The Ministry of Finance (MoF) has recently released Letter No. 03-03-06/1/63388 to clarify the applicable tax treatment of interest expense incurred on a loan used to pay dividends. According to Article 252 of the Tax Code (TC) a taxpayer may deduct all expenses paid or accrued during a tax year necessary to carry on a business aimed at profit making. Also, a taxpayer may record as “non-operating expenses” interest payments made under debt obligations subject to thin capitalization rules on the basis of Article 265 of the TC. The MoF explained that the provisions of Article 265 of the TC do not contain any limitations (except for the thin capitalization rules as set out in Article 269) on the deductibility of interest amounts on the loan used to pay dividends for corporate income tax purposes and recorded as “non-operating expenses”.
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