Deloitte template

1
Taxation of Leasehold Investments Future
implications for Lessor and Lessee Profits tax
aspects.
Olga Belousova Senior Manager obelousova_at_deloitte.
ru 7 [phone] ext. 2067 November 10, 2005

2
Amendments to the list of depreciable property
Article 256.1

• Amendments to the Profits tax legislation
  according to the Law 58-FZ
• Effective starting from January 1, 2006
• Inseparable capital improvements into the leased
  fixed assets made by the tenant (lessee) by
  consent of the landlord (lessor) will be
  considered as depreciable property
• Conclusions
• Taxpayers will be able to depreciate inseparable
  capital improvements if these improvements are
  made by consent of the landlord (lessor)
• If inseparable capital improvements were made
  without consent of the landlord then the property
  would not be depreciable -gt no deductibility for
  the tenant (lessee) and possible risk of
  non-sales income for the landlord

3
Depreciation rules with respect to inseparable
capital improvements Articles 258.1 259.2

• Effective starting from January 1, 2006
• If the landlord (lessor) reimburses expenses on
  capital improvements to the tenant (lessee), then
  the cost of capital improvements will be
  depreciated by the landlord according to the
  norms of the Chapter 25 of the Tax Code after
  reimbursement of expenses and after putting the
  property into operation
• Conclusion
• The further period of depreciation for the
  landlord
• - depends on the period during which the object
  of fixed assets has been depreciating
• - landlord may change useful life of the object
  up to maximum term provided for the same
  depreciation group

4
Depreciation rules with respect to inseparable
capital improvements (II)

• If the landlord does not reimburse expenses on
  capital improvements to the tenant, then the cost
  of capital improvements will be depreciated by
  the tenant over the term of the lease contract
  using depreciation rate based on the useful life
  of the fixed asset (Regulation 1) after putting
  the property into operation
• Conclusion
• For the tenant (lessee) if the period of the
  lease contract is less then the useful life of
  the fixed asset -gt
• - For the landlord (lessor) there is a risk
  that non-depreciated improvements may be treated
  as non-sales income at market level
• - For the tenant (lessee) there is a risk that
  inseparable capital improvements will be only
  partially deductible
• Risks may be mitigated if the lease contract
  contains provisions on buy-out of
  non-depreciated capital improvements by the
  landlord from the tenant at the end of lease
  period

5
Possible application of new norms on depreciation
of inseparable capital investments to financial
lease

• Amendments generally refer to rent, however, they
  may be applicable to financial lease (leasing)
• e.g. the property is on the balance of the
  lessor -gt inseparable capital improvements into
  the leased fixed assets made by the lessee may be
  treated as mentioned above
• the property is on the balance of the lessee -gt
  uncertainties as there is no special regulation
  in this respect starting from January 1, 2006
• Consequences resulted from buy-out of the leasing
  object by the lessee

6
Immediate deductibility of 10 of capital
investments Article 259,1.1

• Effective starting from January 1, 2006
• Landlords will be entitled to deduct immediately
  costs of capital investments from the Profits tax
  base in the amount not exceeding 10 of the
  historical value of
• costs of additional construction, additional
  equipment, modernization, technical re-equipment,
  partial liquidation of fixed assets
• Conclusion
• This norm is applicable to owners of fixed
  assets
• Possibility of immediate deduction of some costs
  on capital investments by the landlord positive
  effect similar to accelerated depreciation

7
Contact information

• Olga Belousova
• Senior Manager
• Tax Legal Services
• Direct 7 [phone]
• Main 7 [phone] ext. 2067
• Fax [phone]
• obelousova_at_deloitte.ru
• www.deloitte.ru
• Deloitte
• Business Center "Mokhovaya"
• 4/7 Vozdvizhenka St., Bldg 2
• Moscow 125009
• Russia

8
Member of Deloitte Touche Tohmatsu