One way of working capital financing of a company is to obtain financial assistance from other companies or individuals. It can be provided both on repayable basis and on non- repayable basis. Peculiaritiesof accounting and taxation of financial assistance are in the following.
Repayable and non-repayable financial assistance
Repayable financial assistance is the amount of funds received by the taxpayer for use under an agreement that does not involve the accrual of interest or other types of compensation in the form of fees for the use of such funds and is mandatory for return (paragraph 14.1.257 of the Tax Code of Ukraine, hereinafter − TCU).
Non-repayable financial assistance is:
- the amount of funds transferred to the taxpayer in accordance with donation contracts, other similar agreements or without concluding of such agreements;
- the amount of bad debt, reimbursed to the creditor by the borrower after the cancellation of such bad debt;
- the amount of the debt of one taxpayer to another taxpayer, which has not been collected after the expiration of the limitation period;
- the principal amount of the loan or deposit provided to the taxpayer without establishing the maturity of such principal amount, except for loans granted for non-current bonds, and demand deposits with banking institutions, as well as the amount of interest accrued for such principal amount but not paid (written off);
- the amount of interest conditionally accrued on the amount of the repayable financial assistance that is not returned at the end of the reporting period, in the amount of the discount rate of the National Bank of Ukraine, calculated for each day of the actual use of such repayable financial assistance (para. 14.1.257 of TCU).
In its economic sense, repayable financial assistance is a loan, and non-repayable financial assistance is donation.
VAT
It should be noted that the provision of financial assistance is not subject to VAT, since it does not fall under the definition of supply transaction for goods or services.
Income tax
The object of taxation of income tax is determined on the basis of accounting data by adjusting the financial result before tax, as defined in the financial statements, on the difference that increases or decreases the financial result before taxation, in accordance with the provisions of the TCU.
The recipient of the repayable financial assistance should reflect it as a part of long-term liabilities (account 55 “Other long-term liabilities”) or current liabilities (685 “Settlements with other creditors” or 611 “Current debt on long-term liabilities in national currency”). The criterion for assigning the repayable financial assistance to a long-term or current debt is the term for the return of such assistance (more or less than 12 months from the balance sheet date).
The part of the long-term repayable financial assistance, which is due for 12 months from the balance sheet date, is classified as current debt and reflected by the accounting record: Dr of account 55 – Cr of subaccount 611. In the case of returning of the repayable financial assistance in cash, it should be reflected by the accounting record: Dr of subaccount 685 or 611 − Cr of subaccount 301 or 311 (para. 8 of Accounting Standards 11 “Liabilities”).
As we see, the formation of income and expenses when receiving the repayable financial assistance does not occur in the accounting, and therefore there is no effect on the financial result before taxation and, accordingly, on the object of taxation of the income tax. In addition, the current version of the TCU does not require a correction of the financial result t before tax on the difference in the amount of the repayable financial assistance.
As for receiving of the non-repayable financial assistance, the situation is different, since such assistance does not provide for its return. Taking into account the requirements of para. 5 of Accounting Standards 15, in the case of receiving cash as donation, a company should recognize income and reflect it in the accounting by the accounting record Dr of subaccount 311 or 301 − Cr of subaccount 718 “Income from current assets received free of charge”.
Unified tax
If the recipient of the financial assistance is the unified tax payer, it is clear that the cash assistance received on a non-repayable basis is included in the income and is the subject to the unified tax on a general basis.
In case of receiving of repayable financial assistance by such a payer, it should be taken into account the requirement of sub-para. 3 of para. 292.11 of TCU. According to this norm, the income of the taxpayer of the unified tax does not include the amount of financial assistance provided on repayable basis received and returned within 12 calendar months from the date of receipt. That is, if the repayable financial assistance is left unpaid after 12 calendar months from the day it is received, it is included in the income of the unified tax payer. In the case of returning such assistance in the future, the adjustment of income is not provided for.
