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The law has been passed on measures of tax support for business

Pepeliaev Group advises that, on 22 March 2022, the State Duma (the lower house of Russia’s parliament) passed the law containing a package of tax measures to support business.

We already commented on this draft law after it was passed in the first reading.[1] The final text, however, is slightly different and reflects technical amendments and also has completely new provisions.[2] For your convenience, we present our alert as a single document. The new provisions included in the draft law during its review in the State Duma have been highlighted. 

General measures

For the period from 9 March 2022 until 31 December 2023, the penalty for companies is taken to be equal to 1/300 of the rate of the Russian Central Bank (‘Central Bank’) regardless of the length of the delay (the increased rate of the penalty starting from the 31st day of the delay does not apply).

As compared with the original text, the ambiguity has been removed which we flagged to you previously. It is irrelevant now when the arrears emerged, before or after 9 March.

Transfer pricing (TP)

The rules have been relaxed for classifying transactions as controlled transactions for TP purposes:

  • the annual limit on income from transactions with foreign related parties has been increased from RUB 60 million to RUB 120 million;

  • for the period from 2022 to 2024, if at least one party applies an investment tax deduction for profit tax purposes, as stipulated by article 286.1 of the Tax Code, this will not serve as the ground for recognising the transaction between Russian companies as a controlled transaction (irrespective of the date when the relevant agreement was concluded).

No liability will be applied for the partial payment of tax which resulted from ‘non-market’ prices being applied to controlled transactions, the profit and/or loss from which are accounted for profit tax purposes in 2022 and 2023, irrespective of the date on which the relevant agreement was concluded.

Controlled foreign companies

Requirements have been loosened for controlling persons to submit their financial statements and documents evidencing the grounds for a CFC’s income to be exempt from tax for the financial years ending in 2020 and 2021 (i.e. CFC notifications for 2021 and 2022): formally, the obligation to submit such documents remains, but no liability will be applied if it is not complied with.

VAT

VAT at a 0% rate is being introduced for services involving renting out, using or granting another right to a tourist industry facility, as well as services of providing accommodation at hotels and other lodging facilities.

To apply the 0% rate, tourist industry facilities must be commissioned after 1 January 2022 and be included in the register the procedure for maintaining which is yet to be approved by the Russian Government. The reduced rate is granted for 20 quarters. As regards hotels and other lodging facilities, the wording is more complicated: there is no condition regarding commissioning starting from 2022; it is established, however, that the 0% rate will be applied not longer than for 20 quarters after such hotels and lodging facilities have been commissioned. In other words, if a hotel was commissioned in December 2020, the 0% rate can be only applied for 15 quarters, starting from April 2022 (excluding five quarters for 2021 and the first three months of 2021).

Companies that seek to apply the 0% VAT rate will in any case be required to arrange for the separate accounting of income which is subject to the 0% rate. This means that a company will have to clearly determine what services to include.

The right for a VAT refund to be obtained under a declarative framework without any bank guarantees and suretyship for the tax periods of 2022-2023 will be granted to any taxpayers who meet the following two criteria:

  • they are not being reorganised or wound up; and

  • no insolvency (bankruptcy) proceedings have been initiated against them.

The amount of the refund which can be obtained under the declarative procedure without any bank guarantees or suretyship should not exceed the total amount of taxes and insurance contributions (not including taxes paid in connection with commodities being transported across the border, or paid by a tax agent) that the taxpayer paid for the calendar year preceding the year in which an application has been filed for having a tax refund applied under the declarative procedure. As regards the excess, the declarative procedure can be applied only if a bank guarantee or suretyship has been provided;

In consultation with the higher tax authority, a tax inspectorate can deny a VAT refund under the declarative procedure if “there is information pointing to a potential breach by the taxpayer who applied for the declarative treatment ... of the provisions set out in this chapter which is associated with the assessment of the amount of tax payable to the state budget (including for previous tax periods)”.

