Tax Developments: Mutual Agreement Procedure and More
Legal Update No 708
Bryan Cave Leighton Paisner (Russia) LLP (formerly Goltsblat BLP in Russia) advises that, on 29 September 2019, the Russian President signed Law No. 325-FZ (the Law) introducing sweeping changes into the Russian Tax Code (the Tax Code). These are:
Tax Loss Carry-Forward
For article 283 of the Tax Code, the Law sets a new criterion of the “main purpose” of reorganisation. For instance, tax authorities may disallow a reorganised company’s tax losses to be cascaded to its legal successor if they find that this is the main purpose of the reorganisation. Even though the Law offers no special rules for determining the primary purpose of the reorganisation, we believe law enforcement will take an approach based on Resolution of the Russian Supreme Commercial Court Plenum No. 43 dated 12 October 2006 and article No. 54.1 of the Tax Code.
Moreover, the restriction on use, for tax base reduction purposes, of loss carry-forwards, set at 50% of the current year tax base has now been extended to the end of 2021.
Mutual Agreement Procedure
Added to the Tax Code for the first time ever is a general mechanism for conducting a mutual agreement procedure (MAP) under double taxation treaties (DTT). Specifically, the Russian Finance Ministry may set deadlines and the procedure for filing and considering MAP applications1 while a MAP completion mechanism will be governed by a specific DTT.
Regrettably, tax collection is not suspended when a MAP is under way. On the other hand, the deadline for filing tax offset (refund) applications and for making MAP-based symmetric adjustments has been extended.
We believe that, since the key MAP clauses are now in the Tax Code, this might help in making the above tax dispute resolution mechanism more popular in Russia.
A Controlled Foreign Company’s (CFC) revenues from Russian entities on which withholding tax is charged will now be disregarded for CFC profit tax purposes if the controlling party is the beneficial owner of these revenues. This rule will cover interest, royalty payments and other revenues listed in clause 1, article 309 of the Tax Code while it previously applied only to dividends. Moreover, if a CFC receives income from sale of shares in a company, it may be reduced by the CFC’s costs incurred in forming the company’s assets (capital).
Corporate Property Tax
The list of taxable assets has been extended considerably. For instance, from 1 January 2020, this tax will apply not only to fixed assets but also to any Russia-based real estate, with the tax base determined as the cadastral value. Specifically, assets listed as properties subject to individual property tax will now also be so taxed.
Even so, according to the Russian Finance Ministry, these changes should not trigger any major increase in company tax burdens, since they merely mean cadastral value-based taxation of assets is transferred from individuals to companies.
Taxation of International Organisations
International organisations created under international treaties signed by the Russian Federation will no longer have to supply confirmation of their tax residence status for DTT application purposes, while previously they were subject to the general rule. On the other hand, they are now required to prove their beneficial ownership.
The Law specifies that any PIT unlawfully not withheld so collected from the tax agent does not constitute taxable income of individuals. The provision prohibiting payment of PIT at tax agents’ expense has been amended to exclude additional tax charges (collection) for taxes the tax agent has unlawfully omitted to withhold.
Furthermore, it is now permitted to use a cost base of documented costs, i.e., amounts on which PIT has been charged and paid when property is received on a free-of-charge basis or for partial payment upon its sale, or documented costs of a donor/testator.
The Law also introduces various other changes to the Tax Code, specifically in relation to investment projects, the procedure for interaction between tax authorities and individuals through multifunctional service centres; foreigners’ tax registration, real estate taxation, etc.
Most of the above developments will come into force on 1 January 2020 while other effective dates are prescribed for some and others will even have retroactive effect. For instance, the new approach to CFC revenue accounting will apply to tax periods beginning from 2018, while the changes affecting use, for PIT purposes, of a cost base upon sale of property received on a free-of-charge basis or for partial payment, will take effect on 1 January 2019.
1 The deadlines and procedure for considering MAP applications are currently set by the Russian Finance Ministry’s MAP Guidelines dated 30 January 2019, which are available on the Ministry’s official web-site.
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