Income Tax Decree No. 3 of 1955 as amended by Law No. 2 of 2008 and its Executive Bylaws provide that capital gains on disposals of assets should be treated as normal business profits and subject to tax at 15%. Any losses on disposal of fixed assets should be tax deductible.
Furthermore, Executive Rule No. 31 requires that gains or losses on the disposal (includes sale, donation, and transfer to other branches or to the head office or substitution and barter thereof) of fixed assets will be accepted by the KTA where the following supporting documents are available:
- Contracts;
- Invoices; and
- Custom statements (where applicable in case the assets are being shipped to another country).
While proof of payments is not specifically mentioned under the Executive Rule 31 as a supporting document, during the mandatory tax inspection stage, tax inspectors typically request for this information in order to assess the gain or loss on disposals of fixed assets.
In addition to the above, the Executive Rule requires that the taxpayer notifies the KTA of the disposal of an asset and is not permitted to dispose the asset until a representative of the KTA is in attendance.
In the case of a loss on disposal, where the KTA is not satisfied with the documentation or process of disposal in line with the requirements of the tax authority, any losses on disposal maybe disallowed. The Executive Rule further clarifies that the KTA could deem a capital gain which would be subject to 15% tax.
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