Russia is taking measures to support business
Living in the times of uncertainty makes both Russian and multinational companies think about their future in the Russian market. Despite the fact that previous years of cooperation were productive, the pressure is too intensive and it makes businesses look for alternatives. Those who are interested in keeping their business may apply for support. Also, some measures of technical nature that are needed to align taxation principles with the market situation were announced.
The measures already in force: inspections are on hold & negative net assets is temporary not an issue Federal law 46-FZ dated 08.03.2022, implemented a number of changes. Many of these changes are specific for local businesses, e.g., the refinement of criteria in the Crimean special economic zone. However, the law provides the reliefs which can be beneficial for foreign business as well without risks to face secondary sanctions.
In particular, scheduled inspections will not be carried out until 31.12.2022 in relation to, for example, licensed activities carried out by SMEs (1), certain health care and other activities.
Also in 2022, the well-known issue with Russian legal entities (“OOOs” and “AOs”) becomes irrelevant, i.e. if the company’s net assets are less than its charter capital at the end of the financial year (FY), following the second FY or each subsequent FY, at the end of which the value of the net assets of a legal entity is less than its charter capital, the company temporarily will not be obliged to make one of the following decisions:
- to reduce its charter capital to the amount not exceeding the value of its net assets;
- to liquidate.
In the absence of access to funding from abroad and given the circumstances of an inevitable drop in income due to the breakdown of supply chains and a number of technological problems resulting from the unilateral termination of relations, this initiative seems right, especially in the context of the established court practice. Nevertheless, we recommend making sure that there remains a realistic possibility of resuming operations in Russia, as the ambiguous situation with the bankruptcy mechanism is fraught with new implications and additional obligations.
The expected measures to be soon implemented
The draft law is already passed by the State Duma in the first reading. It will most probably provide a relief for business considering many tax aspects, i.e. in taxation itself and tax control.
Additional tax incentives for IT companies
The package of incentives for IT companies was implemented earlier, but under the new circumstances a new turn of stimulation may result in additional reduction of corporate income tax rate from 3% to 0% for the periods from 2022 to 2024.
For some time now, there has been a growth in new companies gaining accreditation which is required for implementation of tax incentives. It is important to bear in mind that companies with accreditation may apply for a number of additional benefits in terms of reduced rates of social contributions, subject to compliance with revenue and employee number regulations (2).
Extra measures were promised for the companies and IT specialists to prevent their leaving of Russia.
Monthly payments of corporate income tax (CIT) based on actual profit received
During 2022, the taxpayer will have the right to switch to advance CIT payments based on actual results. However, this should be provided in an accounting policy.
Currency fluctuations to be mitigated for the tax purposes
Recognition of currency exchange differences for the CIT purposes arising in 2022-2024 and 2023-2024, respectively, the value of which is denominated in foreign currencies, is made as of the date of termination (performance) of the relevant claims (liabilities). The exception to this is advances.
This is a positive development, which, in general, is also aimed at considering the economic circumstances in which taxpayers find themselves when determining the actual results of their business.
It must be understood that unrealized foreign exchange rate difference will not affect the tax base for some time, which is important to consider when determining the amount of the income tax payable.
Intra-group loans: new “old” safe harbor ranges & fixed exchange rate for the purpose of the thin capitalisation rules
The attractive safe harbors for interest rates on loans will be extended again until the end of 2023.
The changes which were in force during the pandemic with regard to the safe harbors of interest rates on loans will again be in force. For example, for foreign trade loans in foreign currencies, a rate range of 0% to 7% plus an appropriate floating rate would be considered market-related, i.e. the granting of interest-free loans should not give rise to questions by the tax authorities. It is recommended to pay attention to this when there is a need to move funds around in order to preserve the ability of the Russian part of the international groups of companies to settle, subject to the restrictions imposed under the special economic measures on a number of foreign countries.
As for the loans which were received from foreign companies, it is expected that forgiveness of liabilities deriving from loan agreements will not be recognized as income. It applies to the loans received from foreign organizations before 01.03.2022. Thus, loan obligations can be terminated without negative CIT consequences for the Russian borrower. It is not specified if it applies to loan interests or only to the debt, but we assume that it will be applied to both.
As for the thin capitalization rules, the proposed change is to fix the exchange rate for calculation of amount of interests which should be treated as interest for tax purposes. This measure is applied again similar to the earlier applied one during the period of sharp changes in the exchange rate of the ruble against world currencies.
