The government is interested in increasing investment activity in the Russian Federation, including by providing investors with tax preferences. It can be expected that this trend will continue in the coming years. [1]

One of the most "favorable" and "accessible" for a wide range of taxpayers support mechanisms is the investment tax deduction (hereinafter - ITD). This is confirmed by the statistics of the application of the INV: for the period 2019-2022 Thus, 480 companies from 206 industries used the corresponding right to deduction. [2]

This tool is also interesting because those wishing to use such a deduction have the opportunity to calculate in advance the financial result from its application, to assess the economic effect of capital investments with the application of the relevant benefit in comparison with the depreciation of fixed assets (PPE) in the usual manner and to predict the payment of income tax.

INV is regulated by Article 286.1 of the Tax Code (hereinafter - the Tax Code), as well as by regional legislation, and represents the right of a taxpayer to reduce the amount of profit tax (it is the amount of tax calculated for payment (advance payment), not the tax base) by the amount of investments made in fixed assets.

Since corporate income tax is paid in its main part (17%) to the regional budget, a relevant law must be adopted at the level of a constituent entity of the Russian Federation in order to apply the TIN. At the moment, the relevant regulation is in force in almost all regions, we can expect that in the near future the TIN will be applied everywhere. [3]

The conditions for the application of DTI vary depending on the constituent entity of the Russian Federation, so when switching to this regime it is important for investors to take into account the requirements established by regional law, as the amount of their benefit will depend on this. In particular, if a company has separate divisions (hereinafter - SD) in several regions, the decision to apply the deduction is made separately for each region where such SDs are located. [4]

Further in the article we propose to consider the main conditions and procedure for the application of the INV established by federal legislation, as well as to make the calculation on the example of the current law of the Kaluga Region.

General conditions for the application of INV under Article 286.1 of the Tax Code (subject to change, including tightening by regional law)

1. Applies to all or certain fixed assets (hereinafter - PPE) of the corresponding depreciation group (groups 3 - 10 (except for buildings, structures, transfer devices belonging to groups 8-10)); [5]
2. Profit tax is subject to reduction for the following categories of expenses: creation, acquisition, construction, modernization and reconstruction of fixed assets.
3. The deduction is granted in the total amount of expenses incurred in the following proportion: 90% of expenses reduce profits tax in its regional part and 10% in the federal part;
4. At the same time, the profit tax calculated for payment to the federal budget may be fully reduced by the amount of the deduction. At the same time, the regional part of the profit tax is in any case subject to payment, but within the established rate (the so-called estimated rate): as a general rule - 5% (instead of the standard 17%); [6]
5. In the event that the amount of the TIN calculated under the rules is greater than the amount of profits tax payable, the "balance" of the TIN may be carried forward to future tax periods;
6. In case of sale or other disposal of fixed assets before the expiration of its useful life (for example, when moving the fixed assets to another constituent entity of the Russian Federation within one company, theft of fixed assets, transfer of fixed assets as a result of reorganization in the form of a spin-off, except for the liquidation of fixed assets) the deduction is restored and the corresponding penalties are paid; [7]
7. Application of INV depends on the date of commissioning of PPE, but not on the date of actual payment or incurrence of expenses for acquisition or construction of PPE, i.e. the economic effect of investments can be obtained only after the accounting of PPE objects and their commissioning; [8]
8. Expenditure on PPE for which INV is applied cannot be accounted for in any other way (through depreciation or a depreciation premium):

8.1 In this case, the taxpayer has the right to depreciate a part of the incurred expenses on PPE: if the INV is applied to the original cost of PPE, the expenses for modernization, reconstruction or retrofitting of such PPE can be depreciated (i.e. increase in the original cost of such PPE); [9]

8.2 At the same time, irrespective of the application of INV for accounting purposes, depreciation is accrued in the usual manner and the procedure for calculating property tax remains unchanged; [10]

Regional powers

The Tax Code of the RF directly authorizes the subjects of the Russian Federation to determine the criteria that significantly affect the general elements of INV. [11] Thus, the law of a constituent entity of the Russian Federation may determine:

1. Limit value of expenses taken into account in determining the amount of INV (a constituent entity of the Russian Federation has the right to set a lower value than 90%);
2. The regional income tax rate (estimated rate) at which organizations applying the INV pay tax (a constituent entity of the Russian Federation has the right to set a rate other than 5%, as a rule, regions set it at an average of 10%);
3. Category of taxpayers (for example, regions set restrictions on the type of activity of investors (OKVED), on the amount of investment in the territory of the subject of the Russian Federation, on the status of a participant in an agreement or national project, for example, "Labor Productivity", on the condition of registration of the company in the subject of the Russian Federation);
4. Category of fixed assets (a constituent entity of the Russian Federation has the right both to reduce the general list of fixed assets, e.g., in the Komi Republic INV is applicable only to certain categories of objects, and to expand it by allowing the application of INV for buildings, structures and transfer devices excluded by the general rule from depreciation groups 8-10, e.g., in the Moscow Region and St. Petersburg);
5. Possibility and term for carrying forward the unused part of the INV (a constituent entity of the Russian Federation has the right both to set a time limit for carrying forward and to completely exclude such possibility, for example, Moscow has an unlimited right to carry forward the deduction, while Primorsky Krai prohibits carrying forward the deduction);
6. The procedure for restoring the TIN (a constituent entity of the Russian Federation may introduce an additional obligation to restore the TIN, for example, in the Moscow region the obligation to restore the deduction is related to the 10-year period of actual use of PPE, not the useful life); [12]
7. The possibility of simultaneous application of INV and other regional tax benefits (constituent entities of the Russian Federation often establish that application of INV is possible only if the regional reduced corporate income tax rate is not applied, for example, in the Moscow and Leningrad regions).

