included in the investment deduction?
The investment deduction can be applied only for fixed assets expected to serve from 3 to 20 years. Each constituent entity of the Russian Federation has the right to approve certain categories of facilities for which an investment deduction may be applied or not applied.
What is the amount of the investment deduction?
The investment tax deduction of the current period cannot be more than 90% of expenses for the period, including the initial value of the fixed asset. If the fixed asset has been renovated, then the investment deduction is not more than 90% of the cost of such operations.
The amount of the investment deduction of the current period should be within the difference of two values. The first is that part of the profit tax paid to the regional budget and calculated at 20 percent. The second value is the part of the profit tax paid to the regional budget and calculated on the basis of a 5% rate (or another value approved in the region). Both the first and second quantities are determined without taking into account the investment deduction.
In which period is the deduction applied?
The investment deduction should be applied in the period in which the fixed asset is put into operation, or when its original value is changed due to renovation. If the limits for the period have been exceeded, the remainder of the deduction, as a general rule, may be transferred to subsequent periods.
The prohibition of depreciation and amortization premium.
The fixed asset for which the investment deduction was applied is not subject to depreciation. But this prohibition extends only to that cost, for which the investment deduction was applied.
Procedure for selling a fixed asset.
A fixed asset for which the investment deduction has been applied is not prohibited from being sold. However, in this case, the organization must repay the profit tax in question to the region and pay a penalty fee for the entire period starting from the application of the deduction.
Federal Tax Deductions
The remaining 10% of the costs included in the initial cost of the fixed asset can be used as a deduction to federal income taxes. The right to this reduction is limited to those who used the right to the regional investment deduction. The amount of tax payable, formed after such a reduction, may be zero.
Translated by Alinga Consulting Group.
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