The Russian Finance Ministry and Federal Tax Service Disagree with the Supreme Arbitration Court on Loan Interest Deductibility.


Legal Update No. 141.

Goltsblat BLP advises of adoption of Letter No. 3-2-06/22 of the Federal Tax Service of Russia, dated 17 March 2010, “On Tax Deductibility of Interest on Debt Obligations” (hereinafter - the “Letter” ).

In view of this Letter, it should be recalled that, in considering deductibility of interest under loan agreements for profit tax purposes, the Presidium of the Supreme Arbitration Court of the Russian Federation (“SAC”) concluded in its Resolution No. 11200/09, dated 24 November 2009, that interest may not be included in deductible expenses before the payment date set by the loan agreement.

Yet the Russian Finance Ministry and Federal Tax Service (“FTS”)  hold a contrary point of view on this matter.  In its Letter, the FTS upholds the position of the Finance Ministry concerning deductibility of interest on debt obligations throughout the term of the loan agreement, irrespective of the set interest payment date.  Let us note that a similar point of view was expressed by the Finance Ministry in its Letters No. 03-03-06/1/190, dated 25 March 2010, and Nos. 03-03-06/2/62, 03-03-06/2/63 and 03-03-06/4/36, dated 1 April 2010.

In this case, the finance authorities insist on a more taxpayer-favourable scenario for deducting debt interest under loan agreements. At the same time, local tax authorities exercising tax control might follow the legal position expressed in the above-mentioned resolution of the SAC Presidium, not the Letter.

In this context, if interest is paid later than accrued, it is safer for the taxpayer to abide by the position of the SAC Presidium and deduct interest on debt obligations in the periods stipulated by the loan agreement for its payment. Although this position is less favourable for taxpayers, it minimises the risks of potential claims being raised by the tax authorities, since it provides for interest to be deducted in a later period, which is expressly allowed by art. 54 of the Russian Tax Code  (as amended with effect from 1 January 2010).

For additional information, please contact:

Andrey Shpak,
Partner, Tax Practice,
Goltsblat BLP,
Tel: +7 (495) 287 44 44,
Sergey Kalinin,
Senior Associate, Tax Practice,
Goltsblat BLP,
Tel: +7 (495) 287 44 44,

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