Example of calculation of INV

On the example of the Kaluga Oblast, the algorithm for calculating INV for the purposes of the federal (FB) and regional budgets (RB) is given below: [13]

This entity has the following restrictions on the use of the INV:

• The maximum deduction is 90% of the expenses incurred
• Estimated income tax rate (tax rate for calculation of the maximum value of INV) - 10%

For the example of calculation of INV, the notional amounts of profit received by the organization (500 million rubles) and investments in fixed assets (100 million rubles) are used.

Thus, in the case under consideration, the taxpayer may reduce the profit tax assessed for payment to the federal budget by 10 million roubles, which is 10% of the amount invested.

The tax assessed for payment to the regional budget may be reduced by 35 million roubles in the current tax period. The unused part of the deduction (90 - 35 = 55 million roubles) may be used in subsequent periods.

Timing of application of the INV

The deduction is applied from the beginning of the next tax period (calendar year). [14]

At the same time, if a law of a constituent entity of the Russian Federation was adopted in the middle or at the end of a calendar year, the INV can also be applied in the same year in which the relevant regional law of the constituent entity of the Russian Federation was adopted. For example, the effect of the Omsk Region Law No. 2594-OZ dated 29.05.2023 was extended to legal relations arising from the beginning of 2023. [15]

A taxpayer has the right to change an earlier decision to use (refuse to use) the right to apply the INV only after 3 years (unless a constituent entity of the Russian Federation has established a different period). [16]

At the same time, the inability to apply the INV within the 3-year limit, for example, due to the receipt of a loss, does not necessarily mean that the company refuses the deduction. [17]

TIN can be declared both in the annual tax return and in the return for the reporting period, thus, the taxpayer has the right to reduce both the amount of tax and the amount of advance payment. [18]

The current version of the Tax Code of the Russian Federation provides for the application of the INV up to and including 2027. However, it can be assumed that its validity will be extended. [19]

The Tax Compliance team is ready to provide full legal support for the registration, receipt and application of the investment tax deduction.

***

[1] "The main directions of budget, tax, customs and tariff policy for 2024 and for the planning period of 2025 and 2026" (approved by the Ministry of Finance of Russia)

[2] "The main directions of budget, tax, customs and tariff policy for 2024 and for the planning period of 2025 and 2026" (approved by the Ministry of Finance of Russia)

[3] Thus, for example, in 2023, more than 2.6 billion rubles were allocated from the federal budget for partial compensation of shortfall in income of 32 regional budgets from the application of the investment tax deduction (Order of the Government of the Russian Federation dated November 17, 2023 №3241-r).

[4] Item 8 of Article 286.1 of the Tax Code of the Russian Federation

[5] Item 8 of Article 286.1 of the Tax Code of the Russian Federation

[6] Para. 2 p. 2.1 of Art. 286.1 of the Tax Code of the Russian Federation

[7] Item 12 of Article 286.1 of the Tax Code of the Russian Federation, Letter of the Ministry of Finance of Russia dated 27.06.2018 No. 03-03-20/44237

[8] Decision of the Supreme Court of the Russian Federation of 20.09.2021 No. 305-ES21-11548 in case No. A40-248146/2019 (PJSC Severstal)

[9] Letters of the Ministry of Finance of Russia from 16.11.2022 № 03-03-06/1/111785, from 19.08.2021 № 03-03-06/1/66876

[10] Letter of the Ministry of Finance of Russia dated 14.11.2018 No. 03-03-07/81965

[11] Item 6 of Article 286.1 of the Tax Code of the Russian Federation

[12] Abs. 2, paragraph 4, Article 3 of the Law of the Moscow Region of 19.07.2019 No. 162/2019-OZ "On Investment Tax Deduction in the Moscow Region"

[13] Law of the Kaluga Region of 29.12.2009 No. 621-OZ "On lowering the tax rate of corporate income tax, subject to enrollment in the regional budget, for certain categories of taxpayers and on establishing the right to apply the investment tax deduction"

[14] Para. 2 para. 8 of Art. 286.1 of the Tax Code of the Russian Federation

[15] Letters of the Ministry of Finance of Russia from 06.02.2023 № 03-03-05/9241, from 25.04.2022 № 03-03-06/3/37107

[16] Para. 2 para. 8 of Art. 286.1 of the Tax Code of the Russian Federation

[17] Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of July 30, 2013 № 57 "On certain issues arising in the application by arbitration courts of Part One of the Tax Code of the Russian Federation": in the event of a dispute about whether there was a refusal of the taxpayer to use the benefit, should be based on the fact that the fact that the taxpayer did not take into account the tax benefit when preparing a declaration for a particular tax period does not in itself mean his refusal to use the relevant tax benefit in this period

[18] Paragraphs 2.1 and 3 of Article 286.1 of the Tax Code of the Russian Federation

[19] The corresponding readiness to extend the investment tax deduction is reported by officials of the Russian Ministry of Finance.