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LETTER OF STATE TAX ADMINISTRATION OF UKRAINE

of September 9, 1999 No. 13583/7/22-3118

About the taxation of the income of insurance companies

According to the order of State Tax Administration of Ukraine of 18.11.97 N 417 "About providing feedback of tax authorities in development of methodology and in work on introduction of new documents" the State Tax Administration of Ukraine directs for management and use in work of explanation on questions which arrived from State Tax Administrations in the Autonomous Republic of Crimea, areas, the cities of Kiev and Sevastopol concerning the taxation of the income of insurance companies.

As losses of the insurer are postponed to the next accounting periods. As balance sheet losses of the insurer by results of work for the first half of the year 1997 in reports for subsequent periods of activities, in particular in the declaration on the income of the insurer for 1997 are reflected.

That is in the declaration on the income of the insurer not balance sheet losses of the taxpayer, namely negative value of the taxation object shall be reflected.

When charging gross income from insurance activity this taxation object, namely the amount of insurance payments, cannot have negative value therefore at the insurer only losses from the activities which are not connected with insurance (reinsurance) are postponed to the next tax quarters.

With respect thereto, transferring of negative value of the taxation object at the insurer is reflected in the II Section of the declaration "The Activities of Insurers Which Are Not Connected with Insurance and Reinsurance".

Proceeding from brought if the balance sheet losses received by the insurer in the first half of the year 1997 were connected with insurance (reinsurance), such losses do not belong on gross expenses according to the procedure, stipulated in Article the 6th this Law.

As for distribution of balance sheet losses of the insurer as of 01.07.97 on the losses received from insurance activity and from other activities, it is necessary to use the order of Committee on cases of supervision of insurance activity of 12.12.97 N 80 "About the reporting of insurance companies in 1997" according to which in the income and expenditure statement of the insurer the profit (loss) from insurance activity, on investment and placement of temporarily available funds and on other transactions separately was reflected.

Types of insurance sums, minimum sizes of insurance rates and technique of their calculations.

Insurance sum - limit of liabilities of the insurer concerning compensation of the losses caused by insurance event to the insurer (insured), and also the amount paid on personal insurance. The insurance sum on property insurance shall not exceed project cost. In case of voluntary insurance of life the insurance sum is not limited.

The insurance rate is rate of insurance premium from unit of insurance sum or object of insurance. Insurance rates on obligatory types of insurance are established in the laws on compulsory insurance or the orders of the Government. Insurance rates by voluntary types of personal insurance, proprietary insurance and liability insurance are calculated the insurer actuarially (mathematically) on the basis of the corresponding statistics of approach of insured events. The specific size of insurance rate is determined by the insurance contract by agreement of the parties.

The organization performs the activities as insurance agent. What mechanism of the taxation needs to be used: established by subitem 7.2.1 of the Law of Ukraine "About the taxation of profit of the companies" or in accordance with general practice?

According to article 14 of the Law of Ukraine "About insurance" insurance agents are citizens or legal entities who act for and on behalf of the insurer and carry out part of its insurance activity (the conclusion of insurance contracts, receipt of the insurance payments, performance of works connected with payments of insurance sums and insurance indemnity). Insurance agents are representatives of the insurer and act in its interests for commission fee under the contract with the insurer.

According to the order GNA of Ukraine of 16.01.98 N 22 "About modification of the Procedure for creation of the declaration on the income of the insurer" the mechanism of the taxation of insurance activity provided by item 7.2 of article 7 of the Law of Ukraine "About the taxation of profit of the companies" is used by insurers (residents) legal entities whose activities are regulated by the Law of Ukraine "About insurance" and who have the license for implementation of insurance activity, and also their branches, departments and other separate divisions located in the territory of other territorial community.

Proceeding from brought if the organization performing functions of insurance agent has no status of the insurer or its branch (separate division), the profit taxation mechanism in accordance with general practice is used to it.

What procedure for contributions to the State innovative fund by non-bank financial institutions and insurance companies?

According to article 14 of the Law of Ukraine of 18.02.97 N 77/97-BP "About system of the taxation" collection in the State innovative fund is obligatory payment. According to the Law of Ukraine "About the Government budget of Ukraine for 1999" means of the State innovative fund are included in structure of the income and expenses of the Government budget of Ukraine.

By article 15 of the Law of Ukraine "About the Government budget of Ukraine for 1999" it is determined that subjects of business activity irrespective of patterns of ownership pay to the State innovative fund collection in the amount of 1 percent from products sales amount (works, services) reduced by tax amount on value added and the excise duty.

In trading, intermediary and supplying and sales activity collection is paid from the amounts of trade or sales margin (allowance) on the realized goods, in bank and insurance spheres deyatelnostiot the amounts of gross income.

Proceeding their brought, payers of collection in the State innovative fund are all non-bank financial uchrezhdeniyayuridichesky persons irrespective of patterns of ownership, and the taxation object for them is all sales amount of products (works, services) reduced by tax amount on value added (excise duty) according to statistical and accounting records.

As for insurance companies, the taxation object of the specified mandatory fees for them according to the above-stated Law of Ukraine is the gross income.

According to the Law of Ukraine "About insurance" the gross income of the insurer is determined as income amount from insurance activity, profit on carrying out life insurance, profit on non-operating transactions and other realization reduced by payments of insurance sums and insurance indemnity, contribution to centralized reserve funds and to technical reserves others, than reserve of not earned premiums that is equivalent to products sales amount (works, services) which is the taxation object for payment of such charges by the companies, associations and the organizations.

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