Home / Publications / CMS Russia Tax Outlook #17 | January 2011

CMS Russia Tax Outlook #17 | January 2011

Major Amendments to Russian Tax Legislation in Force as from 1 January 2011

10/02/2011


The majority of important changes to tax legislation traditionally come into effect at the beginning of the year, which is connected to the start of the new tax period. This Tax Outlook is aimed at highlighting the major amendments to Russian tax legislation(1) adopted in 2010 and entered into force in 2011.

We believe that several of the amendments will have a substantial impact on your business in 2011 and will likely require changes to the tax strategies as well as tax and accounting policies of your Russian company or even your international group of companies.

IN THIS ISSUE

Changes to corporate profits tax

  • 0% rate applicable to Russian companies’ participation shares (stocks) transfer
  • Tax exemption of shareholders’ contributions aimed at the improvement of the net assets position of LLCs and JSCs
  • 0% rate applicable to dividends received by Russian companies
  • Threshold amounts of interest on debt obligations
  • Depreciable fixed assets

New rules of 0% VAT rate applicability to works and services related to import and export of goods

Social contributions issues

Decrease of transport tax rates and increase of excises on petrol and fuel

Mineral extraction tax increase


Changes to corporate profits tax

0% rate applicable to Russian companies’ participation shares (stocks) transfer

(Federal Law “On amending certain legislative acts of the Russian Federation in respect of dividends’ payment (profit distribution)” No. 409-FZ dated 28 December 2010 (referred to as the “Law” in the present section)

The Law, adopted at the very end of 2010, introduced a 0% corporate profits tax rate for companies (domestic and foreign) transferring (selling or otherwise alienating) stocks or participation shares in the charter capital of Russian companies.

This tax exemption, aimed at attracting further investment in the Russian economy, applies only to the following transactions:

  • a transfer of either stocks or participation shares where the relevant stock or participation share has been held by the taxpayer continuously for more than 5 years; and
  • or stocks only, the relevant stock must either (i) be not listed on any Russian or foreign stock exchanges during the whole period of their possession by the relevant taxpayer, or (ii) be listed on a stock exchange and represent stock of a company operating in the high-technology (innovation) sector(2).

Finally, we note that the tax exemption discussed will apply only to participation shares and stocks acquired after 1 January 2011. Therefore, from a practical point of view, it will be possible to benefit from the exemption only after 1 January 2016.

The amendments introduced by the Law will certainly attract the attention of both Russian and foreign investors, in particular those wishing to create a joint venture in Russia(3).

Tax exemption of shareholders’ contributions aimed at the improvement of the net assets position of LLCs and JSCs

(Federal Law “On amending part II of the Russian Tax Code and several legislative acts of the Russian Federation” No. 395-FZ dated 28 December 2010 (referred to as the “Law” in the present section)

The Law introduced very important amendments for Russian commercial companies (both limited liability and joint-stock) experiencing problems in financing their business activities and reimbursement of current expenses.

Shareholders of Russian operating companies that have negative net asset positions search for possible ways of refinancing the activities of the latter, for instance, by way of contribution to the charter capital of the company, to the property of the company, or the provision of subsidies etc.

Pursuant to the Law, new types of income receivable by Russian commercial companies have been introduced to the list of income not subject to corporate profits taxation. These new types of income include property, property rights as well as non-property rights transferred by the relevant shareholder to the company for the purposes of an increase in the net assets of such company (by way of creating additional capital of the company and (or) its funds (e.g. reserve accounts)).

We note that this exemption will apply notwithstanding the amount of the participation of the relevant shareholder in the capital of the company. Before the adoption of the Law only contributions subject to Russian free financing rules (according to which property (or money) received by a Russian subsidiary from its parent company whose participation interest in such subsidiary exceeds 50% is exempt from taxation in Russia) benefited from the corporate tax exemption.

Therefore, this amendment is of particular importance for Russian operating companies the charter capitals of which are contributed by numerous investors, none of whom hold 50% or more of the shares.

It is equally noteworthy that the wording of the new provision introduced by the Law expressly states that the exemption will apply to a waiver of debt made by parent companies for the benefit of their Russian subsidiaries which is aimed at the improvement of their net assets position, as well as to situations where undistributed profits (dividends) of the companies are not claimed by their shareholders and so are retained by the Russian subsidiaries with the same aim.

Please note that the Law covers relations arising from 1 January 2007.

