Determination of taxable income

Basis for calculating the tax payable

The taxable income of a company is determined by ascertaining assessable income and then subtracting all allowable deductions.  The basis for calculating the tax payable is determined as the difference between total revenue and total expenditure of the taxpayer, in amounts determined in accordance with accounting regulations and accounting standards including:

Tax deductible expenses

Employees’ related expenditures such as: organized transportation to/from work, food provided to employees, business trip allowance, field allowance, family separation allowance, one-off severance payment, retirement allowance, annual holiday allowance, anniversary awards etc. are tax deductible up to the amount prescribed by the law and the applicable Collective Agreements;

The premiums paid for insurance of the tax payer’s business property and all kinds of compulsory non-life insurance determined by law;

Non-deductible expenses 

Non-deductible expenses for tax purposes, such as stated below, increase the tax base:

  • Expenses that are not connected with a business activity
  • Costs for representation
  • Write-off on unpaid receivables
  • Difference between transfer and market price achieved between related parties
  • The interest on loans received for the purposes of conducting the Company’s business activity is fully tax deductible, provided it does not fall under the thin capitalization rules. Under these rules, if the total amount of the loans received from a shareholder that owns at least 25% of the capital in the company (which is not a bank or a financial organization) during a tax period exceeds the amount of three times its share, the interest referring to these loans shall not be tax deductible (debt-to-equity ratio of 3:1). This shall not apply to newly established entities in the first three years of operation, including the year of establishment
  • Withholding tax, borne as a cost by a Macedonian taxpayer
  • Cash and tax penalties and penalty interest for late tax payments and cost of enforced collection
  • Hidden payments of profits. Delivery of certain products and services of the partners or shareholders or persons connected to them at a price lower than the market , including lower interest on approved loans, payments for goods and services received by the partners or shareholders or persons connected to them, at prices higher than the market and enabling the acquisition of gains of the partners or shareholders or persons connected to them
  • Shortage of assets which are not caused by extraordinary events (theft, fire or other natural disasters), which are not on cost of the salary of the responsible person
  • Donations shall be recognized as tax deductible up to the limit of 5% of the overall revenue, and sponsorships in the amount of 3% of the overall revenue, according to the conditions and the procedure set out in the Law on Donations and Sponsorships in Public Activities
  • Interest on loans for purchasing cars, furniture, carpets, pieces of fine and applied art and other decorative items; Cost of dispersing and scattering on assets over amounts determined by law.


Special rules

Depreciation

The annual depreciation/amortization expense is recognized for tax purposes in accordance with the applicable accounting standards. Generally the straight-line method of depreciation is used.

Stock/inventory

Inventory includes raw materials, work-in-progress, finished goods and payments on account. Each item of inventory must be valued at acquisition cost or cost of production. All valuation methods (FIFO, LIFO, average prices) are accepted.

Capital gains and losses

Capital gains are treated as ordinary taxable income.

Dividends

Dividends received from other Macedonian resident companies are included in the tax base, unless a withholding tax has been levied. With effect from 31 January 2014, dividends paid to resident companies are subject to a withholding tax at a rate of 10%. Before that date, such dividends were not subject to withholding tax. Other payments to resident companies are not subject to withholding tax. Dividends paid to non-resident companies are subject to a final withholding tax of 10%, unless a double tax treaty provides for a lower rate

Interest deductions

Interest on loans granted between related parties at arm’ length (except for loans granted by banks or other financial institutions) is recognized for tax purposes. In case the taxpayer cannot produce satisfactory evidence that the interest on related parties loans is on an arm’s length basis, the interest income/expense from these loans will be determined for tax purposes by applying EURIBOR plus 1% (SKIBOR plus 1% for loans extended in MKD). Penalty interest between related parties is not recognized for tax purposes (except penalty interest incurred with regards to a bank or other financial institutions).

Interest on loans granted by direct shareholders holding at least 25% of a company’s share capital (“qualifying shareholder”) is considered non-deductible for profit tax purposes should the loan amount exceed threefold the amount of the equity attributable to that shareholder (debt-to-equity ratio of 3:1).

The same rule applies to loans granted by a third party, while guaranteed by a qualifying shareholder or granted in relation to a deposit provided by the qualifying shareholder to the third party.

The amount which is not recognized for tax purposes is the amount of interest on the part of a loan which exceeds threefold the amount of the equity attributable to the qualifying shareholder.

The thin capitalization rules do not apply to loan facilities granted by direct shareholders which are banks or other financial institutions, as well as loan facilities granted by direct shareholders to newly established entities in the course of the first three years of their establishment.

Losses

As from 1 January 2015, losses may be carried forward for a period of 3 years. The taxpayer carrying forward losses can exercise this right subject to approval from the tax authorities. A written request must be submitted by 31 March of the year following the year in which the losses were incurred. Prior to that date, losses could not be carried forward for tax purposes.

Foreign sourced income

Resident companies are subject to profit tax on their worldwide income and capital gains.

Investment allowance/incentives 

A taxpayer that is obliged, in accordance with the Law on Registration of Cash Payments, to introduce and use approved equipment for registering cash payments, shall be granted a reduction in the calculated corporate income tax for the procurement of up to ten fiscal machines, in the amount of their value.

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