AmCham Macedonia Winter 2014 (Issue 40) - Page 16

ANALYSIS Recent Tax Law Changes – For Better or Worse? provide a tax exemption for dividend income at the shareholder level, if such dividends are already taxed upon their distribution. CIT on Loans: Preventing Unintentional Impacts on Companies Author: Ana Shajnoska, Senior Tax Consultant, PricewaterhouseCoopers Skopje A recent move to address tax evasion in Macedonia may inadvertently and unfairly impact many taxpaying and law-abiding companies working here. From December 2013 – January 2014 several changes were made to Macedonia’s tax legislation. Among them, the Corporate Income Tax (“CIT”) Law was amended, a change which entered into force in late January 2014. Although seemingly small changes, they touch on two major issues from a tax perspective: granting loans and distributing dividends. New CIT on loans: Outstanding receivables related to the transfer of loans – or any funds which are considered loans – are now subject to CIT, unless the funds are returned in the same year when the loan was made. Taxpayers will be entitled to tax credits to recoup taxes paid in previous years when the loan is fully repaid. New CIT on distributed dividends: The latest legal changes basically eliminate the tax exemption given since 2010 to encourage local reinvestment of profits. This means that when local companies decide to distribute profit, it will now be subject to CIT, regardless of the residency of the shareholder. To avoid double taxation, these changes 16 These changes were primarily aimed at decreasing tax avoidance by limiting the period for which loans can be granted “tax-free”. The expected response to this change is that local companies will be discouraged from transferring excess funds without expecting any returns. This measure may also contribute toward closing the loophole through which profits could be effectively distributed to shareholders or controlled entities as long term loans, rather than as dividends. It's important to note that CIT now applies to both standard loans and any transfer of funds deemed to be a loan "in essence". Thus, the current approach could result in taxation of every long-term loan granted by local companies to any other entity. While decreasing CIT now applies to both tax avoidance is an admirable goal, standard loans and any since it will lead to transfer of funds deemed greater consistento be a loan “in essence”. cy and transparency of the country's tax system, steps should also be taken to avoid unreasonably burdening companies that are not attempting to avoid taxation. It is quite common for different entities within a single holding structure to finance each other whenever possible to avoid entering into unnecessary and costly external financing arrangements. Therefore, it would make sense to distinguish outstanding receivables from loans granted to related parties (especially between parents and subsidiaries) from those granted to non-related parties. Even for those loans granted between related parties, a threshold loan amount could spare many reasonable and operationally justified loans from illogical taxation. Emerging Macedonia Winter 2014 Issue 40