Year 2019 is bringing a number of changes to the Russian Tax Code, most importantly a VAT increase from 18% to 20%1. Other amendments (Amendments)2 include new exemptions from the Russian thin capitalization rules, tax-free repatriation of certain investments, and new exemptions from Russia's controlled foreign companies rules (CFC rules) for holdings via foreign public companies.
What the Law Says
1.20% general VAT rate
Russia's general VAT rate will increase from 18% to 20%. The 20% VAT rate will apply to goods supplied and services performed after 1 January 2019, under both new and existing contracts. Russian VAT on advances made in 2018 for supplies to take place in 2019 may need to be adjusted to the new 20% rate. The reduced 0% and 10% Russian VAT rates for certain types of goods and services should not be affected.
2.Tax-free sale of shares in Russian companies
An existing tax exemption for Russian companies and individuals on the sale of non-publicly traded shares (participation interest) in Russian companies (and shares in hi-tech companies) uninterruptedly held for 5 years now covers shares acquired before 1 January 2011.
3.Tax-free repayment of contributions to assets
Income from a repatriation of monetary funds within the amount previously invested as a tax-free contribution to the assets of a Russian company (without a formal charter capital increase) will be exempt from tax, including the Russian withholding tax.
4.Exit Proceeds are Equivalent to Dividends
Dividend tax treatment is now clearly confirmed to liquidation proceeds and payments upon exit from a Russian subsidiary exceeding equity contributions, where previously they could be taxed at higher ordinary profits tax rates. Any losses incurred upon such liquidation (exit) should be tax deductible.
Interest on investment loans are exempt from thin capitalization limitations when (i) the loan funds are used exclusively to finance an investment project in Russia, (ii) loan payments are at least 5-year deferred, (iii) the lender directly or indirectly owns 35% or less of the shares (participation interest) in the Russian borrower, and (iv) the lender is incorporated (tax resident) in a tax treaty jurisdiction.
Investment loans should be for the construction of new facilities for the production of goods or provision of services in Russia.
6.New exemption from Russian CFC rules
Russian tax residents owning foreign subsidiaries through a foreign public company are no longer subject to the Russian CFC rules with respect to the respective retained earnings, provided that (i) more than 25% of its shares are publicly traded on a foreign stock exchange in an OECD member state that is not "blacklisted" by the Russian Federal Tax Service, and (ii) a Russian tax resident directly or indirectly owns 50% or less in such public company.
The Amendments expressly require filing CFC notifications even for loss-making companies.
7.Tax benefits for non-resident individuals
Like Russian tax residents, non-residents also get a tax exemption on the sale of Russian immovable property held for at least 5 years, or for 3 years if received as a gift or inheritance from a close relative.
8.New caps for late payment interest
The Amendments limit the accrual of late payment interest by the amount of tax underpayment.
9.Amendments to the Russian beneficial ownership rules
The Amendments slightly relax the Russian beneficial ownership rules, as addressed in our previous Legal Alert.
Actions to consider
- check VAT terms and gross-up provisions in contracts to duly accommodate the VAT increase;
- consider new opportunities for the tax efficient debt and equity financing of Russian companies; if necessary, consider the restructuring of local operations in Russia;
- review current taxpayer arrangements and structures to check whether new simplified beneficial ownership confirmation procedures, exemption from the Russian CFC rules and other new benefits are available.
1 Federal Law No. 303-FZ "On Amendments to Certain Legislative Acts of the Russian Federation on Taxation", dated 3 August 2018.
2 Federal Law No. 199-FZ "On Amendments to Parts One and Two of the Russian Tax Code", dated July 19, 2018; Federal Law No. 424-FZ "On Amendments to Parts One and Two of the Russian Tax Code and to Certain Legislative Acts of the Russian Federation on Taxation", dated 27 November 2018.