Global Tax Alert | 14 June 2013
Russia's Ministry of Finance issues guidance on the deduction of interest on loans to finance investment in a subsidiary
Russia's Ministry of Finance has long expressed the view that interest on loans received by Russian companies to finance contributions to the capital of subsidiaries or the acquisition of shares (including shares in foreign companies) is deductible for profits tax purposes.1 Nonetheless, tax practice is variable on this issue.
Generally the courts have based on their rulings on a similar position in relation to the matter.2 However, there have been negative court decisions according to which the taxpayer cannot deduct such interest.3 The main arguments of the courts in the adverse rulings are that such loans were not directly connected with the taxpayer's business activity and the taxpayer was unable to prove that such loans were aimed at receiving profit. The fact that this issue has continued to be the subject of litigation indicates that some tax inspectors share this view despite clarifications from the Ministry of Finance to the contrary.
The Ministry of Finance recently issued another letter on this issue4 which confirms that the taxpayer has a right to deduct such interest subject to certain conditions being satisfied.
This recent clarification of the Ministry of Finance notes that the Tax Code does not contain provisions which expressly limit the deduction of interest on loans for the purposes described above. However, the taxpayer should meet the following conditions in order to deduct interest:
- • The expenses should be aimed at generating income and be economically justified and documented.5
- • The interest rate on the loan does not exceed 180% of the Central Bank refinancing rate if the debt liability is in rubles or 80% of that rate in the case of a debt denominated in foreign currency.6 Any excess interest above these limits is non-deductible.
Addressing the first of these is clearly the key to minimizing the risk of disputes given that the second is a straight-forward question of fact. The argument in favor of an interest deduction would be that the taxpayer acquired the stocks or shares in question with a view to receiving future dividend income and/or in the expectation that the value of its investment will increase. This must be supported by documentation concerning the investment and decisions as to how it would be financed.
Further limits on deductions may arise under the thin capitalization ruled depending on the source of loan.
1. Letters of the Ministry of Finance No. 03-03-06/1/748 of 30 November 2009 and No.03-03-06/1/728 of 5 November 2009.
2. Decision of the FAC of the East Siberian Region No. A10–248/2011 of 5 May 2012 and Decision of the FAC of the Moscow Region No. КА-А40/7188-11 of 14 July 2011.
3. Decision of the FAC of the Moscow Region No. KA-A40/13043-06 of 25 January 2007.
4. Letter of the Ministry of Finance No. 03—08-05/5690 of 27 February 2013.
5. Article 252.1 of the Tax Code.
6. Article 269.1 of the Tax Code.
For additional information with respect to this Alert, please contact the following:
EY (CIS) B.V., Moscow
- • Vladimir Zheltonogov
+7 495 705 9737
Ernst & Young LLP, Russia Tax Desk, New York
- • Julia Samoletova
+1 212 773 8088
EYG no. CM3531