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Russian PEs & Subsidiaries of French Legal Entities Are Eligible To Deduct All Costs from Industrial & Commercial Activities
Taxand Russia discusses the developments.
The above provision is applicable to a permanent establishment or a company or other entity that pays taxes and is a Russian resident, provided:
- at least 30% of the Russian company's authorised capital is held by one or more French residents
- the Russian company's authorised capital amounts total to at least FRF500,000 or its equivalent in another currency. This amount is equal to EUR76,220 at the official rate of the European Central Bank.
On 29 September 2009 The Russian Ministry of Finance issued a letter No. 03-08-05 setting out its position on the application of clause 4 of the Protocol to the DTT between Russia and France signed on 26 November 1996 in respect of the full deductibility of expenses by permanent establishments and French subsidiaries.
The Department for Tax and Customs Policy of the Russian Ministry of Finance inquired whether it was possible to recognise, for Russian CIT purposes, voluntary insurance costs incurred with respect to industrial or trading activities carried out by the Russian permanent establishment (Russian subsidiary) of a French legal entity.
This question was triggered by the fact that taxpayer's expenses on voluntary insurance may be deductible only if the respective type of insurance is specified in clause 1, article 263 of the Russian Tax Code. If such a type of insurance is not included in the above-mentioned list and legislation does not stipulate the obligation to provide insurance against the corresponding risk, expenses on such insurance may not be recognised as deductible for CIT purposes.
At the same time, in accordance with clause 4 of the Protocol, a Russian company controlled by a French resident company, when assessing its CIT, is eligible to deduct expenses incurred with respect to its industrial or trading activities. This provision is applicable under certain conditions specified in clause 4 of the Protocol, namely: at least 30% ownership interest and at least FRF 500,000 investments, which is equivalent of approximately EUR 76,000.
In its Letter, the Russian Ministry of Finance stated that the Protocol did not impose any restrictions on the deductibility of expenses. Moreover, the French text of the Protocol refers to the possibility of deducting all expenses incurred by the company with respect to its industrial and trading activities.(It should be noted that the Russian Ministry of Finance did not limit its conclusions only to insurance expenses in its response.)
The Russian Ministry of Finance reached the above conclusion on the basis of its interpretation of the Protocol with due account of the protocol of negotiations held between the Russian and French contracting parties, as well as the French text of the Protocol.
Following the provisions of article 32 of the Vienna Convention on the Law of Treaties concluded on 23 May 1969 allowing in cases when the interpretation leaves the meaning ambiguous or obscure, to recourse to the supplementary means of interpretation, including the preparatory work of the treaty, the Russian Finance Ministry found it possible to use the draft Protocol in the French language, which is identical to the official French text of the Protocol, for the interpretation.
Consequently, if expenses are incurred with respect to activity aimed at obtaining profits and are justified and documented, i.e. they comply with the requirements established in article 252 of the Russian Tax Code, expenses should be deductible for CIT purposes in accordance with the Convention and the Protocol thereto.
In view of the above position of the Russian Ministry of Finance, we believe that when assessing the possibilities for Russian permanent establishments and Russian subsidiaries of French resident companies to deduct expenses, the general provisions of the Russian Tax Code should be followed. Such provisions allow the taxpayer to deduct expenses to an extent to which they are deemed economically justified (i.e., within the meaning of clause 4 of the Protocol, "they are incurred with respect to industrial and trading activities") and documented. Restrictions imposed by certain provisions of Chapter 25 of the Russian Tax Code on deduction of specific expenses should not be applied.
It should be noted that Russian DTTs with such countries as Germany, the Netherlands, Belgium, the UK and the USA, contain special provisions on the deduction of expenses incurred by permanent establishments of non-residents in Russia or their subsidiaries. The analysis of the applicability of such DTTs to a specific situation may reveal a possibility for full deduction of certain expenses.
To benefit from the tax treaty provisions a Russian subsidiary of a resident in a tax treaty country would need to perform a 3 step analysis to identify:
1. whether the relevant tax treaty contains a clause on full deductibility of all or specific expenses
2. if such a clause exists, whether the subsidiary qualifies for its application; and
3. if the subsidiary qualifies for such a full deductibility, it needs to check whether it uses all available benefits.
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