The exchange rate is expected to be fixed as of 01.02.2022, i.e. at RUB 77.4702 per USD and RUB 86.5032 per EUR (3).
The restrictions are expected to apply for the periods from 2022 and 2023.
In effect, this means that the ruble value of the debt will not significantly exceed the taxpayer’s equity when calculated, i.e. the company does not run the risk that some of its expenses will be recognized as non-deductible for CIT purposes.
Interests for late payment of taxes to be reduced twice
It is expected that the formula previously applicable to arrears not exceeding 30 days will be applicable for the period from 2022 to 2023, i.e. the penalty rate for entities is assumed to be 1/300 of the refinancing rate without dividing by arrears of fewer than or over 30 days.
An increase in the key rate in order to contain the rate of inflation has affected a number of parameters stipulated in the tax legislation and has resulted in penalties calculated at a rate of approx. 46% per year. The new approach application avoids a disproportionate increase in penalties. New penalty rate is expected to be at the level of 24%.
Zero VAT rate
A 0% VAT rate is expected to be applied in relation to the services involving leasing, use and other rights of a tourist industry facility and services involving the provision of temporary accommodation in hotels and other accommodation facilities. This is a temporary measure. It will last for 20 tax periods (quarters) after the objects are put into operation or starting from the end of their reconstruction. The procedure for confirming the right to apply the zero rate and the moment of determining the tax base (the last day of the tax period) will also be clarified.
For companies specializing in domestic tourism, this initiative provides new opportunities to restructure their business which may not be viable in the current circumstances.
Taxation of property: new thresholds for “expensive” cars & freeze of the cadastral value
The figures for calculating transport tax are expected to be clarified to avoid unreasonable inclusion of expensive vehicles the value of which has increased in line with the exchange rate. The step-up coefficient in the amount of 3 will be applied to vehicles with the cost of more than RUB 10 million. Currently step up coefficient is applied for the vehicles with the cost of more than RUB 3 million.
The cadastral value of property for which cadastral value is used as the basis for property tax calculation is expected to be fixed at the level that was determined as of 01.02.2022. For example, this is expected to work for business and shopping centers, property of foreign companies, which are not operating in Russia through a permanent establishment.
Personal income tax
Taxation of interest on deposits: exemption in 2021 and 2022 and changes to the mechanism for calculating the non-taxable part of income may be revised. The formula for calculating the non-taxable amount of interest is expected to be changed: the maximum value of the CBR’s key rate that was in effect as of the 1st day of each month is expected to be used.
This is going to be a consistent step in an attempt to maintain a normal level of liquidity in the banking system. At the same time, the mechanism itself becomes more responsive to market developments and the results of government regulation.
The benefit in kind received in 2022 and 2023 from interest savings on borrowed funds from employers may also be exempt from the Russian PIT.
Also, according to the draft law, following numerous restrictions and the risk to freeze the assets of those persons, who were controlling persons and who can become owners of Russian assets without any proxy and this income from the obtained assets most probably will not be taxable with the Russian PIT.
Position of the Federal Tax Service
The Tax Service decided to stop new and current bankruptcy procedures, new blocking of bank accounts and currency control related audits except for those forms of currency control implemented temporary in order to prevent dramatic fall of the Russian ruble.
Also, transfer pricing related clarifications were provided. It is stated that export of goods with discounts obviously influencing financial result should be considered additionally in case of special audit of transfer pricing to make sure that all market conditions are considered to estimate properly, if results are at the arm’s length level. These clarifications state that this is for exporters, but from the context we expect that this will also be applicable for trade with commodities and other resources. At the same time, we should admit that basically the situation in the market should always be considered.
(1) Small and medium-sized enterprises (SMEs), as well as microenterprises, include organizations where at least 51% of the authorized capital belongs to individuals, organizations, subjects of SMEs.
The share of organizations not belonging to the SME should not exceed 49%, and the share of the state or non-profit organizations should not exceed 25%. In addition, restrictions must be observed on the size of revenues and the number of employees:
- • Revenue for microenterprises should not exceed RUB 120 million and the number of employees should not exceed 15.
- • Revenue for small enterprises should not exceed RUB 800 million, and the number of employees should not exceed 100.
- • Revenues for medium-sized enterprises should not exceed RUB 2 billion, and the number of employees should not exceed 250.
(2) Налоговый маневр в IT сфере
(3) Официальные курсы валют на заданную дату, устанавливаемые ежедневно
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