VAT in the Transfer of Basic Assets into Authorized Capital

Arbitration practice shows that taxpayers often encounter the problem of calculating value added tax (VAT) in the transfer of basic assets, raw materials and materials into authorized capital. This problem can be resolved by correlating the norms of various legal acts regulating the said relations.

In accordance with art.7 of the RF Law “On Value Added Tax” the sum of the value added tax subject to introduction into the budget is determined as the difference between the sums of the tax, received from buyers for acquired goods (work, services), and the sums of the taxes actually paid by the suppliers of the goods (work, services) the cost of which relates to the expenses of production and turnover.

Moreover, in accordance with the provisions of art.39 of the Taxation Code of the RF, the realization of goods (work, services) by an organization, enterprise or individual entrepreneur consequently recognizes the transfer on a compensatory basis (including exchange of goods, works or services) of property rights concerning goods, the results of work carried out by one person for another, compensatory rendering of services by one person to another, and in cases provided for by the Taxation Code of the RF, the transfer of property rights for goods, results of works carried out by one person for another, the rendering of services by one person to another – on a non-remunerative basis.

However, the taxation legislation of the RF does not acknowledge as realization of goods (works, services) the transfer of goods (works, services) if such a transfer is in the nature of an investment (p.3 art.30 Taxation Code of the RF). Among others, investments into authorized (joint stock) capital of economic associations and societies, investment by agreement into a simple partnership (joint venture agreement) are not acknowledged as realization of goods (works, services).

Thus, the value of basic means transferred by the founder into the authorized capital is not subject to VAT, and equally repayment of entrance VAT on them. The amounts of VAT paid at the same time to suppliers must be written off by the transferring side as profit which remains at the disposal of the enterprise (in debit to account 81 “Use of Profits”).

However there are frequently situations in practice when goods (works, services) were originally obtained for production aims and VAT was reckoned into account, i.e. the sum of VAT, subject to levy in the period when the goods (works, services) were paid for and acquired, decreased.

Due to the circumstance that the indicated goods (works, services) were introduced into the authorized capital (were unrealized), there is a problem in that the VAT paid earlier was taken into reckoning improperly, as reckoning is permissible only if these goods were subsequently used for production purposes.

The solution of this complex question is contained in the Letter of the Administration of the Ministry of Taxes and Collections of the RF in Moscow “On Value Added Tax” of 3 September 1999 No.02-14/5290. Among other things, the Letter indicates that in the transfer by the founder of basic assets which are being exploited into the authorized capital, there is a reinstatement of the sums of the VAT reflected earlier in debit account 81 “Use of Profits.”

The directions contained in the above-mentioned Letter by the Administration of the Ministry of Taxes and Collections of the RF in the city of Moscow remove random interpretations of various legal norms.

It is essential to note that the same situation arises in other cases, when goods acquired earlier for industrial use are subsequently used for other purposes. Consequently, in this case, one may also speak of the necessity for the reinstatement of paid VAT.

V.A. Sobolev

Source publication: Business Lawyer [Biznes-advokat], 2000, No.19