Supreme Arbitration Court Presidium Upholds Deductibility of Losses arising from Waiver of Debts as Part of Amicable Agreements.


Legal Update No. 168.

Goltsblat BLP advises that Resolution No. 2833/10 of the Presidium of the Supreme Arbitration Court of the Russian Federation (the “SAC”) of 15 July 2010 has been published on the case over inclusion of a forgiven debt in non-operating expenses for corporate profit tax purposes (the case of ZAO Yaroslavl Metalwork Plant).

In the case concerned, the tax authorities acting in line with the position of the Russian Ministry of Finance excluded the taxpayer’s loss incurred as a result of forgiving a debt under an amicable agreement with a debtor from non-operating expenses deductible for profit tax purposes.
Courts of three levels previously refused to satisfy the taxpayer’s claims proceeding on the basis that partial release of the debtor from its obligation to settle the debt does not qualify as bad debt as defined in paragraph 2, clause 2, article 265 of the Russian Tax Code, so the forgiven debt cannot be booked under non-operating expenses.

The Presidium of the Supreme Arbitration Court disagreed with the position of these courts and the tax authorities, indicating that the list of non-operating expenses and losses classified as non-operating expenses is not exhaustive and permits other expenses and losses to be included in expenses deductible for profit tax purposes, provided that these comply with the criteria prescribed by article 252 of the Russian Tax Code.

Explanations were also given that the taxpayer losses incurred as a result of forgiving a debt may be deducted if the taxpayer proves that it waived the debt in order to derive income, for instance, in the event of an amicable agreement concluded in order to settle mutual claims. Debt forgiveness can only be recognised as gift if a court of law establishes the creditor’s intention to release the debtor from its payment obligation by way of donation.
The SAC Presidium also pointed out that the taxpayers taking steps for judicial collection of the indebtedness and for its settlement by entering into an amicable agreement cannot be put into an inferior position compared to the taxpayers refraining from such moves and retaining their right to charge the outstanding debt to deductible expenses on the date when the statute of limitations expires.

Pursuant to this position of the SAC Presidium, taxpayers who have not charged the forgiven debt to expenses may deduct them in the tax returns for the current reporting period, provided that their forgiving the debt aimed at income acquisition (clause 1, article 54 of the Russian Tax Code).
Should the tax authorities strike out the forgiven debt from the taxpayer’s deductible expenses, the taxpayer will most probably succeed in holding its ground at a state arbitration court, since the SAC Presidium expressly stated in the Resolution that its interpretation of legal rules is universally binding and must apply to similar cases considered by state arbitration courts.

For additional information, please contact:

Andrey Shpak, Partner,
Tax consulting/ tax litigation
Goltsblat BLP;
T: +7 (495) 287 44 44,

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