Company foundation in Russia – Tax Aspects
Financing through shareholder loans in Russia
Similar to other countries, Russia has thin capitalization rules. These rules limit the amount of interest on shareholder loans for tax deductibility purposes. The calculation is somewhat complex, but to approximate, the loan amount cannot be more than three times the equity of the company. A foreign-owned company in Russia cannot deduct interest paid on loans exceeding this limit. Independent from this, the interest rate has to reflect market conditions. In case a company does not meet the thin capitalization requirements at the end of the relevant reporting period, the interest payment is then considered as a dividend, which means a tax of 15% on the interest paid has to be withheld. Some Double Taxation Treaties also allow a reduced rate.
Loss carry forward in Russia
In principle, any tax losses may be carried forward for up to 10 years. It is possible to offset current profits completely with carried forward losses. Nevertheless in accounting (tax) periods from 1 January 2017 to 31 December 2020, the tax base for tax for the current accounting (tax) period may not be reduced by losses made in prior tax periods by more than 50 per cent. However, the losses have to be supported by sufficient documentation.
Impact of ruble devaluation on net assets in Russia
2014 was marked by high volatility of the Ruble to the Euro and Dollar. This situation could change after 2015, but currently many foreign companies are facing the fact that devaluation has negatively reflected on their financial statements and net assets. Why did this happen? Many subsidiaries handle import of goods and equipment to Russia, and very often have long term dates for payment for such supply agreements. Also, subsidiaries can receive funds as loans from a parent company. Usually, these liabilities are in foreign currency and are revalued in rubles on every reporting date. For comparison purposes, the exchange rate of the Ruble fluctuated this way for the previous several years:
- 44 RUB / EUR as of December 31, 2013
- 68 RUB / EUR as of December 31, 2014
- 80 RUB / EUR as of December 31, 2015
- 69 RUB /EUR as of December 31, 2017
- 79.5 RUB /EUR as of December 31, 2018
The loss of revaluation of liabilities in foreign currency is reflected in the profit and loss statement and influences the calculation of a company’s net assets.
VAT refund claims in Russia
If VAT paid through purchases and “received services” is higher than the VAT payable on revenues, tax authorities may conduct a two month desk tax audit. Afterwards, the difference between input and output VAT can generally be returned to the company’s bank account or offset against further VAT liability in future periods. If the tax authorities refuse to refund the input VAT, and a suit is filed for reimbursement, the taxpayer usually wins. But, it often requires legal procedures through three levels of jurisdiction before the tax authority proceeds with payment.