This content is from: Macedonia

FYR Macedonia: Profit tax: A two-fold system

Elena Kostovska, Eurofast Global
In 2009, FYR Macedonia made an overhaul in the taxation approach to corporate profits, abandoning the previous adjusted profits tax base and moving to a tax base centered mostly on profit distribution but also on a number of taxable items. Therefore, profit tax in the country arises from two sources: profit distributions and non-deductible expenses plus any understated revenues and is no longer focused on the actual profit realised by the taxpayer.

The first element (distribution) is quite straightforward, with tax arising in cases of dividend distribution (or any other profit distributions, such as expatriation in cases of branches of non-residents). An exemption was introduced in mid-2010 which is still in effect and stipulates the profit tax exemption of dividends distributed to resident legal entities; therefore effectively limiting the taxation to profits distributed to resident physical persons as well as foreign entities or physical persons.

The second category of items subject to profit tax is slightly more complex, with taxpayers often needing advice and clarifications as to what constitutes the tax base. In simple terms, the base consists of non-deductible expenses as well as any understated revenues. Non-deductible expenses are those that are considered not recognised for tax purposes; the long list of items that is frequently subject to discussions includes expenses not related to the taxpayer's main business activity, understated revenues (for goods or services between related entities as well as from interest), loss from bad debts (except in cases of debtor's bankruptcy or liquidation), and unjustified inventory shortages. Other non-deductible expenses that raise the profit tax base include fines and penalties for overdue payments to the state, expenses incurred on behalf of a board member (or shareholder) for food, drinks, gifts, use of a private car, procurement of property (movable or immovable) on such member's behalf, scholarships (except employee scholarships under conditions), insurance premiums for the management or for any non-business property as well as interest expenses under thin capitalisation rules.

Yet another category of partially deductible expenses is in place, whereby employee-related expenses (such as business trip allowances, car allowances or director's salaries – up to 50% of the average national monthly salary) are only deductible up to an amount defined in the law, as are public interest donations and sponsorships (deductible up to 5% of the company's gross revenue), and entertainment expenses (up to 90% of the expenses' amount)

Essentially, the FYR Macedonian tax system is less interested in the financial result of the taxpayer (be it profit or loss position for the period in question) as taxpayers are required to pay the profit tax even if they have shown a negative financial result. As a reminder, the profit tax rate in the country is flat at 10%, with the tax payment due 30 days from the due date of the annual tax returns and advance payments made each calendar month by the 15th day of the following month.

Elena Kostovska (
Eurofast Global, Skopje Office
Tel: +389 2 2400225

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