0% rate applicable to dividends received by Russian companies

(Federal Law “On amending part II of the Tax Code of the Russian Federation and Federal Law “On amending chapters 23 and 25 of the Tax Code of the Russian Federation” and recognising several provisions of the laws of the Russian Federation invalid” No. 368-FZ dated 27 December 2009 (referred to as the “Law” in the present section))

We remind you that the amendments which were adopted more than a year ago, to revise the criteria for application of a 0% corporate profits tax rate to dividends received by Russian companies, have entered into force as of 1 January 2011.

According to the Russian tax rules, dividends received by a Russian company from another Russian company or from a foreign legal entity are in principle taxed at a flat rate of 9%. However, dividends could previously be exempt from Russian corporate profits tax if the following criteria were met:

  • the recipient of dividends held at least 50% of the charter capital of the dividends' payer or owned depository receipts entitling it to receive at least 50% of the amount of paid dividends;
  • the share or depository receipts had been owned for at least 365 days on the day dividends were declared; and
  • the value of the investment was at least RUB 500 mln.

According to the Law, the requirement of a minimum investment value of RUB 500 mln has been abolished. This change of the dividends’ taxation regime is of particular importance for small and medium-sized companies and offers opportunities for Russian companies having subsidiaries in other countries.

Please note that the Law covers relations arising from 1 January 2010, i.e. dividends arising on profits in 2010 onwards.

Threshold amounts of interest on debt obligations

(Federal Law “On the modifications to part I and part II of the Russian Tax Code and other legislative acts of the Russian Federation, as well as on recognition of certain legislative acts of the Russian Federation as ceased to be in force in relation to settlement of arrears in taxes, duties, fines and penalties and certain other questions of tax management” No. 229-FZ dated 27 July 2010 (referred to as the “Law” in the present section))

As you may know, certain expenses incurred by companies are subject to limitations on tax deductibility for corporate profits tax purposes according to Russian tax legislation. One such limitation relates to interest on loans and other borrowings charged at a rate which is more than 20% above the average rate charged for comparable loans made in the same quarter.

In the absence of comparable data on loan interest rates, or at the taxpayer’s choice, specific thresholds fixed in the Russian Tax Code apply. During the last year or so, such thresholds were being systematically modified (new temporary “anti-crisis” rules were being introduced), which resulted in the appearance of numerous rules depending not only on the period of interest accrual, but also the time period in which the relevant loan was obtained.

The Law has also introduced certain new temporary rules applicable in 2011 and 2012.

For your convenience and in order to avoid any confusion in your accounting, we have summed up the rules fixing thresholds for deductible interest on debt obligations in the table below:

For more information, please refer to our CMS Tax Outlook No. 14 of June-July 2010 “Significant changes introduced to the Russian Tax Code”.

Depreciable fixed assets

(Federal Law “On amending part I and part II of the Russian Tax Code and other legislative acts of the Russian Federation, as well as on recognition of certain legislative acts of the Russian Federation as ceased to be in force in relation to settlement of arrears in taxes, duties, fines and penalties and certain other questions of tax management” No. 229-FZ dated 27 July 2010 (referred to as the “Law” in the present section))

According to the Law, the cost of property recognised for corporate profits tax purposes as depreciable fixed assets must amount to at least RUB 40,000 (instead of the previous amount of RUB 20,000).

Please note that this new threshold will apply only to items acquired by companies after 1 January 2011, and, therefore, property acquired before such date will remain to be treated as a depreciable fixed asset even if its cost is in the range between RUB 20,000 and RUB 40,000.

New rules of 0% VAT rate applicability to works and services related to import and export of goods

(Federal Law “On amending chapter 21 of the part II of the Tax Code of the Russian Federation” No. 309-FZ dated 27 November 2010 (referred to as the “Law” in the present section))

In general, according to the tax rules in force, a 0% VAT rate is applicable to both transportation of exported and imported goods and related works and services.

However, for years practical application of this legal rule has caused problems for taxpayers due to various interpretations of the relevant provisions of the Tax Code and an absence of an exhaustive list of works and services subject to the tax exemption in question (cf. our Tax Outlook No. 10 of February 2010 “Value-added tax on transportation and related services: 0% or 18%).

The Law aims to solve these problems by introducing a clear exhaustive list of works and services which are subject to 0% VAT rate. Such list now includes:

  • international transportation services (including forwarding (transport expedition) services rendered on the basis of a freight forwarding agreement);
  • works and services executed by Russian pipeline transportation companies with respect to oil and oil products (including transportation of oil and oil products within the Russian territory to a point of transhipment for export from Russia and transhipment of exported oil and oil products) on the basis of specific agreements with the beneficiaries of such works and services;
  • services of natural gas transportation by pipeline provided that they are rendered by the owner of gas-main pipelines according to a separate agreement;
  • services provided by the company managing the unified national electric grid with respect to electric power transmission to the electric power systems of foreign companies (where the relevant agreement is concluded with a Russian entity); and
  • processing of goods subject to the customs regime of processing on the Russian territory; etc.