This rule is extremely ambiguous. Nor is there clarity as to the nature (the gravity in terms of the amount) of the potential breach, or the legal force and procedure for information regarding the potential offence to be recorded, or the procedure for a tax inspectorate to obtain such information, specifically, if it is limited by any deadline (for example, if RUB 10,000 was unlawfully deducted 10 years ago, will this constitute the ground for refusing such a refund now?) It is not clear from the text of the law whether the tax inspectorate is obliged to disclose to the taxpayer information regarding the potential breach, or whether the taxpayer can refute it and/or challenge a refusal to refund the VAT under the stated ground? We have serious concerns as to whether such an ambiguous legal rule complies with the Constitution.

Profit tax

For those IT companies that now qualify for the 3% profit tax rate, a 0% profit tax rate is being established for 2022-2024.

This support measure for the IT industry is envisaged by the Russian President's Decree No. 83 dated 2 March 2022. No other tax measures of the Decree which are aimed at supporting the IT industry have not yet been included in laws.

In 2022, income of Russian companies generated when loans (credits) are forgiven which were received from foreign companies and foreign nationals prior to 1 March 2022, as well as loans (credits) the rights of claim to which were assigned to foreign companies and nationals prior to 1 March 2022 will not be included in the profit tax base.

The question of the taxation of transactions involving the writing off of debts has a long history. At some point, it was permissible to forgive obligations to shareholders (members) without accruing any taxes. Then this was cancelled. Non-taxable debt forgiveness can return today, but in a new form, namely when a creditor is a foreign company. The advantage is that in the scenario proposed it is irrelevant what kind of foreign entity is forgiving debt, it can be a shareholder or another company (i.e. a financing company of an international group). The disadvantage is that non-taxable forgiveness applies only to loans (credits) and does not apply to the forgiveness of loans by Russian lenders.
To apply ‘thin capitalisation’ rules to debt obligations which emerged prior to 1 March 2022, the amount of the controlled debt in foreign currency will be determined at the exchange rate of the Central Bank as at the last date of the reporting period. The exchange rate should not, however, exceed the Central Bank’s exchange rate set on 1 February 2022. Consequently, the tax burden should not increase owing to the growing value of foreign currency.

The same rules for adjusting calculations relating to ‘thin capitalisation’ were used during the previous surge of exchange rates of foreign currencies in 2014 (article 2(1) of Federal Law No. 32-FZ dated 8 March 2015). Therefore, when practical questions arise regarding the application of the proposed new developments, we can rely on the previous practice.

A right is provided to companies to make monthly payments of corporate profit tax based on the actual profit. The change in the procedure for calculating advance payments should be recorded in the company's accounting policy. In order to use this right, a taxpayer must notify the tax authority at the company’s location (at the location where it is registered as a major taxpayer) not later than on the 20th day of the month when the reporting period ends, starting from which the taxpayer moves to making monthly advance payments based on the actual profit.

The same measure was introduced in 2020 in the framework of overcoming the consequences of the coronavirus. Please note that Russian companies for which payment of income to foreign companies remains relevant should take into account that if they switch to monthly payments based on the actual profit derived, tax authorities will most likely demand monthly calculations of the amounts of income paid to foreign companies and the taxes withheld.

There is an extension of the enlarged ‘safe’ interval of interest rates that is used in transactions between related entities when income/expenses under debt obligations are booked for tax purposes.

Essentially, this means the extension for two more years (2022 and 2023) of those ‘safe’ intervals which were established previously for the period of 2020-2021 (for example, as regards rouble loans between Russian related companies, tax authorities cannot challenge the interest rate ranging from 0% to 180% of the rate of the Central Bank).

As regards rouble debentures to foreign related persons, the interval has even been increased to be 0% to 180% of the key interest rate established by the Central Bank for 2022-2023 (it was 75% to 180% of the key rate prior to the end of 2021).

