Amendments to the Tax Legislation concerning taxation of interest

04.03.2015

The Goltsblat BLP Tax Practice advises that, on 20 February 2015, the State Duma adopted a Federal Law (approved by the Federal Council on 25 February 2015) amending the rules concerning taxation of interest. It is to be signed by the Russian President in the near future and will apply after it has been published.

In particular, the law provides for the following:

On the cap on interest income and expenditures

1. The previous law sets an acceptable range of interest caps only with respect to controlled transactions to which a bank is party. This rule will now apply to controlled transactions between any parties. Consequently, a safe harbour is now available for a substantially broader group of taxpayers.

2. The previous law set the following acceptable ranges (safe harbour) with respect to rouble-denominated loans: 75%-180% of the CBR refinancing rate in 2015 and 75%-125% of the CBR refinancing rate from 2016. The new law determines otherwise.

2.1. For controlled related-party transactions: 0%-180% of the CBR key interest rate in 2015. So, in 2015, interest free loans could be granted without any negative tax implications.

2.2. For other controlled transactions (concluded through intermediaries without functions and with offshore companies): from 75% of the CBR refinancing rate to 180% of the CBR key interest rate in 2015.

2.3. From 01 January 2016, 75%-125% of the CBR key interest rate for all controlled transactions.

(!) Nothing has changed with respect to uncontrolled transactions: interest calculated on the basis of the effective rate is recognised as income or expenditure (other than when thin capitalisation rules are applied). Should both grounds exist for recognising the transaction as controlled (for example, affiliation with an offshore debtor), the tougher option is applied.

3. A special procedure is stipulated for determining the cap on interest expense accrued in December 2014. A coefficient of 3.5 instead of 1.8 may be used with respect to the CBR refinancing rate during this particular month.

On thin capitalisation rules with respect to loans issued prior to 01 October 2014.

New rules are introduced to eliminate completely the impact of exchange rate differences on the controlled debt to equity ratio.

From 01 July 2014 to 31 December 2015:

1. When determining controlled debt, the foreign exchange rates set by the CBR as of 01 July 2014 need to be used;

2. When determining equity, no exchange differences resulting from revaluation of foreign currency claims (liabilities) are taken into account.

(!) This amendment does not cover the accounting procedures for exchange rate differences within non-sales income and expenses.

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