Optimisation of corporate income tax for permanent establishments in Belarus since January 1, 2019

published on June 21, 2019 | reading time approx. 3 minutes

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Foreign companies operating in the Republic of Belarus through a permanent establishment have effective opportunities to optimize the taxation of their profits by transferring costs from the parent company to their permanent establishment.

• Tax-deductible expenses

• Deductibility of foreign costs

• Procedure for transferring foreign costs to the permanent establishment

• Management and general administrative expenses

• Recommendations

Such optimization is only possible under strict compliance with the requirements of the Belarusian Tax Code (hereinafter referred to as “BTC”). In the following, we present the necessary steps for corporate income tax optimization.

It should be noted that the entry into force of a new BTC on January 1, 2019 has changed the regulations for the tax recording of the expenses of foreign companies operating through a permanent establishment in the Republic of Belarus in some significant areas.

Tax-deductible expenses

• Costs and non-operating expenses incurred directly by the foreign enterprise in Belarus and reported in the accounting and tax balance sheet of its permanent establishment in Belarus.
• Costs and non-operating expenses in connection with the activities of the foreign enterprise through its permanent establishment in Belarus incurred by the foreign enterprise outside the Republic of Belarus, including management and general administrative costs (hereinafter referred to as “foreign costs”). These costs are initially recorded in the accounts of the foreign parent company. Foreign costs are transferred by the parent company to the Belarusian permanent establishment for inclusion in the Belarusian accounts on the basis of the primary accounting documents (Aviso). (see the figure below)

Deductibility of foreign costs

In order to take foreign costs into account in Belarusian tax accounting, these costs must first be confirmed in accordance with the BTC by an audit report prepared in the state in which the head office is located.
The foreign costs must be deductible for corporate income tax purposes both in Belarus and in the country in which the parent company is established. If the foreign expenses are not deductible in the parent company state, they shall not be included in the audit report.

 
On the other hand, the Belarusian accounting department is obliged to check the types (items) of costs presented in the audit report for compliance with Belarusian tax regulations. In particular, no foreign costs from the audit report shall be included in the corporate income tax return which would not be tax deductible under Belarusian law. Since this subsequent ”filtering“ of the costs entails enormous expense, the audit report should not include these costs from the outset.

Procedure for transferring foreign costs to the permanent establishment

Corporate income tax in Belarus is initially to be  quarterly declared (20 April, 20 July, 20 October) and paid (22 April, 22 July, 22 October, 22 December). Afterwards the tax is to be declared for the entire tax year (20 March of the following year) and the final tax payment is to be made (22 March of the following year).

 
Since 1.1.2019, the BTC expressly prohibits the inclusion of foreign expenses in the corporate income tax return for the entire tax period (calendar year) if these have not been confirmed by an audit report of the state in which the foreign company has its registered office (Art. 180 para. 10 of the BTC).

 
The submission of the audit report to the Belarusian tax authority may not be later than the submission of the corporate income tax return for the tax period (calendar year) in which the foreign costs mentioned in the report were incurred ( point 10 article 180 of the BTC).

 
In order to avoid temporary tax overpayments, it is advisable to transfer foreign costs to the permanent establishment on a quarterly basis. Together with the tax returns for the respective quarterly reporting periods, the audit reports must also be submitted quarterly to prove the foreign costs. If the foreign costs have already been confirmed by audit reports for the first three quarters of the tax period, the foreign costs for the fourth quarter can also be declared in the same way without reference to the previous quarters of the tax period.
The requirements for the form of audit reports were simplified as of 1 January 2019. It is no longer necessary to provide them with a notarized translation or a translation certified by the Belarusian Chamber of Commerce and Industry (point 4 article 22 of the BTC) – a simple translation is now sufficient.

Management and general administrative expenses

In addition, the new BTC contains a new definition of management and general administrative costs, which can be taken into account as foreign costs for profit taxation in the Republic of Belarus. These are administrative and general economic costs, which are very restrictively defined in the Belarusian Accounting Act.
The conversion of foreign management and general administrative costs into Belarusian rubles is also subject to a new procedure in accordance with point 12, Article 180 of the BTC. If the auditor's report does not contain any information about the exact date of their booking abroad, but the months and quarters in which they incurred, these foreign expenses will be converted into Belarusian rubles at the official exchange rate as of the following dates:

1. on the last day of the quarter in which they were taken into account for tax purposes in the foreign country (the amount of these costs must be stated in summary form per calendar quarter in the audit report)
2. on the date of closure of the Belarusian permanent establishment, if these costs fall within a calendar quarter in which the permanent establishment was liquidated

 
This new procedure simplifies the currency conversion of management and administration costs, as the costs must no longer be converted individually, but per quarter on a common key date.

Recommendations

Belarusian laws do not provide a unified form of audit opinion for the purpose of transferring foreign costs to the Republic of Belarus. In addition, foreign auditors are subject to their national rules and requirements regarding the preparation of audit reports. Thus they often hesitate to make changes to their standard audit reports. It is important to convince the foreign auditor to include in the audit report in advance all binding formulations and information required by the Belarusian Tax Code. Otherwise, there is a risk that foreign costs may not be taken into account in the taxation of profits in the Republic of Belarus despite the existence of an audit report. As a result, the Belarusian tax authorities can add these non-deductible costs back to the tax base and recalculate the corporate income tax, which could result in significant sanctions.

 
In the preparation of the auditor's report confirming the foreign costs, Rödl & Partner Minsk has drafted an extensive “check list” and a sample of an audit report, so that nothing important will be missing and the requirements of the Belarusian law will be fulfilled.