Income/expenses in a form of positive/negative exchange rate differences which arise in the periods from 2022 to 2024 and from 2023 to 2024 respectively under claims (liabilities), the value of which is expressed in foreign currency (except for advance payments) are booked as of the date when the corresponding claims (liabilities) are terminated (discharged).

Therefore, the unrealised exchange rate differences (based on the results of the tax (reporting) period) will not affect amounts of tax liabilities, but will generate profit and losses on paper which are due to the changes in the exchange rates).

Personal income tax

Individuals will not have to pay taxes on interest income from their deposits with Russian banks which they received in 2021 and 2022.

The general taxation rules for interest income will also change: non-taxable interest income on deposits will be equal to the amount of interest calculated as a product of RUB 1 million and the maximum key rate of the Central Bank out of the rates that were in effect as at every first day of each month in the relevant year (rather than as at the first day of the year). This amendment will help to reduce the tax due if the key rate of the Bank of Russia (Central Bank) increases over a year.

Consequently, the provision which was put into practice last year will not be operable for now. Considering the current circumstances, a decision has been made to exempt from taxation excess profits on loans which individuals received in 2021, which will help to reduce the amount of taxes due this year.
No income of individuals received in the form of a financial benefit for 2021 and 2023 will be subject to personal income tax.

The original version of the draft law stipulated that only a financial benefit for 2022-2023 would be tax-exempt and only from savings on interest for using loans (credits) that individuals received from their employers.

Without this exemption, because of the significant increase of the bank of Russia’s key rate, individuals who had received from their employer credit/a loan on market terms were to pay personal income tax at the 35% rate on the difference between the 13.33% rate (2/3 of the key rate) and the interest rate under the agreement they had entered into. In certain cases, the amount of tax due could have reached 50% or more of the amount of the interest paid under the loan obligation.

The final version of the draft law extended the exemption to income for 2021, and further exempted a financial benefit obtained from the acquisition of

  • goods (work or services) from individuals, companies or individual entrepreneurs who are related to the taxpayer;

  • securities and derivatives from a CFC by a controlling person.

No income will be subject to personal income tax which was derived from the receipt into ownership in 2022 of property (other than monetary funds) and/or property rights from a foreign company with respect to which a taxpayer was a controlling person as at December 2021, provided that:
  • the property (property rights) was (were) held by the foreign company that transfers same as at 1 March 2022;
  • together with its tax return, the taxpayer has submitted an application for such income to be tax-exempt, indicating the features of securities (membership interests) received, the foreign company which has transferred such property (property rights), and attached the documents evidencing the value of the securities (membership interests) based on the accounts of the transferring company.

If the above items are further transferred/assigned, an amount equal to the value of the property (property rights) transferred will be booked as expenses of the taxpayer that are associated with the acquisition of the securities (membership interests) based on the accounting data of the foreign transferring company.

As compared with the original version of the draft law, the list of exempt income has been extended: previously the matter was about the receipt from CFCs of securities of Russian companies, membership interests in Russian companies, units of Russian mutual investment funds, or state and municipal securities.

This benefit can be viewed as a new step towards 'deoffshorisation'. Please note that unlike similar rules of article 217(60) and 217(60.1) of the Tax Code, it is not required in the case concerned to liquidate the foreign company from which the individual receives assets.

Contrary to expectations, no similar exemption has been introduced for income of Russian companies that receive property and property rights from CFCs on a free-of-charge basis.

Property tax for companies and individuals, and land tax

As regards property tax for companies and individuals, and land tax, the cadastral value of real estate will not extend the value which was fixed as at 1 January 2022 for the purposes of the tax base in 2023 and 2024.

Help from your adviser

Pepeliaev Group’s experts are ready to assist you with implementing new taxation rules within your practices and with applying the opportunities granted by the legislature to the fullest extent. We will also help you to identify risk zones that require special attention.


[1] https://www.pgplaw.ru/analytics-and-brochures/alerts/v-nalogovyy-kodeks-budut-vneseny-sushchestvenny...

[2] https://sozd.duma.gov.ru/bill/84984-8

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