Global Tax Alert | 7 February 2014

Russia enacts major changes to the Profits Tax treatment of interest

  • Share

Executive summary

Significant amendments to the profits tax treatment of interest income and expenses were enacted in Federal Law No. 420-FZ of 28 December 2013 (the Law).1

The general limits on the deductibility of interest in Article 269 of the Tax Code have been replaced with provisions relevant to controlled debts only. The new provisions include rules as to amounts to be recognized as interest income, whereas previously the relevant clauses concerned only the amounts of interest to be recognized as an expense. The thin capitalization rules in clauses 2 to 4 of this article are unchanged.

The amendments to Article 269 enter into force not earlier than one month from the date of official publication of the Law and not earlier than the first day of the next tax period. The Law was officially published on the Official Internet Portal of Legal Information ( on 30 December 2013. As the tax period for profits tax is a calendar year the new wording applies from 1 January 2015. Investors will need to reassess projected cash flow in order to determine the economic impact of the changes and whether previous investment decisions should be revised.

The provisions relate to interest on debt obligations, defined as credits, trade and commercial credits, loans, bank deposits, bank accounts or other borrowings, irrespective of the form in which they are arranged.

Detailed discussion

Interaction with the transfer pricing rules

There was hope that the inclusion of interest within the scope of the transfer pricing rules (effective from 1 January 2012) would be closely followed by the abolition of some or all of the limits on deductions under Article 269. This expectation was based on the principle that interest which is at an arm's-length rate should be deductible in full and therefore the only limits needed are those provided by the transfer pricing rules,2 whereby adjustments are made to the tax base if prices used in controlled transactions do not conform to market prices. The new wording of Article 269 effective from next January is a step in this direction, specifying that in the case of transactions recognized as controlled under the transfer pricing rules, those rules should be taken into account in determining the interest recognized for profits tax purposes except as otherwise established by Article 269.

An exception to this general rule specifically envisaged by the new provisions is where one of the parties to a controlled transaction is a bank. In this case:

  • The lender will have the right to recognize interest calculated on the debt obligation at the actual rate as income if that rate exceeds the lowest value of the range of threshold values which is established by clause 1.2 of Article 269 (see below), whereas
  • The borrower will have the right to recognize interest calculated on the debt obligation at the actual rate as an expense if that rate is lower than the highest value of this same range of threshold values.

In all other cases of controlled transactions to which one of the parties is a bank, the interest recognized by a taxpayer on indebtedness will be determined with account taken of the transfer pricing provisions.

Interest not disallowed under the transfer pricing rules may be non-deductible under the thin capitalization rules. This is not a change; the new wording of paragraph three of clause 1 merely confirms the fact that the application of the transfer pricing rules to interest with effect from 1 January 2012 was in addition to rather than in place of the application of the thin capitalization rules.

Ranges of threshold values established by clause 1.2

Currently clauses 1 and 1.1 of Article 269 establish only upper limits for interest deductions.3 Interest is fully deductible (subject to any amounts disallowed based on other provisions of the Tax Code) provided that the amount of interest incurred by the taxpayer in respect of the relevant debt obligation does not deviate significantly from the average level of interest charged on debt obligations issued in the

same quarter (month – for taxpayers which pay profits tax monthly based on profit actually earned) under comparable conditions. In the absence of debt obligations issued in the same period under comparable conditions or at the taxpayer's choice, there are two limits, one for debt obligations arranged in rubles and another for all other cases. The limits in effect in 2014 cap deductions for interest on ruble debt at 180% of the Central Bank Refinancing rate (the CBR rate) and deductions for other interest at 80% of the CBR rate.

From 2015 there are to be several different threshold ranges, the upper limit capping interest deductions and the lower limit determining the minimum interest income which may be recognized for tax purposes by a creditor for debt subject to these rules. Individual threshold ranges are provided for debt arranged in each of five foreign currencies, based on reference rates relevant to the currency in question rather than the CBR rate. The thresholds for debt in euros, for example, are set by reference to the European interbank offered rate (EURIBOR) in euros. Thresholds for loans denominated in other currencies are set by reference to the LIBOR rate in US dollars.

Currency of Indebtedness

Lower threshold

Upper threshold

Rubles in 2015

75% of the CBR rate

180% of the CBR rate

Rubles from 1 January 2016

75% of the CBR rate

125% of the CBR rate

Euro (€)

EURIBOR (€) + 4 percentage points

EURIBOR (€) + 7 percentage points

Chinese yuan (CNY)

SHIBOR (CNY) + 4 percentage points

SHIBOR (CNY) + 7 percentage points

Pounds sterling (GBP)

LIBOR (GBP) + 4 percentage points

LIBOR (GBP) + 7 percentage points

Swiss francs (CHF)

LIBOR(CHF) + 2 percentage points

LIBOR(CHF) + 5 percentage points

Japanese yen (JPY)

LIBOR (JPY) + 2 percentage points

LIBOR (JPY) + 5 percentage points


LIBOR (USD) + 4 percentage points

LIBOR (USD) + 7 percentage points

If the interest rate is fixed and does not change throughout the term of a debt obligation the relevant reference rate (the CBR rate, EURIBOR, etc.) will be that in effect at the date on which monetary resources or other assets were received in the form of a debt obligation. In other cases the corresponding rate which is effective on the date interest is recognized for profits tax purposes should be used to calculate the threshold at that date. For non-ruble loans the reference rate for the term most closely corresponding to the term of the debt obligation on which the interest has arisen should be used to calculate the thresholds.

Recognition of interest in tax accounts

Article 328 Clause 4 has been amended to clarify the rules for the recognition of interest by taxpayers who apply the accrual basis. This is a welcome development. There have been a few cases in recent years in which the Supreme Arbitration Court (the SAC) and lower courts have supported the tax authorities in denying the deduction of interest when the loan agreement provides that repayment of both interest and the loan principal is not to be made until the end of the loan's term. Such cases have created uncertainty as to when taxpayers may recognize interest on loans where payment of interest is deferred. Ruling No. 11200/09 of the Presidium of the SAC of 24 November 2009 (commonly referred to as the SaNiVa case) was the first such decision by the SAC. The SAC subsequently issued two further decisions along similar lines: Determination No. 10178/12 of 1 October 2012 and Determination No. VAS-6608/13 of 5 June 2013.

Under the new wording of the third paragraph of Article 328, interest incurred on loans whose term spans more than one accounting (tax) period should be recognized on a monthly basis irrespective of the payment date which is stipulated by the loan agreement if the taxpayer applies the accruals basis for recognizing income and expenses. This wording is effective from 1 January 2014. This is positive for the many taxpayers with long-term loans under which payment of interest is deferred until the borrower's cash flow from operations is sufficient to cover the payments.


1. A broader overview of the tax amendments enacted in the law, which also includes numerous measures relevant to participants in the securities market, can be found in an EY Russian Tax Alert of 27 December 2013.$FILE/EY-Tax-Alert-27-December-2013-Eng.pdf

2. In Section V.1 of the Tax Code.

3. Recently extended to apply until 31 December 2014 by Federal Law No. 306-FZ of 2 November 2013.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V. branch in Moscow
  • Maureen O'Donoghue
    +7 495 228 3670
Ernst & Young LLP, Russian Tax Desk, New York
  • Julia Samoletova
    +1 212 773 8088

EYG no. CM4164