News › Weekly Alert Article
Loans from foreign sister companies may be regarded as controlled debt
On 9 April 2010 the Ninth Arbitration Court of Appeal become available. The Court upheld the decision of the lower court, recognising the amount of debt owed to a foreign sister company is considered part of controlled debt - even though under the literal interpretation of the Russian tax law loans from foreign sister companies are not regarded as controlled debt. Taxand Russia reviews the court case and discusses how this impacts multinationals.
Under Russian thin cap rules interest on controlled debt exceeding 3 times the net assets of the company is not deductible and is re-characterised into dividends. However, the definition of controlled debt under Russian tax law does not include loans from foreign sister companies. At present this circumstance is sometimes used to circumvent restrictions imposed by Russian thin capitalisation rules.
In this particular court case, as a result of the court decision the deductibility of interest on loan from foreign sister company was subject to limitation. If higher-instance courts uphold this approach, this could result in new tax risks for multinationals with similar financing structures.
Multinationals financing their Russian entities through foreign sister companies should re-evaluate the risks of applying thin capitalisation rules.
In particular check whether there is business purpose behind structuring debt finance and what tax adjustments are required if debt from foreign sister companies is taken into account for purpose of application of thin cap rules. What's more multinationals should seek publically available information about the structure to assist with decision making.
Your Taxand contacts for further queries are:
T. +7 495 967 00 07
T. +7 906 059 8008