How will intragroup financing be arranged now?

 

It will be difficult from 2018 onwards to transfer any property rights to a daughter (subsidiary) company without paying profit tax. It will also become more difficult to increase the net assets of subsidiaries.

WHAT HAPPENED?

Federal Law No. 286-FZ was adopted on September 30, 2017 and introduced significant amendments to Article 251 of the Tax Code, in particular, to revenues exempt from profit tax. These amendments will enter into force on January 01, 2018 and affect all companies planning to increase the net assets of their subsidiaries or forgive their debts.

HOW WAS IT BEFORE?

For the time being, profit tax is not imposed, among other things, on[1]:

• Any property, property or non-property rights received by a subsidiary from its shareholder(s) to increase the subsidiary’s net assets, and
• Increase in net assets with simultaneous reduction or termination of the subsidiary’s debt to its shareholder(s).

In practice, such transfer of property, property or non-property rights, as well as debt forgiveness are often made through contributions to subsidiaries’ assets, agreements for financial aid or debt forgiveness.

HOW WILL IT BE FROM 2018 ONWARDS?

The aforementioned rule will be changed from January 01, 2018, and property, property or non-property rights will not be subject to profit tax only if the following conditions are met simultaneously:

(1)   They are received as contribution to the subsidiary’s assets (vklad v imushestvo), and

(2)   Such contribution is made as prescribed by civil law.[2]

However only the following can be contributed to assets under civil law:

• Cash
• Property items
• Shares in share capital, state and municipal bonds
• Exclusive rights, other intellectual rights and rights under license contracts subject to monetary valuation.[3]

OUR TAKE ON THIS CHANGE

It therefore follows that generally debt forgiveness, property and non-property rights (save for intellectual rights) cannot be used for contribution to assets, and if transferred, they will not be exempt from profit tax under the above ground. As far as debt forgiveness is concerned, we expect that it will still be possible to apply the approaches upheld by court practice regarding Tax Code Article 251(1(11)) for exemption of debt forgiveness from profit tax (if the debt arose from the initial transfer of assets or money from the parent company to the subsidiary).

It is worth noting that the introduction of restrictions on the list of what can be contributed to a company’s assets with profit tax exemption has not been extended to contributions to share capital, and the transfer of property right as contribution to share capital will continue to enjoy profit tax exemption.[4]

In our opinion, the above changes will give rise to the following consequences for taxpayers:

• Fewer ways will be available for intragroup financing, and it will be more difficult to increase promptly the net assets of subsidiaries without additional tax burden;
• Additional tax risks will arise upon debt forgiveness of subsidiaries.

RECOMMENDATION

If you are considering financing your subsidiaries or increasing their net assets, we recommend reassessing your plan in view of the changes outlined above. We would be pleased to assist you in assessing tax risks, as well as selecting and implementing any optimal intragroup financing models that would meet all your requirements.

If you have any questions or would like to find out more about these changes, please feel free to contact us.

The content of this Legal Alert is provided for general information only and should not be treated as a substitute for legal advice for which it is always necessary to consider the actual and specific circumstances of the situation at hand.

 

[1] Article 251(1(3.4)) Russian Tax Code as currently in force

[2] Article 251 (1(3.7)) of the Russian Tax Code and amendments to Article251(1(3.4)) will enter into force on January 01, 2018

[3] Article 66.1(1) Russian Civil Code

[4] Article 251(1(3)) Russian Tax Code, Article 15 Federal Law On Limited Liability Companies, Article 34(2) Federal Law On Joint Stock Companies