Lately thin capitalisation rules have been in the news in the Russian media on and off. In spite of this and the significant amendments made to Article 269 of the Russian Tax Code over a year or so ago, the key issue of how to account for interest payable on loans from foreign sister companies remains legally unresolved. The uncertainty that has arisen since the Severniy Kuzbass case about four years ago, was about to be resolved when the relevant bill was unexpectedly “highjacked” to introduce anti-crisis measures instead, in the form of a change in the tax treatment of interest.
A bill that was originally intended to fill the gap in the thin capitalisation rules was submitted to the State Duma in December 2014. Against all odds, the text was completely redrafted ahead of the bill’s third reading, and the provisions on the treatment of loans from foreign sister companies were reassigned to a new bill, which means that the provisions need to go through the entire legislative procedure one more time.
The final version of the bill (which came into force on 9 March 2015 as Federal Law No. 32-FZ) therefore brings other important changes that affect the tax treatment of interest. Overall, the new rules can be described as an anti-crisis measure substantially improving the situation of taxpayers.
For the period from 1 July 2014 to 31 December 2015, the controlled debt amount within the meaning of Article 269(2) of the Tax Code as well as the company's equity must be calculated by applying the rate of the Russian Central Bank as at the end of the reporting period subject to a cap of the official exchange rate applicable on 1 July 2014 (i.e. 46.1827 for EUR/RUB and 33.8434 for USD/RUB). Due to the sharp devaluation of the rouble, without such a provision, loans that were previously compliant with the thin capitalisation 3:1 debt-to-equity ratio requirement would unexpectedly become non-compliant, thereby preventing the deductibility of a significant amount of interest.
Federal Law No. 32-FZ contains other technical norms for the calculation and accounting of interest which are equally favourable to businesses. For example, the new law extends the rules for the determination of the market value of interest rate, which were previously only applicable to bank loans, to all controlled transactions. This change brings some clarity for those who need to prepare transfer pricing documentation.
Ultimately, it will give companies some comfort to see that the Russian authorities are beginning to implement practical support measures in the area of tax. Regrettably this positive step was taken to the detriment of the resolution of the question of how to account for interest payable on loans from foreign sister companies, which has been postponed indefinitely.
Published in Le Courrier de Russie No. 277.