2009 Legislation News24/03/09 / cata_tax-news

• Amendment to Income Tax Act Effective 1 January 2009

We informed you of the changes to be introduced by the amendment in Tax News Issue No. 6/2008 and subsequent issues. Below we refer to selected changes and certain proposed amendments that were finally deleted.

Exemption Applicable to Disposal of Shareholdings

A proposal for amendment abolished the originally proposed, more severe restrictions on the exemption applicable to disposal of shareholdings in subsidiaries pursuant to which the right to have the exemption applied does not exist if real estate constitutes the majority of assets of the subsidiaries. The exemption applicable to disposal of shareholdings will not depend (as it currently does) on whether the company involved is a real-estate company or not.

Thin Capitalization

Effective 2008, thin-capitalization rules that set forth the circumstances under which interests on loans are tax deductible or not have been amended. From now on, thin-capitalization rules are applied only if the lender or arranger is a party related to the borrower (pursuant to the former text of the Act - this also applies to loans between unrelated parties). Financial costs are not tax deductible on amounts in which the aggregate of loans and credits from, or arranged by, related parties exceeds the equity by triple (applicable to banks) or double (applicable to other parties) in a taxation period.

Interest on junior loans and credits and loans and credits the interest or maturity of which depend entirely or mostly on the borrower’s profit shall not be tax deductible regardless of the borrower-lender relationship, i.e. even if the borrower and lender are not related in any manner whatsoever.

• Amendment to the Reserves Act

The terms and conditions of tax deductibility of tangible assets adjustment reserves have been made more restrictive, taking effect from 1 January 2009. These costs are newly tax deductible only if the funds in the full amount of the reserve are transferred to an independent bank account by the deadline for filing the tax return. These provisions do not apply to reserves the creation of which commenced in 2009. The creation of reserves commenced in 2008 and earlier are subject to the former procedures.