10 February 2012
Thin capitalization rules: Russian Supreme Arbitration Court quashes precedent court practice in favour of taxpayers
According to the Russian Tax Code the thin capitalization rules apply if a Russian company has an outstanding debt to a non-resident company which directly or indirectly holds more than 20% in the share capital of the Russian company. The thin capitalization rules do however not apply if the Russian company is fully owned by one or several Russian entities of individuals.
Lower courts recently issued decisions which provide for the non-applicability of the Russian thin capitalization rules in cases where the Russian company is owned by a foreign entity, based on double tax treaties containing a non-discrimination clause. Accordingly, the courts confirmed the unlimited deductibility of the interest expenses in these cases.
In its judgement of 15 November 2011 the Supreme Arbitration Court quashed the rulings issued by the lower courts and confirmed the applicability of the Russian thin capitalization rules. The judgement concerns a Russian company with outstanding debt to foreign affiliated companies, including a Swiss company owning more than 20% in the Russian company. The Supreme Arbitration Court reminded the lower courts that double tax treaty reliefs may only be invoked in case of a contradiction between the Russian Tax Code and the treaty provisions. The thin capitalization rules only apply to associated enterprises which are out of the scope of the non-discrimination principle. Accordingly, the application of the thin capitalization rules, does not violate the non-discrimination principle in the context of international tax law.
Currently loans from foreign sisters are not regarded as subject to Russian thin capitalization rules. Taking into account the recent developments the application of the Russian thin capitalization rules to such loans cannot be excluded.
In light of the above, in particular Russian companies with loans from foreign affiliated companies (parent as well as sister companies) should re-asses their tax position in regard to the applicability of the Russian thin capitalization rules.
If you have any questions relating the above topics, please do not hesitate to contact us.