There are two debatable points in loan relations with the participation of legal entities and individual entrepreneurs, which lead to different interpretations of the same norms by entrepreneurs and state bodies. This is the ability to represent interest-bearing loans without a license, as well as tax liabilities for a grant loan. So far, the situation is largely regulated not by regulatory legal acts, but by letters of explanation from state bodies. Therefore, entrepreneurs using loans cannot feel protected from the recognition of transactions as invalid and the application of penalties. If it is not possible to use other schemes for raising funds, for example, an increase in the authorized capital (possibly with its subsequent decrease) or contributions to joint activities,
Initially, loan relationships between legal entities will be considered.
IN WHAT CASES IS A LOAN OF MONEY BETWEEN LEGAL ENTITIES APPLIED?
Legal entities usually resort to a loan in the following situations:
- attraction of money for the production of products and subsequent settlement by it (a loan for sowing with the calculation of the grain of the future harvest, a loan for materials with payment for manufactured products);
- the parent legal entity provides assistance to a subsidiary;
- enterprises belonging to the same holding lend to each other.
LOAN WITH INTEREST PAYMENT
IS SUCH AN AGREEMENT POSSIBLE?
Subparagraph 5) of paragraph 1 of Article 8 of the Law of the Republic of Kazakhstan "On Private Entrepreneurship" states that private entrepreneurship entities have the right to provide funds (loans) to private entrepreneurship entities on a reimbursable basis. Thus, the law not only does not prohibit, but directly grants the right to private business entities to provide loans to each other, including with the payment of remuneration.
TAX CONSEQUENCES FOR THE LEGAL ENTITY-LENDER
CORPORATE INCOME TAX
The remuneration received from the borrower for the granted loan forms income of the taxpayer-lender and is subject to corporate income tax at the rate in accordance with the applicable tax regime.
VAT
In accordance with subparagraph 1) of paragraph 1 of Article 230 of the Tax Code of the Republic of Kazakhstan, the turnover on the sale of goods, works, services is a turnover subject to value added tax (VAT).
According to subparagraph 6) of paragraph 2 of Article 231 of the Tax Code, the provision of a loan (loan, microcredit) means a turnover for the implementation of works, services.
As stated in paragraph 3-1 of Article 231 of the Tax Code, in the cases provided for by subparagraphs 5) and 6) of paragraph 2 of Article 231 of this Code, the amount of taxable turnover is determined on the basis of remuneration.
Article 250 of the Tax Code provides for a list of financial services that are exempt from VAT. These are, in particular, banking loan operations and other operations carried out on the basis of a license from the National Bank, as well as operations carried out by legal entities without a license within the powers established by the legislative acts of the Republic of Kazakhstan.
Borrowing money between citizens and non-financial organizations subject to the payment of remuneration is not recognized as a financial service. Therefore, the interest paid on the loan will be subject to VAT.
TAX IMPLICATIONS FOR THE LEGAL ENTITY BORROWER
In accordance with paragraph 2 of Article 13 of the Law of the Republic of Kazakhstan "On Accounting and Financial Reporting", income represents an increase in economic benefits during the reporting period in the form of an inflow or increase in assets or a decrease in liabilities that result in an increase in equity, other than an increase related to with contributions from persons participating in the capital. If there is an obligation to repay the loan received, the money received shall be recognized in the borrower's accounting records as liabilities, which, in accordance with paragraph 1 of the same article of the Law, are understood to be the existing obligations of an individual entrepreneur or organization arising from past events, the settlement of which will lead to the disposal of resources containing economic benefits.
Thus, the amount of the loan subject to repayment is not recognized as income of the legal entity-borrower, and, accordingly, is not subject to inclusion in the total annual income as property received free of charge.
LOAN WITHOUT INTEREST
IS SUCH AN AGREEMENT POSSIBLE?
A gratuitous loan agreement between two legal entities does not contradict civil law.
TAX CONSEQUENCES FOR THE LEGAL ENTITY-LENDER
A legal entity that issued a gratuitous loan does not have any tax obligations.
TAX IMPLICATIONS FOR THE LEGAL ENTITY BORROWER
By analogy with a compensatory loan agreement, the amount of the loan to be repaid is not recognized as income of the legal entity-borrower, and, accordingly, is not subject to inclusion in the total annual income.
Currently, the tax authorities consider the provision of interest-free financial assistance on a repayable basis as a loan transaction, and consider it a gratuitous provision of services.
The arguments for this are as follows.
In accordance with subparagraph 6) of paragraph 2 of Article 231 of the Tax Code, the turnover for the sale of works, services means any performance of work or provision of services, including gratuitous, as well as any activity for remuneration other than the sale of goods, including the provision of credit (loan , microcredit). According to subparagraph 16) of paragraph 1 of Article 85 of the Tax Code, the total annual income includes all types of income of the taxpayer, including income in the form of property received free of charge. And according to Article 96 of the Tax Code, the value of any property, including works and services received by the taxpayer free of charge, is his income. Unless otherwise established by the Tax Code, the value of property received free of charge, including works and services,
Thus, the tax authorities include in the total annual income of the borrower the cost of the service in the form of gratuitous use of the loan. At the same time, the amount of such income should be determined according to the accounting records of the borrower in accordance with international financial reporting standards and the requirements of the legislation of the Republic of Kazakhstan on accounting and financial reporting.
The procedure for determining the cost of a loan service received free of charge has not been specifically defined or approved. Currently, taxpayers independently determine for themselves in the accounting policy how this income will be calculated. The taxpayer must include the self-calculated remuneration in his income as the cost of the service provided free of charge.
Paragraph 11 of IAS 18 Revenue states that when the contract is effectively a financing transaction, the fair value of the consideration is determined by discounting all future receipts using an implied rate of interest. The implied rate of interest is the most accurately determined of the following:
- (a) the prevailing rate for a similar issuer financial instrument with a similar credit rating; or
- (b) an interest rate that discounts the face amount of a financial instrument to current cash sales prices of goods or services.
The difference between fair value and the nominal amount of consideration is recognized as interest income in accordance with paragraphs 29–30 of IAS 18 and in accordance with IAS 39. In accordance with paragraph 48A of IAS 39 IAS 39 Financial Instruments: Recognition and Measurement The best evidence of fair value is quoted prices in an active market. If the market for a financial instrument is not active, an entity establishes fair value using a valuation technique. The purpose of applying a valuation method is to determine what the price of the transaction would be at the measurement date in an exchange between independent parties motivated by normal business considerations. Valuation techniques include the use of information about recent market transactions between independent, knowledgeable,
Thus, taxpayers need to proceed from the current prices for similar services if they received them for a fee. The cost of providing a loan is the amount of the fee. At the same time, to calculate the cost, it is necessary to take into account not bank interest rates, but rates on loans provided by non-financial organizations. The accountant should justify the application of these rates by collecting and analyzing statistical information on similar loans.
Consequently, the amount of income recognized by the taxpayer who received a loan or, in other words, gratuitous (interest-free) financial assistance on a repayable basis, in accounting, taking into account the application of IFRS, legislation on accounting and financial reporting, is the amount of income in the form of material benefits from savings on remuneration for such assistance is included in the total annual income of the borrower and is subject to corporate income tax.
LOAN BETWEEN AN INDIVIDUAL ENTREPRENEUR AND A LEGAL ENTITY
Everything specified in relation to a loan agreement between legal entities also applies to a loan agreement, the parties to which are a legal entity and an individual entrepreneur.