The deadline for calendar year corporate tax (CIT) returns is fast approaching, 31 May 2024. In view of the approaching deadline, we have collected in this newsletter a number of CIT reduction options that businesses can choose to apply after the tax year, but before the adoption of their accounts, and which would allow them to use a larger share of their profits to finance new investments or operating costs.

1. Development reserve

Development reserves can be created in the tax year up to the amount of the pre-tax profit, in the form of a transfer from the profit and loss reserve to a committed reserve. A condition of taking the tax base reducing item into consideration is that the tied-up reserve must exist also on the last day of the tax year, and it may only be released in case of the realization of certain investments in the next four tax years. When making a decision on the above, it is important to be aware that the development reserve is not a tax allowance, as it only results in a deferred corporate income tax payment obligation; however, it may serve as the source of a significant amount of interest-free funds for the company to realise its planned investments.

2. Tax allowance for SMEs

If the taxpayer qualifies as a small or medium-sized enterprise on the last day of the tax year in which it takes out a loan from a financial institution for the acquisition or production of a fixed asset, the amount of the interests accrued may be deducted from the tax due until the year prescribed in the original loan agreement for the repayment of the loan or until the fixed assets are still on the books of the taxpayer. This tax allowance may be applied up to 70% of the tax due; furthermore, since this is considered as aid, additional limits should also be taken into consideration, depending on the nature of the investment.

3. Tax base reduction for investments in case of SMEs

Taxpayers that qualify as small or medium-sized enterprises may reduce their tax base by a maximum amount equalling to their pre-tax profits in connection with the following types of investments:

• the value of immovable property for which no occupancy permit was previously issued;
• the value investments incurred in the interest of commissioning fixed assets in the category of technological equipment, machinery and vehicles that were not previously taken into use;
• the cost price of renovations, extensions, change of purpose or conversions increasing the cost value of immovable properties;
• in the category of intangible assets, the cost price of licenses to software products, intellectual property entered in the books in the tax year and not previously taken into use.

This possible tax base reduction is also considered as de minimis aid, and therefore, additional limits should also be taken into consideration, depending on the nature of the investment.

4. Applying depreciation write-off

While the cost of depreciation write-off according to the Accounting Act and the book value of derecognized assets increase the pre-tax profit, the value of the depreciation write-off recognised by law and the calculated book value of the derecognised assets reduce it. The Accounting Act determines the depreciation write-off of assets on the basis of the useful life of the assets and their expected residual value. By contrast, the Corporate Income Tax Act provides for a pre-fixed linear depreciation for a number of assets and, in some cases, it also provides for an option to choose a higher depreciation rate than the rate according to the main rule.

On the basis of the latter choice, a company may choose a depreciation rate according to the Corporate Income Tax Act that is higher than the depreciation rate chosen under the Accounting Act. Thus, in the initial years of the asset’s useful life, the company may reduce its corporate income tax, since the depreciation write-off established according to the Corporate Income Tax Act law constitutes a tax base reducing item.

5. Tax allowance available in connection with employees

When making the tax calculations, it is also worth considering allowances related to employees.

• Tax allowance for employing workers reduced capacity to work

The corporate income tax base may be reduced by the amount of the monthly salary paid to workers with a reduced capacity to work, up the amount of the minimum wage in effect on the first day of the tax year. The condition of the above that the average statistical headcount of the company is not more than 20 persons.

• Tax allowance related to vocational training

The pre-tax profit may be reduced by 24% of the minimum wage for each full or fraction of a month and for each student involved in dual vocational education and training in the framework of a vocational training contract.

• Tax base reducing items related to special groups of employees

The corporate income tax base may be reduced by the social contribution tax paid with respect to such vocational students mentioned in the previous section who have successfully passed their vocational examinations and the company continued to employ them; persons who were previously unemployed; as well as former inmates who were employed within 6 months of being released and those on parole, for the duration of their employment or a maximum of 12 months.

6. Tax base reduction in case of for research and development activities carried out by affiliated undertakings

If a subject of the corporate income tax does not use the full amount of the tax allowance available in connection with research and development activities, then the remaining amount may also be used by its affiliated enterprise as a tax base reducing item. Therefore, it may be worth for affiliated companies to use this transferable option.

Such transfer is subject to the following conditions:

• the research development activity must be linked to the revenue generating activities of both affiliated undertakings;
• the company using the remaining amount of the tax allowance must, by the deadline for filing the tax return, possess a written declaration given by the affiliated enterprise with the required data content.

The above possibilities may, on the one hand, reduce the amount of the corporate income tax for 2023, resulting in a lower amount of tax difference to be paid by 30 May, if the actual amount of the tax is higher than the advances paid during the year; on the one hand, if the tax difference was higher than the actual amount of the tax, the difference may be claimed back. Furthermore, it is also significant advantage that by reducing the amount of the corporate income tax for 2023, the amount of the tax advance to be paid for the second half of 2024 and the first half of 2025 would also be lower, thereby improving the company’s liquidity position. Therefore it is worth considering the above possibilities for all businesses, even before making the calculation for the tax year. As can be seen from the above list, these options for tax and tax base reduction are quite varied and complex, and familiarity with the related strict procedures and conditions is indispensable in order to avoid tax risks.