Please note that specific sets of documentation are now required for each particular case of 0% VAT rate application. These requirements are in general similar to the ones currently in force, however, specific new provisions are now set for the confirmation of the right to apply 0% VAT rate in case of transportation of goods within the territory of the Customs Union.

The above amendments should now allow the 0% VAT rate for companies involved in transportation and related services to be applied more effectively as well as enabling disputes with their contractors and customs and tax authorities to be avoided.

Social contributions issues

(Federal Law “On amending article 58 of the Federal Law “On Insurance Contributions to the Pension Fund, Social Security Fund, Mandatory Medical Insurance Fund and Territorial Mandatory Medical Insurance Funds” and article 33 of the Federal Law “On obligatory medical insurance in the Russian Federation” No. 432-FZ dated 28 December 2010 (referred to as the “Law” in the present section))

On 1 January 2010 new Russian tax legislation entered into force, replacing the unified social tax (UST) with insurance contributions payable to four separate state non-budgetary funds. According to this new legislation, the previous UST regressive scale has been cancelled and the general tax rate has been increased from 26% to 34% for such part of an employee’s remuneration as is below RUB 415,000.

From 1 January 2010 to 31 December 2010 a transitional period operated during which the 26% rate applied to any pay below RUB 415,000.

Therefore, we remind you that the transitional period has now come to an end, and the 34% rate will apply to remuneration below the fixed salary limit starting from 1 January 2011. Please also note that for 2011 the said limit has been increased from RUB 415,000 to RUB 463,000.

Additionally, some tax privileges under the Tax Code have been prolonged for specific companies. Pursuant to the Law, companies operating the simplified taxation system (in certain fields of activities, as listed by the Law) will pay insurance contributions at a general rate of 24% in 2011 (their position has, however, became worse compared to the transitional period of 2010, when they were entitled to pay insurance contributions at the flat rate of 14%).

Decrease of transport tax rates and increase of excises on petrol and fuel

(Federal Law “On amending part I and part II of the Russian Tax Code and the Law of the Russian Federation “On tax authorities in the Russian Federation” No. 306-FZ dated 27 November 2010)

(Federal Law “On amending articles 342 and 361 of the second part of the Tax Code of the Russian Federation” No. 307-FZ dated 27 November 2010)

Transport tax issues were subject to hot debate in 2009, the result of which was the granting to regional authorities of a right to increase/decrease transport tax rates by up to 10 times (instead of the former 5 times) with the possibility to establish variable rates according to the age and/or emission class of vehicles.

According to the Russian Tax Code, transport tax is a regional tax assessed on registered transportation vehicles and payable by the registered owner. The procedure for collection and filing of the relevant tax return is established regionally. The current transport tax rates were introduced to the Russian Tax Code in 2003 and depend primarily on a vehicle's engine capacity.

As the decision adopted in 2009 was highly unpopular, in 2010 the transport tax rates for the majority of vehicles were finally reduced by half. However, the right of regional authorities to increase/decrease transport tax rates fixed by the Tax Code by up to 10 times was preserved.

On the other hand, this improvement in the position of car owners is cancelled out by a significant increase of excises fixed for petrol, diesel fuel and motor oils. The minimum increase is 30%, and the maximum increase amounts to 200%.

Also please note that as from 2011 the excise rates depend directly on the class of petrol and fuel (instead of as previously the type of fuel and its octane number).

Mineral extraction tax increase

(Federal Law “On amending articles 342 and 361 of the part II of the Tax Code of the Russian Federation” No. 307-FZ dated 27 November 2010 (referred to as the “Law” in the present section))

According to the Law, the mineral extraction tax rates for oil and combustible natural gas will increase yearly as from 2011 due to the increase in inflation, as follows:


Notes:
1) And principally to the Russian Tax Code (Part I No. 146-FZ dated 31 July 1998 and Part II No. 117-FZ dated 5 August 2000) (the “Tax Code”).

2) To be defined by the Government of the Russian Federation.

3) In addition, please note that the same exemption, but with respect to the personal income tax, will apply to the transfer of stocks or participation shares by individuals subject to the same conditions as those discussed.

4) 7.75% as of 1 June 2010.

5) In case no more temporary rules will be adopted.

6) Please note that the effective rate for oil is calculated by multiplying the rate stated in the table by two coefficients fixed in the Russian Tax Code.


Dominique Tissot
Anastasia Prozor

Authors

Tissot Dominique
Dominique Tissot
Partner
Moscow
Anastasia Prozor