The procedure has been established for deduction of amounts related to the establishment of special reserve funds for taxation purposes for banks and credit organizations engaged in certain types of banking activities.
Article 111.3 of the Tax Code states that, banks and credit organizations engaged in certain types of banking activities shall be entitled to deduct from the income for tax purposes, the amounts related to establishment of special reserve funds (provisions) in accordance with procedures established by the relevant executive authority.
Thus, the rules for deduction of amounts for tax purposes related to the establishment of special reserve funds by banks and credit organizations engaged in certain types of banking activities as outlined in Article 111.3 of the Tax Code, was approved by the Decision of the Cabinet of Ministers No. 276 dated September 22, 2021 ("Rules of the Cabinet of Ministers").
For tax purposes, the Rules of the Cabinet of Ministers is referring to the Rules of the Financial Markets Regulator, to regulate deductible expense amounts related to the creation of special reserve funds, in 3 different ways:
- full deduction,
- deduction with 50% restriction and,
- restricted on deduction.
We would like to bring to your attention several (but not limited to) special rules regarding the deduction of reserve funds from income for tax purposes:
1. The amount of deductible expenses on loans issued by banks and non-bank credit organizations (NBCOs) to interrelated persons (persons related to the bank) shall be limited to 50%.
2. Below are outlined several (but not limited to) cases in which the special reserve funds created by banks are not allowed to be treated as deductible for tax purposes:
- on satisfactory assets;
- on unsatisfactory assets - in case of non-submission of documents confirming the intended use of the loan and in several other cases;
- on risky assets - in the absence of documents related to credit assessment in credit files;
- on bad assets - in case of termination of entrepreneurial activity of the physical person.
You can get acquainted with the full list of restrictions in the Resolution of the Cabinet of Ministers No. 276 dated September 22, 2021.
The Rules of the Cabinet of Ministers does not provide for a calculation mechanism.
The paragraph 2.4.2 of the Decision, which stipulates that the amounts attributable to the reserve funds shall not be deducted from income if the classification of assets based on the period of delay factor is satisfactory, shall enter into force on 1 January 2022, and the remaining provisions of the Decision shall enter into force on the date of adoption of the Decision.
