Moldova Approved Regulation on Implementation of Certain Tax Exemption Provisions for Foreign Investors

On 5 December 2003 the Moldovan Ministry of Finance passed a Regulation on the Procedure of Conclusion, Operation, and Termination of Effects of Agreements Providing for 50-Percent Corporate Income Tax Exemption of Qualifying Business Entities with a Share of Foreign Investments Exceeding the Equivalent of US $250 Thousand. The main provisions of the Regulation are summarized below.

General Provisions

The Regulation has been drafted on the basis of the provisions of Article 24(3) of the Law on Entry into Effect of Sections I and II of the Tax Code and considering the recent modifications introduced therein.

Under the modifications, certain businesses with foreign investments exceeding the equivalent of US $250 thousand after formation of their registered capital and declaring first income are entitled to a five-year, 50 percent income tax reduction. Eligibility begins on the date that the applicable agreement is concluded with a regional tax authority operating in the area of tax registration of the enterprise. The tax reduction is available to businesses that derive more than 50 percent of their gross income from sales of their own goods (works and services). In addition, those businesses must invest at least 80 percent of their calculated (but unpaid) income tax in the development of their own production or in state or branch national economic development programs, and they cannot be in the arrears to the national public budget, including under loans provided by the Ministry of Finance.

It should also be mentioned that businesses that have been using the aforementioned tax benefit before the conclusion of an agreement with a regional tax authority may continue to use the exemption provided that they enter into a respective agreement with the tax authority for the term remaining until the expiry of the 5-year statutory tax exemption period.

Businesses eligible to use the aforementioned corporate income tax benefit may also use other corporate income tax benefits, unless the current legislation stipulates otherwise.

General Definitions

The Regulation provides that for the purpose of the tax legislation, the following notions shall be understood and construed as follows.

Foreign Investors

Pursuant to the Regulation and Article 2 of the Law on Foreign Investments, the following persons may be investors in Moldova:

• foreign natural and legal persons and their associations registered in the country of their citizenship, domiciled (permanent residence) to practice business activity;
• foreign legal persons not registered in their country of citizenship to practice business activity;
• Moldovan citizens and stateless persons permanently residing in the country of their residence to practice business activity;
• foreign states;
• international organizations.

Foreign Investments

The Regulation provides, referring to Article 3 of the Law on Foreign Investments, that in Moldova investments may be made in the form of:

• freely convertible and other types of foreign currency being purchased by Moldovan banks and an object of bank operations;
• machinery, equipment, vehicles, devices, raw and other materials;
• property and non-property rights, including intellectual property rights.

  Development of Own Production

Development of own production shall mean expenses of a business entity incurred with a view of producing new types of goods (provision of new types of services) or increasing of the existing volume of production (provision of services). Particularly, these expenses shall include those incurred for the purpose of purchasing fixed assets, unfinished material assets, reparation and making subsequent capital contributions to improve the state of fixed assets, expenses incurred to purchase material and non-material property as well as other types of expenses incurred for the purpose of producing new types of goods or provision of new types of services or to increase the volume of production of goods (provision of services).

Investments in State or Branch National Economy Development Programs

Pursuant to the Regulation, this term shall mean expenses incurred by business entities with a view of financing various state or branch programs providing for development of certain branches of the national economy.

Own Goods

This term should include ready-made goods and semi-finished products produced by the taxpayer, produced from processing of the taxpayer's raw materials and goods at other enterprises as well as goods and semi-finished products, whose processing resulted in modification of the first four digits of their respective codes in the Moldovan Commodity Nomenclature or in whose net cost the taxpayer's expenses make up at least 50 percent.

Own Works, Services

Under the Regulation, this term should mean works performed and services provided by the taxpayer through the use of own production facilities and labor force, provided that they make up at least 50 percent of the cost of such works and services.

Arrears to the National Public Budget

This term shall mean any indebtedness of business entities under any tax liability before the national public budget for past tax periods. Yet, the current debts, whose respective repayment terms have not expired, are not considered to be making part of the arrears to the national public budget for the purpose of the Regulation.

