Tax implications for the employees due to the usage of the company car on lease
How is the taxable income defined for the purposes of application of the personal income tax? This question has become of current interest due to the amendments to subpara. 164.2.17 (“a”) of the Tax Code made in July.
It shall be pointed out that the said subparagraph of the Tax Code was presented in the new wording, where after the words “cost of accommodations, other objects of tangible or intangible property“ appeared the words “which belong to the employer” (para.45 of the Law of Ukraine No. 4834-VI of 24.05.2012).
Now only those cases when the employer provides the owned property to the employee fall within the scope of the said rule. Usage of the leased property irrespective of the purposes (for the purpose of execution of labor duties or not) does not fall within the scope of subpara. 164.2.17 (“a”) of the Tax Code. As the result there is a question: how to qualify the provision of the leased property for the use by employee, since application of the leasing scheme by the employer has become widespread practice. Does the income of the employee working on the leased fixed assets arise? Proceeding from the formal reading the answer seems to be “yes”.
In accordance with subpara. 14.1.56 of the Tax Code “income is a total amount of the income of the taxpayer from all types of activity, received (accrued) during the reporting period in monetary, tangible or intangible forms either on the territory of Ukraine, its continental shelf in the exceptional (maritime) economic zone or beyond its borders”.
This definition does not provide for a clear understanding of the notion “income”. The concept of income is disclosed through the use of the same term – income. Therefore, further the legislator determines the income by means of indication of its particular type.
Para. 164.2 of the Tax Code contains a list of personal incomes which are included to the tax base for the purposes of the personal income tax (hereinafter – the “PIT”). These are, inter alia, other incomes, except for those set forth in Article 165 of the Tax Code (according to subpara. 164.2.19 of the Tax Code).
But how to determine what is meant by the definition “other income” in the situation when the usage of the leased property is envisaged neither as one of the cases within para. 164.2 nor as the exempt income under Article 165, and the term “income” is disclosed through the “income”?
With this in view there is a question whether a definition “income” envisaged in the accounting standards may be used for these purposes whereas according to such definition the income is the increase of the economic benefits in the form of receipt of assets or decrease of the liabilities.
Para. 5.3 of the Tax Code envisages that other terms used in this Code but not defined by it, are used in the meanings applied in other laws. National accounting standards are not the laws, therefore, following the formal approach there are no grounds for application of the terms defined by the standards.
For the Corporate Profit Tax purposes other terms are used in the meanings defined by the Law of Ukraine “On Accounting and Financial Statements in Ukraine” and the National Accounting Standards (subpara. 14.1.84 of the Tax Code). No similar rule for the purposes of personal income tax is established.
If not to use the accounting term “income”, such qualification as “other income” becomes impossible at all. However, it is unlikely that the tax authorities will agree with such reading.
If to use the accounting term “income”, provision of the leased property to the employee with respect to their labor duties shall not be considered as the income since, in substance, this does not result in increase of the benefits in the form of receipt of assets or decrease of the liabilities. Undoubtedly this is an aggressive approach and it is better to apply this approach as the last resort measure in the present conditions.
However, the aforementioned may be applied to the situation with the use of company car. The issue whether the car is used within the labor duties of the employee shall be resolved in every particular case.
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.
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