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Depreciation of the expenses for independent creation of intangible assets by the Enterprise аccording to the Amendments to the Tax Code of Ukraine which entered into force on July 1, 2012

01 October, 2012 Newsletters

The Law of Ukraine “On Amendments to the Tax Code of Ukraine on improvement of certain tax rules” of May 24, 2012 No. 4834-VI, which entered into force on July 1, 2012, set forth part 2 of para. 144.1 of Article 144 of the Tax Code of Ukraine (hereinafter referred to as “the TC Ukraine”) in the following wording:

“the subjects of depreciation are the following: <...> expenses for independent production (creation) of fixed assets, intangible assets, cultivation of long-term biological assets for use in economic activities, including expenses for wages to employees who were engaged in production (creation) of fixed and intangible assets“.

Before the mentioned amendments the intangible assets had not been mentioned in this clause. In other words, proceeding from the literal reading of the provisions of Article 144 of the Tax Code, only the expenses for independent creation of fixed assets were subject to depreciation, while the expenses for independent creation of intangible assets should not have been depreciated. Provided that respective expenses were related to the business activity of the taxpayer such expenses were allowed for deduction for the profit tax purposes based on the general rules.

The above-mentioned approach is based on the formal reading of the Tax Code, and prudent taxpayers capitalized expenses for creating intangible assets in the same way as fixed assets. However, any claims to the taxpayers who have not done this, and included the costs directly to the expenses, were illegal.

At the same time, starting from July 1, 2012, the expenses for independent creation of intangible assets are subject to depreciation. Therefore, currently the tax authorities have legal grounds for raising this issue during the tax audit and for non- recognition of the expenses which, in their view, should have been capitalized within the value of intangible assets created in the result of such expenses.

It should be noted that this issue requires special attention, since in practice the taxpayer may not even suspect that intangible assets are created as a result of certain business processes. Such situation occurs quite often in respect of compilations of data (databases). Thus, the compilations of data (database) in accordance with Article 433 of the Civil Code of Ukraine are related to the objects of copyright if they under the selection or arrangement of their components are the result of intellectual activity. This is often overlooked.

If costs, which may be deemed to be related to creation of compilation of data (database), are included to the expenses, then after July 1, 2012 such approach may lead to tax risks. Namely, the tax authorities may challenge deduction of respective amounts. In practice, such amounts may prove to be quite significant.

With this in view we recommend conducting a self-examination starting from July 1, 2012 on the issue whether certain processes on the enterprise may be considered as creation of an intangible asset. If such risk is detected, the prudent approach will be capitalization of expenses for creating such asset with further depreciation and proper documenting of these processes.

The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.

Kind regards,

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