What differences are taken into account determining the income taxation object in case of investment real estate operations, which is measured at original cost / fair value in accounting?

Information and Reference Department, published 06 June 2022 at 13:31 Chapter: News

Sub-paragraph 134.1.1 Paragraph 134.1 Article 143 of the Tax Code of Ukraine as of 02.12.2010 № 2755-VI with changes and amendments (hereinafter – TCU) stipulates that the income taxation object is income with a source of origin from Ukraine and abroad, which is determined by adjusting (increasing or decreasing) the pre-tax financial result (profit or loss), determined in financial reporting of an enterprise according to national regulations (standards) of accounting or international financial reporting standards on differences determined by relevant provisions of the TCU.

Differences that arise during calculation of depreciation of the non-current assets are formed according to requirements of Article 138 of the TCU.

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

the amount of accrued depreciation of fixed assets and / or intangible assets according to national accounting regulations (standards) or international financial reporting standards;

the amount of residual cost of an individual item of property, plant and equipment or intangible assets, determined according to national accounting standards (standards) or international financial reporting standards in case of liquidation or sale of such item.

Paragraph 138.2 Article 138 of the TCU stipulates that the pre-tax financial result is reduced, in particular on:

the amount of calculated depreciation of fixed assets and / or intangible assets according to Paragraph 138.3 Article 138 of the TCU;

the amount of residual cost of an individual object of fixed assets or intangible assets, determined taking into account provisions of Article 138 of the TCU in case of liquidation or sale of such object;

the amount of initial cost of acquisition or production of a separate item of non-productive fixed assets and / or non-productive intangible assets and the cost of their repair, reconstruction, modernization or other improvements, including those included in expenses according to national accounting standards (standards) or international financial reporting standards in case of sale of such non-productive fixed assets and / or intangible assets, but not more than amount of income (revenue) received from such sales.

Residual cost of fixed assets, other non-current and intangible assets for purposes of Section III of the TCU, is amount of residual cost of such assets and items, which is defined as difference between the original cost and amount of calculated depreciation according to provisions of Section III of the TCU (Sub-paragraph 14.1.9 Paragraph 14.1 Article 14 of the TCU).

To calculate the depreciation according to provisions of Paragraph 138.3 Article 138 of the TCU, the cost of fixed assets and intangible assets is determined without taking into account their revaluation (discount, revaluation) and is carried out according to accounting provisions (Second clause of Sub-paragraph  138.3.1 Paragraph 138.3 Article 138 of the TCU).

Taking into account requirements of Sub-paragraph 138.3.2 Paragraph 138.3 Article 138 of the TCU for tax purposes, the depreciation of fixed assets is accrued in case of their determination for use in the taxpayer’s economic activities.

As follows, the pre-tax financial result is increased by amount of accrued depreciation of investment property, which is accounted for at cost, taking into account accumulated depreciation (hereinafter – at original cost) according to national regulations (standards) of accounting or international financial reporting standards.

If the investment property, which is accounted for at original cost, is not intended for use in economic activities, such assets are not subject to depreciation for tax purposes and, accordingly, financial result is not reduced by the amount of depreciation of these assets.

In case of sale of investment property, which is accounted for at original cost, which is intended for use in economic activities and is subject to depreciation in tax accounting, the pre-tax financial result is increased by the residual of such assets, determined according to accounting rules and decreases by the residual cost of these assets, determined taking into account provisions of Article 138 of the TCU.

In case of sale of investment property, which is accounted for in the financial accounting at original cost, which is not intended for use in economic activities, the pre-tax financial result is increased according to Paragraph 138.1 Article 138 of the TCU, in the amount of residual cost of such assets, determined according to accounting and decreases according to Paragraph 138.2 Article 138 of the TCU, in the amount of original cost of acquisition or production and the cost of their repair, reconstruction, modernization or other improvements of such assets, determined according to accounting but not more than the amount of income (revenue) received from such sales.

In case of investment property operations, which are accounted for at fair cost (depreciation and impairment are not recognized) there are no differences in tax accounting, defined by rules of Paragraphs138.1 and 138.2 Article of the 138 TCU. Results of operations with such assets (sale, revaluation) are determined according to accounting rules and are reflected in the pre-tax financial result without adjustments.

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