Ministerial Decision on Adjustments under the Transitional Rules
Ministerial Decision on Adjustments under the Transitional Rules
With effect from June 1, 2023, the Cabinet of Ministers has released Cabinet Decision No. 120 of 2023, which establishes standards for modifying a taxable person’s initial balance sheet in accordance with Federal Decree Law No. 47 of 2022, also known as “The CT Law.”
By establishing transitional provisions for excluding gains on assets owned prior to the corporate tax regime, the Decision seeks to give Taxable Persons a one-time benefit.
When calculating a Taxable Person’s taxable gains upon disposal of the following assets, the decision/relief pertains to particular assets and liabilities that businesses owned prior to the implementation of the corporation tax law:
1. Gains upon the sale of real estate (which will be considered “Qualifying Real Estate” if the requirements below are satisfied);
2. Gains upon the sale of intangible assets (which, if the requirements below are satisfied, will be considered “Qualifying Intangible Assets”); and
3. Gains and losses from the sale of financial obligations and assets (which, if the requirements below are satisfied, will be designated as “qualifying financial obligations” and “qualifying financial assets”).
How to obtain relief or adjustments:
In the context of immovable property and intangible assets, a Taxable Person may choose to modify their Taxable Income to the extent that each of the following requirements is satisfied:
1. The assets are owned before to the first Tax Period, which is to say, before the first fiscal year of the Taxable Person;
2. A historical cost basis is used to account for the assets; and
3. After the CT Law takes effect, the assets are sold or otherwise deemed sold to a Taxable Person for a price higher than their net book value, or for a profit.
If the following requirements are met, a Taxable Person may modify their Taxable Income in relation to Qualifying Financial Assets and Qualifying Financial Liabilities in order to determine gains and losses:
1.The assets are owned before to the first Tax Period, which is to say, before the first fiscal year of the Taxable Person;
2.Historical cost accounting is used to account for the assets;
The election has to be made for each qualifying immovable property, all qualifying intangible assets, and all qualifying financial assets / liabilities at the time the first tax return is submitted. With rare exceptions, the election cannot be reversed.
How the gains will be computed?
Regarding Eligible Immovable Property
Gains realized on the sale of a qualifying immovable property after the CT Law went into effect may be modified in one of the following ways:
Option 1: If the item had been sold at the beginning of the first Tax Period, the gains that would have resulted would be excluded. The difference between (1) and (2) is the amount of benefit that needs to be excluded:
(1) The asset’s Market Value (“MV”) at the beginning of the first Tax Period
(2) the greater of the asset’s initial cost and its net book value (“NBV”) at the beginning of the first Tax Period.
Option 2: (1) x (2) is the formula for determining how much gain needs to be omitted.
1. (Sales Proceeds at the time the asset is disposed of) – (The greater of the asset’s initial cost and its NBV at the beginning of the first tax period).
2. (Total number of days the asset is possessed) / (Number of days the asset is owned prior to the first Tax Period).
Regarding Qualifying Intangible Assets
The following technique can be used to modify the profits recognized on assets possessed before the Taxable Person’s first Tax Period:
1. The formula to determine how much benefit needs to be removed is (a) x (b):
2. (Sales Proceeds at the time the asset is disposed of) – (The greater of the asset’s initial cost and its NBV at the beginning of the first tax period).
3. (Total number of days the asset is possessed) / (Number of days the asset is owned prior to the first Tax Period).
The Qualifying Intangible Asset may, however, only be owned for a maximum of ten years prior to the first Tax Period.
Regarding Qualifying Financial Liabilities and Qualifying Financial Assets
Gains and losses from the sale of qualifying financial liabilities and assets may be excluded by a taxable person provided that the liabilities and assets were sold for market value, with the NBV serving as the asset’s initial cost at the beginning of the first tax period.
1. The path ahead
2. The choice will be applicable to certain assets that are measured using historical cost data.
3. The ruling provides a certain kind of future tax relief on profits inherent in assets owned on the day the Connecticut legislation was enacted.
4. When filing tax returns for the first tax period, the election must be made voluntarily.