New ground for exemption from profits tax in an amicable increase of net assets

Pepeliaev Group notes that Federal Law No. 409-FZ dated 28 December 2010 has brought in a new ground for exemption from profits tax in an amicable increase of net assets. This law mainly deals with the regulation of relations between companies and their shareholders relating to profit distributed but not claimed (i.e. unclaimed dividends). However, some of the amendments brought in by the law go beyond the scope of this issue.

Federal Law No. 409-FZ “On amending various legislative acts of the Russian Federation to the extent of regulating the payment of dividends (distribution of profit)” dated 28 December 2010 adds a new sub-clause 3⁴ to clause 1 of article 251 of the Russian Tax Code. This provides for property, property rights and non-property rights to be non-taxable to the extent of their monetary value when such property or rights are transferred to a partnership or company by the members or shareholders so as to increase net assets. This rule extends to unclaimed dividends as well as to other instances of increasing net assets through a one-off reduction or termination of an obligation to members or shareholders under the law, the constituent documents or any other declaration of intent by a member or shareholder. In particular, an increase in net assets may bring about the creation or increase of so-called “additional capital” or “reserves” for a partnership or company.

The rule in question extends to legal relations arising after 1 January 2007 (clause 2 of article 4 of the Federal Law, which came into force as of its publication date, i.e. 31 December 2010).

Pepeliaev Group commentary

The provision in question largely overlaps the current sub-clause 11 of clause 1 of article 251 of the Russian Tax Code:

The emergence of two overlapping provisions dealing with the exemption of amicable transactions means that fresh amendments to tax legislation can be expected in the near future dealing with this issue and codifying the rules in question. In particular, the prospect of repeal of a tax benefit for an “upwards” transfer, from a company to a member, cannot be ruled out, bearing in mind that, should it be funded using profit, it is, in essence a distribution of profit and should therefore be taxable. If an “upwards” transfer is not funded using profit, then the question arises as to whether this causes a loss to other members of the partnership or shareholders of the company. However, any such changes cannot retroactively worsen the position of taxpayers, who have applied their right to receive a justified tax benefit for which provision is made in a Federal Law.

Pepeliaev Group’s lawyers will track the practice that develops as the new legal developments are applied and will monitor any subsequent amendments to the legislation.

For further information, please contact:

in Moscow – Ivan Khamenushko, Senior Partner, at: (495) 967-0007 or by e-mail; Peter Popov, Senior Associate, at: (495) 967-0007 or by e-mail

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-0717 or by e-mail