According to the Russian Ministry of Finance, foreign exchange losses fr om interest are not deductible from taxable profit wh ere such interest has been classified as dividends under thin capitalisation rules

Pepeliaev Group advises that according to Russian Ministry of Finance, exchange losses on foreign currency interest are not deductible fr om taxable profit wh ere such interest has been classified as dividends under clause 4 of article 269 of the Russian Tax Code (Letter No. 03-03-06/1/91 dated 11 February 2011).

As a general rule, exchange losses on revaluation of foreign currency loans and interest thereon may be deducted by the lender from taxable profit as non-operating expenses (sub-clauses 2 and 5, clause 1, article 265 of the Tax Code).
With regard to exchange losses on foreign currency interest which has been reclassified as dividends under clause 4 of article 269 of the Tax Code, the Ministry of Finance argues in its letter No. 03-03-06/1/91 dated 11 February 2011 that, since such interest is not deductible from taxable profit, foreign exchange losses on such interest are not deductible either.

Pepeliaev Group's comments: The stance taken by the Ministry of Finance is at least questionable. However, it should be borne in mind that, under sub-clause 5, clause 1, article 32 of the Tax Code, the tax authorities must be bound by written clarifications of the Ministry of Finance on the application of tax legislation.

Conclusions and recommendations

The position taken by the Ministry of Finance means that the tax authorities may refuse to allow such foreign exchange losses to be deducted from taxable profit.

When assessing their tax risks, companies should take into account what the implications may be, whether the stance taken by the Ministry of Finance is justified, and whether a more favourable position could be defended in court.

For further information, please contact:

in Moscow – Denis Schekin, Senior Partner, at: (495) 967-0007 or by d.schekin@pgplaw.ru

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 640-60-10 or by e-mail