Special depreciation plans under the Corporate Income Tax
General depreciation methods under the Corporate Income Tax Act (LIS)
As is known to most taxpayers, companies may deduct as an expense, for Corporate Income Tax purposes, the annual depreciation corresponding to their fixed assets (intangible assets, tangible assets, and investment property).
This allows the effective annual depreciation of these assets to be treated as a deductible tax expense. For some companies with substantial investments in buildings, facilities, and machinery, this may represent a significant item in their profit and loss account, and therefore have a notable impact on the (taxable) base each financial year.
The Corporate Income Tax Act (LIS), in order to provide legal certainty, considers depreciation to be effective when one of the following methods is applied:
Straight-line depreciation rates set out in the approved tables.
A constant percentage applied to the remaining value to be depreciated.
Application of the sum-of-the-years-digits method.
Special depreciation plans
However, it may be the case that the taxpayer considers these methods – especially the officially approved tables – do not accurately reflect the effective depreciation of their assets. In such situations, the taxpayer may be allowed to depreciate the assets according to their actual wear and tear.
To avoid disputes with the tax authorities – particularly when the depreciation exceeds the maximum permitted by the tables – the LIS provides the possibility for the taxpayer to submit a special depreciation plan for prior approval by the tax authorities.
Application for special depreciation plans
This procedure is governed by Article 7 of the Corporate Income Tax Regulations. The initial application must include the following information:
Description of the assets to be included in the plan, indicating the activity to which they are assigned and their location.
Proposed depreciation method, including the timing and distribution of depreciation charges.
Justification for the proposed depreciation method.
Acquisition price or production cost of the assets.
Date on which depreciation of the assets is to commence.
For assets under construction, the expected date on which depreciation will begin must be indicated.
The application may be submitted at any time during the depreciation period of the asset, within its useful life. The tax authorities then have a period of three months to process and decide on the procedure. If no express decision is issued within this period, the depreciation plan proposed by the taxpayer shall be deemed approved (positive silence).
For such plans, it is essential to attach a detailed technical report justifying the proposed depreciation period, whether due to the nature of the asset, intensive usage, or rapid technological obsolescence.
Approval of special depreciation plans
It is common practice during this type of procedure for the tax authorities to request additional information and technical reports while the process is ongoing. Taxpayers may submit observations or arguments once a draft resolution has been issued, and before the final decision is made.
Once approved, the depreciation plan will take effect in tax periods ending after its submission, unless a different date is expressly established.
Furthermore, approved depreciation plans may be amended at the taxpayer’s request, in accordance with the rules outlined above. In any event, the plan may be applied to other assets with identical characteristics whose depreciation is set to begin within three years from the date of notification of the approval, provided that the physical, technological, legal, and economic circumstances that determined the approved method remain substantially unchanged. Such application must be notified to the tax authorities before the end of the tax period in which it is to take effect.
Conclusions
As can be seen, this is a valuable alternative to consider for companies with high levels of investment in fixed assets due to their business activity, particularly those with complex and intensively used facilities and machinery. These types of assets are often not easily accommodated within the simplified classifications of the official depreciation tables.
A technically sound and well-documented proposal has a good chance of being approved, potentially resulting in a significant increase in tax-deductible annual expenses with full legal certainty. This, in turn, may lead to savings on Corporate Income Tax and improved cash flow for the business.
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