General Terms for Exemption from Corporate Income Tax

The Regulation stipulates that business entities applying for a corporate income tax exemption on the basis of Article 24(3) of the Law on Entry into Effect of Sections I and II of the Tax Code must meet the following eligibility requirements:

• applicants must have in their registered capital a share of foreign investments exceeding the equivalent of US $250 thousand recalculated as of the date of making investments, provided that as of the date of applying for exemption the amount of the registered capital of the business entity, formed in the established procedure, has not been understated;
• applicants must gain more than 50 percent of their gross income from sales of their own goods (works and services) in the year preceding the one in which the corporate income tax exemption petition was filed;
• applicants must form registered capital in the procedure stipulated by applicable legislation and declare first income;
• applicants must not be in the arrears under loans secured by state guarantees;
• applicants must not be in the arrears before the national budget as of the date of filing a corporate income tax exemption petition and must not incur such arrears until the date of signing the corporate income tax exemption agreement with the regional tax authority.

  Corporate Income Tax Exemption Petitions

Businesses that meet the requirements described above may submit a standardized corporate income tax exemption petition to the regional tax authority. Such petition must be accompanied by the following documents:

• a copy of all corporate foundation documents;
• documents confirming the formation of the registered capital in which the share of foreign investments exceeds the equivalent of US $250 thousand;
• a copy of the balance sheet for the year in which the registered capital of US $250 thousand has been formed, as well as for the reporting period in which first income has been declared;
• a copy of the opinion, provided by the Finance Ministry, confirming the lack of arrears under loans of Finance Ministry, including those secured by a state guaranty;
• certificates issued by a regional tax authority and the Customs Department to confirm the lack of debts to the national budget;
• a copy of the opinion, provided by the Ministry of Economy, concerning the state or branch program in which the business entity intends to make investments (if any);
• a detailed plan of the use of the granted exemption in the development of their own production or in state or branch national economic development programs.

The regional tax authority must examine the exemption petition and accompanying documents within 15 days from the registration of petition or, if additional time is required, within one month. The regional tax authority must communicate its decision to the applicant within 5 days from the date of its decision. The decision of the tax authority may be appealed in the procedure stipulated by Section V of the Moldovan Tax Code.

Corporate Income Tax Exemption Agreements

A sample form of such agreement is provided as an annex to the Regulation.

Qualifying businesses may obtain the corporate income tax exemption on the basis of an agreement entered into with the respective regional tax authority. A sample form of a corporate income tax exemption agreement is provided as an annex to the Regulation.

The agreement shall be executed in duplicate, with one copy provided to the applicant and the other retained by the PSTS.

The Regulation stipulates that in case of conclusion of a corporate income tax exemption agreement, the 5-year corporate income tax exemption shall be granted beginning from the tax period (calendar year), in which the regional tax authority took a decision exempting the business entity from the corporate income tax, or from the period immediately following that tax period. The specific moment from which the taxpayer is entitled to use the corporate income tax exemption is established by mutual agreement of the taxpayer and the respective regional tax authority.

The regional tax authority shall exercise control over the correctness of calculation and use of the corporate income tax exemption for the purposes stipulated in the Regulation and the corporate income tax exemption agreement as well as the compliance of the taxpayer's obligations under the exemption agreement.

A business entity granted corporate income tax exemption shall, on a yearly basis (but not later than 31 March of each year), direct at least 80 percent of the amount of exemption for the development of own production or state and branch national economy development programs.

Also, if a business entity granted corporate income tax exemption has invested in its own production the amount exceeding 80 percent of the exemption amount during the tax period, the respective difference is considered to be investments made for similar purposes in the next tax year.

The regional tax authority is obliged to unilaterally rescind the corporate income tax exemption agreement in case the business entity fails to perform its obligations stipulated by the agreement and the Regulation. In such case, the amount of the 5-year corporate income tax exemption shall be transferred to the budget subject to application of respective fiscal penalties provided by law.

Iurie Lungu,
Graham & Levintsa,
Chisinau, Moldova