EIT Law Article 32

Asset Classification

The eligibility for faster cost recovery depends on the category of the asset and the specific industry in which the enterprise operates. Under eit law article 32, assets such as high-tech electronic equipment or machinery used in harsh environments qualify for shortened depreciation lives. The standard depreciation period for most machinery is ten years, but this article allows for a reduction of up to forty percent of that duration.

This means a company can write off the cost over six years instead of ten, significantly increasing its cash flow in the short term. The classification is determined by the tax catalog issued by the Ministry of Finance, which lists the specific types of equipment that are eligible. Companies must keep detailed records of the purchase date, the original cost and the technical specifications to justify the use of these rates during an audit.

Calculation Method

Businesses have the choice between several mathematical approaches to determine the annual depreciation expense for tax filings. While the straight-line method is the default, eit law article 32 permits the use of the double declining balance method or the sum-of-the-years-digits method for qualifying assets. The double declining balance method applies a constant rate to the book value of the asset each year, resulting in much higher expenses at the start.

In contrast, the sum-of-the-years-digits method uses a fraction that decreases every year, providing a more gradual but still accelerated write-off. These calculations must be consistent with the accounting standards used in the company’s financial statements, although temporary differences between tax and book values are common. The tax bureau requires a filing to be made when a company chooses to deviate from the standard straight-line approach.

Operational Benefit

The primary advantage of utilizing these provisions is the deferral of income tax payments to a later period. By applying eit law article 32, a factory can lower its tax liability during the years when it is also paying off the loans used to buy the equipment. This reduction in the effective tax rate helps to mitigate the financial risk of large capital investments.

The benefit is particularly relevant for the semiconductor, biotechnology and high-end manufacturing sectors where equipment becomes obsolete quickly. However, the rule does not apply to buildings or structures, which must follow the standard twenty-year depreciation schedule. It also stops being a benefit if the company is already in a loss-making position, as the extra depreciation only increases the loss carry-forward rather than providing immediate tax savings.

Companies must balance the tax benefits against the impact on their reported earnings to shareholders.