The Tax relief for the reinvested profit – New regulations 2016

Adrian Beșleagă
Manager Operatiuni @ A&I Consulting

“You want to set a goal that is big enough that in the process of achieving it you become someone worth becoming” - Jim Rohn

The Tax relief for the reinvested profit – New regulations 2016

According to the new Fiscal Code, entrepreneurs benefit from a wider scope regarding the items which they purchase and which fall under the tax relief law for the reinvested profit. In other words, entrepreneurs have the possibility to reduce the amount of profit tax by investing it in IT equipment: hardware and software. In the following lines, we will explain which are the new legal changes and we will present three examples of tax calculation that can be exempt from the reinvested profit.

Until the end of 2015, tax exemption was applied for the profit reinvested in technological equipment, machines and work installations, according to the regulations regarding subgroup 2.1, as included in the catalog regarding the classification and normal operation time for fixed assets.

Since January 2016, the regulations have been extended to include the tangible assets included in class 2.2.9, as well as software, namely: electronic computers, peripheral equipment, machines and cash registers, control and billing machines and software. It is important to note that it only applies to the assets that are considered new.

When it comes to how the exemption is applied, the rules remain unchanged. In the following lines we will provide a few specific examples.

Your company applies the quarterly tax declaration and profit tax payment system

Let us suppose your company purchases and starts using some IT equipment, worth 45.000 lei, in September 2016. The gross accounting profit for the period January 1, 2016 – December 31, 2016 is 400.000 lei.

At the end of 2016, your company registers a taxable profit of 500.000 lei.

How do we calculate the profit tax exemption on reinvested profit for the 2016 year?

If the taxable profit is 500.000 lei, then the profit tax for 2016 is: 16% x 500.000 lei = 80.000 lei

Then, we calculate the related income tax for the reinvested profit: 16% x 45.000 lei = 7200 lei, tax exemption. The gross accounting profit for 2016 is 400.000 lei, so the investment is covered.

Is it necessary to assign a part of the profit that benefited from the tax exemption to the reserves?

The answer is yes. However, there is an exception: the amount related to the legal reserve, in case it was not constituted in the previous year, which is calculated as following:

• We determine the amount allocated to the legal reserve

  Example: Your Company allocates 5% from the accounting profit for the constitution of the legal reserve. Thus, the part allocated to the reinvested profit is: 5% x 45.000 lei = 2250 lei.

  The amount of tax exempt profit allocated to reserves is: 45.000 lei – 2250 lei = 42.750 lei.

  It is important to take into account that the fiscal value of the equipment, namely 45.000 lei, is lineary or digressively amortized, according to art.28 of the Fiscal Code, which is why you cannot opt for an accelerated amortization.

Your company applies the annual declaration and payment of the profit tax system

In this case, your company recorded a taxable profit of 2.000.000 lei. The gross accounting profit for 2016 is 1.400.000 lei. Your company purchased and started using IT equipment worth 50.000 lei, in September, equipment worth 90.000 lei in May, and software worth 60.000 lei in September.

How do we calculate the income tax exemption on reinvested profit for the 2016 year?

First we calculate the profit tax for the year 2016: 16% x 2.000.000 lei = 320.000 lei

Then, we calculate the total value of the investment in tehncological assets: 50.000 + 90.000 + 60.000 = 200.000 lei

The accountability gross profit covers the investment, so that the tax related to the reinvested profit is:

16% x 200.000 lei = 32.000 lei, therefore, the tax exempt is worth 32.000 lei.

In terms of how much is distributed towards reserves, out of the total amount that benefited from tax exemption, the situation is similar to that in the previous example. If we keep the same 5% rate for the reserve establishment, the amount that is allocated to the reinvested profit is: 5% x 200.000 lei = 10.000 lei.

Therefore, the amount that was exempt from profit taxes will be: 200.000 lei – 10.000 lei = 1.900.000 lei.

The IT equipment is purchased over several consecutive years. In terms of the declaration and payment of profit tax, the quarterly system is applied

Let’s suppose that your company purchased IT equipment worth 40.000 lei in August 2014, equipment worth 60.000 lei in March 2015, and equipment worth 70.000 lei in May 2016.

There is no partial commissioning. There is only a final one for all equipment, in June 2016.

Between January 1st and June 31st, the company recorded a taxable profit worth 1.800.000 lei and the gross accounting profit for the same period is worth 500.000 lei.

How do we calculate the income tax exemption for the reinvested profit and due profit tax?

First, we calculate the profit tax for the second quarter of 2016:

16% x 1.800.000 lei = 288.000 lei

Then we calculate the total value of the investments made in IT equipment:

40.000 + 60.000 + 70.000 = 170.000 lei

The gross accounting profit related to the quarter, when the commissioning of the investment was made, covers the investments, so the profit tax related to the reinvested profit is:

16% x 170.000 lei = 27.200 lei, therefore the tax exemption is worth 27.200 lei

As in the previous examples, it is easy to calculate the amount of profit that was exempt from taxes that is allocated to the reserves, keeping the same 5% from the accounting profit.

The amount that will be alocated to the reinvested profit is: 5% x 170.000 lei = 8500 lei

The amount from the tax exempted profit that will be allocated to the reserves is: 170.000 – 8500 = 161.500 lei

The recent ammendments to the Fiscal Code are beneficial for both IT entrepreneurs and those who want to invest in technological equipment, IT and software. It is also important to note and take into account that, if you benefit from this facility, you are obliged to retain the purchased equipment for at least half the length of their economic usability, as established by the applicable accounting regulations, but not more than 5 (five) years.

However, if this condition is not met, the profit taxes will be recalculated taking into account the entire investment. As a result, the fiscal receivables will be evaluated according to the Fiscal Procedure Code at the date of the facility application. Thereby, you have the obligation to submit the rectified declaration.

The following assets do not observe the above procedures:

• The assets that are transferred under the reorganization operations conducted by the law;

• The assets alienated under the procedures of liquidation/ bankruptcy, according to the law;

• The assets that are or were destroyed, lost, stolen, damaged or replaced. These situations must be proved or confirmed. Theft is demonstrated by proof documents issued by juridical institutions.

For the assets purchased under financial leasing contracts, the tax exemption applies to their user.

How can this modification of the Fiscal Code help you?

You have the possibility to invest in IT equipment and to be exempt from paying 16% tax value from the reinvested profit, leading to new development opportunities. Therefore, if you make an investment of 100.000 lei, 16.000 lei may represent the tax exemption amount.

„Our two greatest problems are gravity and paper work. We can lick gravity, but sometimes the paperwork is overwhelming”- Wernher Von Braun