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Abrupt Change in Application of Thin Capitalisation Rules

Russia

On 15 November 2011, the Supreme Arbitration Court decided on the case of "North Kuzbass". The question was about the correlation between national thin capitalisation rules and the non-discrimination provisions of the DTT. Court practice before "the North Kuzbass" case supported the approach that non-discrimination rules prevail over the national thin cap rules. But after North Kuzbass, it has become unclear how this court practice will develop further. Taxand Russia looks at this case and how the outcome may affect businesses in Russia.

The previous court's ruling clearly stated that thin cap rules left foreign companies worse off in these circumstances in comparison with Russian companies. The non-discrimination rule protects a Russian company with a foreign shareholder from the application of the national thin capitalisation rule. This practice has been developed over recent years and has already become one of the features of tax structuring opportunities in Russia. After the North Kuzbass case, however, this may change.

The case in question is that of foreign mother and sister companies loaned to the Russian company North Kuzbass, LLC. After a deep analysis of the holding structure and the ways of loan financing, the courts decided that in ordinary circumstances the thin cap rules should be applied, but this time the courts decided to discriminate against the foreign company keeping it in the economically worse off situation. However the Presidium of Supreme Arbitration Court didn't agree with the decision. The written decision will be issued within two months and then the position of the Supreme Court will become clear, ie whether it really disagrees with the fact that the non-discrimination rules established in the DTT are to prevail, or whether there were special circumstances of this particular case that triggered such a position from the Supreme Court.

This case has already had great resonance in the business and professional community.


 

Taxand's Take

Companies with foreign investment may consider an overview of their position regarding thin capitalisation rules. We can assume that the tax authority will try to challenge structures that made use of the non-discrimination provisions to avoid applying the thin capitalisations. However, a lot will depend on the decision of the courts.

Your Taxand contacts for further queries are:
Andrey Tereschenko
T. +7 495 967 00 07
E. a.tereschenko@pgplaw.ru

Ivan Zelenin
T. +7 495 967 00 07
E. i.zelenin@pgplaw.ru

Taxand's Take Author