The income tax proclamation No. 979/2016 (DOWNLOAD) (hereinafter the Proclamation) imposes a certain amount of tax on income from a disposal of certain investment areas. Article 59(1) of the Proclamation, states that a person who derives a gain on the disposal of immovable property, a share, or bond (referred to as a “taxable asset’) is liable to pay an income tax.
For the purpose of determining capital gains tax there are two types of taxable assets; Class ‘A’ and Class ‘B’. Class ‘A’ are immovable assets which includes a mining or petroleum right, or mining or petroleum information, as defined in Article 36 of the Proclamation. Some of this rights/information is exploration right/information, mining right/information, and petroleum operations right/information. An immovable asset, however, don’t include a building held and wholly used as a private residence for 2 years prior to the disposal of the asset. On the other hand, Class ‘B’ taxable asset means shares and bonds.
This being said, the rate of capital gains tax is 15% for a class ‘A’ taxable asset (immovable asset), and 30% for a class ‘B’ taxable assets (shares and bonds).
Under the proclamation, a person is required to pay an income tax based on the amount of a gain on disposal. The amount of a gain on disposal of a taxable asset by a person is the amount by which the consideration for the disposal of the asset exceeds the cost of the asset at the time of disposal. Therefore, a person is only required to pay an income tax if the amount gained exceeds the cost of disposal.
The proclamation even offers an offset for a person making loss on a disposal of a taxable asset (i.e. the cost of disposal should exceed the consideration for the disposal) during a tax year. Article 59(4) of the proclamation reads as:
If a person makes a loss on disposal of a taxable asset during a tax year, the loss shall be recognized and be available to offset a gain on disposal of a taxable asset of the same class during the year subject to the following:
- the loss may be used only to offset gains under this Article;
- the unused amount of a loss can be carried forward indefinitely for offset against gains on disposal of taxable assets of the same class until fully offset;
- no loss is recognized on the disposal of a taxable asset by a person to a related person;
- the person has substantiated the amount of the loss to the satisfaction of the Authority.
In addition to the proclamation, the income tax regulation no. 410/2017 provides for the regulation of capital gains tax where the asset is disposed as a donation. Article 53 of the regulation reads as follows:
- For the purpose of Article 59 of the Proclamation, tax payable on a capital asset disposed by donation shall be calculated on the difference between the original cost of the asset and the cost of the asset at the time of disposal by donation.
- The receiver of donation shall be liable to pay tax on a capital asset disposed by donation.