Changes to Russian Tax Code and Implications to Financing of Russian Subsidiaries

Russian subsidiaries owned by foreign companies are commonly financed group internally by loans, contributions to assets, parent company aid and forgiveness of loans.

Of the above-referenced financing options the last-mentioned is not as such a tool for improving the company’s liquidity, but it is rather a tool for improving the subsidiary’s net asset standing. Having a Russian subsidiary’s net assets in good order is important owing to the net asset rule established by the Federal Law on Limited Liability Companies requiring that a company’s net assets must be no less than the company’s share capital or at the least the minimum share capital (RUR 10 000) established by said law.

By virtue of Federal Law No. 286-FZ on “Amending Part II of the Tax Code of the Russian Federation and certain other acts of the Russian Federation” forgiveness of debt is practically removed from the options by which a Russian subsidiary’s net asset standing may be improved, since the aforementioned law removes forgiven debts from the types of income that is exempted income tax. Taking into consideration that a loan granted by a parent entity to its Russian subsidiary becomes subject to income tax once forgiven, forgiveness of debt becomes a much less lucrative option for improving a Russian subsidiary’s net asset standing.

The law for amending the Russian Tax Code was approved on 30 September 2016 and the changes will take effect from 01 January 2018.

We recommend companies operating in Russia to oversee the financial standing of their subsidiaries well before end of 2017 to ensure that there is time to make necessary arrangements before the changes to the Tax Code takes effect.

MK-Law has assisted its clients with the planning and execution of different types of financing structures in Russia. Please do therefore not hesitate to contact us in case you need assistance with evaluating the effects that the above-referenced legal changes may have on your organization.

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