Is the pre-tax financial result adjusted for amount of value of the fixed assets forcibly seized from a legal entity during the martial law in favor of military administration?

Martial law was imposed on the entire territory of Ukraine by Decree of the President of Ukraine № 64/2022 as of 24.02.2022.

Paragraph 2 Part 1 Article 1 of the Law of Ukraine № 4765-VI as of 17.05.2012 "On the transfer, forced alienation or seizure of property under legal regime of the martial law or state of emergency" with changes and amendments (hereinafter – Law № 4765) stipulates that seizure of property is a deprivation of a right of state enterprises, state economic associations of economic management or operational management of individually determined state property for the purpose of its transfer for the state’s needs under legal regime of the martial law or state of emergency.

Seizure of property under legal regime of the martial law or state of emergency is carried out without reimbursement of such property’s value (Part 3 Article 3 of Law № 4765).

First clause of Sub-paragraph 134.1.1 Paragraph 134.1 Article 134 of the Tax Code of Ukraine as of 02.12.2010 № 2755-VI with changes and amendments (hereinafter – TCU) stipulates that the corporate income taxation object is a profit from the source of origin from Ukraine and abroad determined by adjusting (increasing or decreasing) the pre-tax financial result (profit or loss), defined in financial reporting of enterprise according to national accounting regulations (standards) or international financial reporting standards for differences determined by relevant provisions of the TCU.

Sub-paragraph 14.1.202 Paragraph 14.1 Article 14 of the TCU stipulates that sale (realization) of goods is any operation carried out according to contracts of sale, exchange, supplies and other economic, civil law contracts, which provide for the transfer of ownership of such goods for fee or compensation, regardless of the terms of its provision, as well as operations for free provision of goods.

Operations to deprive the state-owned enterprises of a right to manage or operatively manage state property for purpose of transferring it for the state’s needs under legal regime of the martial law or state of emergency are equated to the sale of such property.

Paragraph 138.1 Article 138 of the TCU stipulates that the pre-tax financial result increases, in particular:

for amount of the residual value of an individual object of property, plant and equipment and / or intangible assets, determined according to the national accounting regulations (standards) or international financial reporting standards, in the case of liquidation or sale of such object;

for amount of the residual value of an individual object of non-productive fixed assets and / or non-productive intangible assets, determined according to the national accounting regulations (standards) or international financial reporting standards, in the case of liquidation or sale of such object.

Paragraph 138.2 Article 138 of the TCU stipulates that the pre-tax financial result decreases:

for amount of the residual value of a separate object of fixed assets and / or intangible assets, determined taking into account provisions of Article 138 of the TCU, in the case of liquidation or sale of such object;

for amount of the initial acquisition value or manufacture of a separate object of non-productive fixed assets and / or non-productive intangible assets and costs of their repair, reconstruction, modernization or other improvements, including those attributed to value according to the national accounting regulations (standards) or international financial reporting standards, in the case of sale of such object of non-productive fixed assets or intangible assets, but not more than amount of income (revenue) received from such sale.

As follows, the taxpayer in the case of forced seizure of fixed assets during the martial law in favor of the military administration adjusts the pre-tax financial result according to requirements of Paragraphs 138.1 and 138.2 Article 138 of the TCU.

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