Russia | Tax events which you should be aware of in Q3

In this newsletter we are informing you about the latest changes in the field of taxation, which are important for your business in Russia:

  • «Thin capitalization» rules: important to know when the interest was accrued
  • Work out of the question regarding due diligence when selecting a contractor:
  1. Recommendations of the Federal Tax Service for regional inspectorates in regard to the unjustified tax benefits
  2. Court: Arrangement of the duty to pay taxes to another person
  • Court: Requalifying of the services of individual entrepreneurs to labour relations
  • News in the VAT on electronic services

«Thin capitalization» rules: important to know when the interest was accrued

The Ministry of Finance has decided that it is required to determine whether a debt is controlled or not at the moment of the interest accrue, rather than its payment. In the specific case the company had a controlled debt during a year on a loan, where the interest rate limit for “thin capitalization” was not calculated. At the moment of the interest payment it stopped being controlled, and the company did not apply “thin capitalization” rules.
However, the consequences are the following: the company is obliged to withhold the tax at the source while paying the interest, which exceeds the accrued limit, to the foreign company at the rate of dividends.

At the same time, when taxing the income of a foreign organization it is possible to consider the provisions of the treaty on double taxation avoidance with the state the resident of which a foreign organization is (letter from the Ministry of Finance of the Russian Federation as of 14.03.2017 N 03-08-05/14396).

We will be glad to render you the services regarding the analysis of tax implications of your instruments of international financing.

Work out of the question regarding due diligence when selecting a contractor

Recommendations of the Federal Tax Service for regional inspectorates in regard to the unjustified tax benefits

One of the latest letters from FTS as of 23.03.2017 № ЕД-5-9/547@, addressed to subordinate tax authorities directly indicates the impossibility of the formal approach to the proof of the lack of due diligence by the taxpayer, if contractors of second and third link have signs of bad faith. That means, in order to bring to responsibility, tax authority must collect the evidence of a taxpayer’s negligence, rather than simply refer to the fact of the contractors’ unreliability, as it often happens based on the results of checks.
At the same time, the letter focuses on economic feasibility of a contractor choosing. The above-mentioned letter contains the features that allow you to define an unreliable contractor, as well as the evidence of the adequacy of such a choice. On the whole, these clarifications can be seen as a positive step in the application of the unjustified tax benefits concept by the tax authorities.

Court: Arrangement of the duty to pay taxes to another person

The court confirmed the decision of the tax authority, in accordance with which the taxpayer and its contractors carried out concerted actions aimed solely at obtaining the unjustified tax benefit by the taxpayer.
In the specific case the supplier, who did not pay VAT due to the application of the simplified tax regime, sold products to the buyer, who paid VAT, and who in his turn, handed over the products upon the commission agreement to the agent, who was not obliged to pay VAT on goods, but only in the cost of services (commission). In accordance with the terms of the transaction, the main burden of the VAT had to be borne by the buyer, but he did not fulfill his liability to pay taxes.
A buyer was recognized as the formal participant in the transaction due to his absence of personnel, a warehouse and a no other transactions except for the mentioned above, the transaction itself was requalified to the purchase and sale transaction with additional taxes calculation to the agent from selling products to third parties.

As a result, the agent suffered from the dishonesty of the contractor (definition of the Supreme Court of the Russian Federation as of 31.01.2017 N 307-КГ16-19481).

If you want to learn more about how you can justify to the tax authority the choice of any contractual partner, please contact us. We will be glad to render you services on your contractors’ checks regarding your present and future business partners

Court: Requalifying of the services of individual entrepreneurs to labour relations

In the specific case the services rendered by individual entrepreneurs to the taxpayer were requalified by the court to labour relations on the basis of the following circumstances:

  • there was just one employee in the company the General Director
  • the services and payments to the individual entrepreneurs were regular
  • in labour agreements there were indicated the employees’ positions, working day length and lunch break
  • working places were located on the territory of the company
  • the individual entrepreneurs did not have any other clients.

It is should be mentioned that the existing practice makes the arrangement of relations with the employees as individual entrepreneurs vulnerable, owing to the high risks of additional tax assessment (definition of the Supreme Court of the Russian Federation as of 27.02.2017 N 302-KГ17-382).

If you engage employees, including individual entrepreneurs, then you may require to assess your risks or revise your existing structure. We will be glad to offer you our services for analysis and preparation of proposals to reduce the identified risks.

News in the VAT on electronic services

The Ministry of Finance issued the clarification regarding the VAT on electronic services rendered to foreign organizations. In accordance with the explanations, the services on provision to use the database by the Internet under a license agreement from a foreign supplier are not subject to VAT (letter from the Ministry of Finance of the Russian Federation as of 26.04.2017 N 03-03-06/1/25101).
Thus, it is possible to use the bases of foreign group of companies from the office in Russia and exempt these services from VAT upon the availability of the license agreement.
Currently, the tax authorities conduct consultations with the leading banks of Russia regarding the possibility to entrust banks with the authority of tax agents in part of VAT withhold on the services provided by foreign companies to individuals on the territory of Russia.
In case this initiative is implemented the VAT will be withheld by banks while performing the instructions to pay for the services of a foreign supplier.

We would like to remind you that from 2017 there have been introduced the changes into the Tax Code in accordance with which the electronic services which are rendered on the territory of Russia are subject to VAT.

Learn about it in detail in Newsletter Changes in the Russian legislation which may influence your accounting and tax planning  as of 13 February 2017 or address our experts.

Should you have any questions or require our help, contact our experts:

Alex Stolarsky
Director for Legal, Compliance and Tax
+7 / 495 / 956 55 57
Sergey Leoshko
Head of Tax Department
+7 / 495 / 956 55 57
Olga Lux
Tax Expert
+7 / 812 / 458 58 00
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