Changes to thin capitalisation rules for profit taxation purposes

Companies may borrow necessary monetary funds – in particular, in the form of credits and loans, commodities and commercial credits. In this regard, under certain conditions, the company may have a controlled indebtedness, for which the accounting of expenses for profit taxation purposes should be made according to the special rules regarding so-called 'thin capitalisation' stipulated in Article 269 of the Tax Code.

As of January 1 2017, the outstanding indebtedness of a Russian organisation regarding the following debt obligations is recognised as its controlled indebtedness:

• a debt obligation to a foreign person which is an affiliated person of the Russian organisation, if such foreign person participates directly or indirectly in the Russian organisation;
• a debt obligation to a person recognised as an affiliated person of the abovementioned foreign person; and
• a debt obligation under which the abovementioned foreign person and its affiliated person act as security or guarantors or otherwise undertake to ensure the fulfilment of this debt obligation.

In addition, according to the new thin capitalisation rules, the following persons may be recognised as affiliated:

• organisations in cases where one organisation participates directly or indirectly in the other organisation and the share of such participation is more than 25%;
• an individual and an organisation where the individual participates directly or indirectly in the organisation and the share of such participation is more than 25%;
• organisations where the same person participates directly or indirectly in these organisations and the share of such participation in each organisation is more than 25%; and
• organisations and individuals where the share of direct participation of each previous person in each subsequent organisation is more than 50%.

Further, as of January 1 2017, the amount of a company's controlled indebtedness must be calculated on the basis of all of the obligations of the Russian organisation in the aggregate that have the abovementioned characteristics of controlled indebtedness.

The overall amount of interest to be recognised as the expenses on controlled indebtedness will be calculated by the taxpayer for the last day of each reporting tax period by dividing the amount of interest on the controlled indebtedness accrued by that taxpayer in each reporting tax period by the capitalisation rate calculated for the last reporting date of the corresponding reporting tax period.

As of January 1 2017, in the event of a change to the capitalisation rate in the subsequent reporting period or following the tax period in comparison with the previous reporting periods, the overall amount of interest to be recognised as the expenses on the controlled indebtedness for the previous reporting period is not subject to change.

The abovementioned changes to the thin capitalisation rules aim to strengthen the barriers that prevent the outflow of capital abroad to the foreign companies of multinationals doing business in Russia.