News › Weekly Alert Article

Thin Capitalisation Rules and the Double Taxation Protocol of the Treaty between Russia and Switzerland


On 25 September 2011 the protocol of the Double Taxation Treaty between Russia and Switzerland was signed in Washington. The most important amendments to the DTT are new opportunities of information exchange between tax authorities (there was no mention of information exchange in the DTT) and the start of real working thin capitalisation rules that were ineffective under the old DTT wording. Taxand Russia considers the evolution of the Russian court's view on the Thin Capitalisation rules and possible consequences of the amendments.

Russian Thin Capitalisation rules apply if the amount of the debt of a foreign company exceeds the capital of the Russian Company by more than three times. In this case the Russian Company should divide the total interest by the Capitalisation Coefficient (capitalisation coefficient = outstanding debt divided by the divided by the Russian entity's equity attributable to the foreign entity's ownership interest in the Russian entity).The excess in interest amount is not deductible and qualified as the dividends for the tax purposes and should be withheld.

The protocol to the DTT with Switzerland will make amendments to:

Thin capitalisation rules
The added protocol establishes that the ruling on dividends and interest should not restrict the national Thin Capitalisation rules of each country. However, the protocol does not establish that thin cap rules should not be restricted by the ruling on non-discrimination.

Information exchange
The protocol adds a new article about the information exchange. So the financial offices should control domestic taxpayers at the request of the tax authority even if such added control is ineffective for them. This will help to restrict tax benefits gained by residents of one of the agreement's countries, if a beneficial owner isn't a resident of the other.

No withhold interest
In the old version of the DTT with Switzerland, Russia could withhold interest on rates of 10% (or 5% for banks). Now, however, if the Swiss entity is a beneficial owner the interest that arises in Russia cannot be withheld.

Stock's trade taxation
In accordance with the changes in Russian tax legislation regarding stock selling, that took place in June-July 2011, Russia and Switzerland will not tax income gained from selling stocks in a legal entity. This is providing assets consist of immovable property worth 50%, and that stock is traded on a stock-exchange or that the immovable property is a place of doing business.

Not sure about linking to the article even if I pdf'd - it really is poorly written and needs a tax person to look at it and make sense of it before I edit from a brand/linguistic perspective

Taxand's Take

The protocol to the Double Taxation Treaty between Russia and Switzerland makes important amendments in information exchange and thin cap rules. It gives tax benefit to some stock investors. But the great trend at present from both legislative and judicial points of view, is actually applying thin cap rules and paying attention not only to form but also to matter. Taxand Russia would advise holding companies to check the corporative structure and loan financing models to minimise tax risks.

Your Taxand contacts for further queries are:
Andrey Tereschenko
T. +7 495 967 00 07

Ivan Zelenin
T. +7 495 967 00 07

Taxand's Take Author