Publications

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Russia’s State Duma swiftly passed a bill in late November that is part of the country’s response to the global financial crisis and its impact on the Russian economy.

The measures in the bill, "On the Introduction of Amendments to Chapter I and Chapter II of the Tax Code and Other Legislative Acts of the Russian Federation," took effect January 1. They deal with a host of taxes, including VAT and other corporate taxes. President Dmitry Medvedev has signed the bill into law and it has been officially published.

The following are some of the key changes in Law No. 224 FZ.

When the Favorable Changes Take Effect

Tax provisions favorable for taxpayers will have legal force immediately once these laws are officially promulgated. This effectively means that many tax provisions of the new law (except for those which are set to apply retroactively from January 1, 2008) became effective starting January 1, 2009.

Corporate Profits Tax Rate Reduced to 20 Percent

Under amended Article 284 of the Russian Tax Code, the Russian corporate profits tax rate is reduced by 4 percent. Thus, the total corporate profits tax rate is set at 20 percent.

Certain taxpayers may be able to take advantage of additional reductions of as much as another 4 percent that are available through regional laws. For example, in St. Petersburg and in Leningrad Oblast, investors will be able to claim a tax rate of 16 percent on profits earned as a result of carrying out certain qualifying investment activities.

Increased Tax Deductibility Cap for Interest Expenses

Article 8 of the new law has effectively increased the tax deductibility cap for interest expenses incurred on debt financing, including loans and other borrowings. The law has allowed Russian borrowers to deduct interest within 1.5 times the Russian Central Bank refinancing rate on ruble-denominated loans and 22 percent on hard currency loans in the absence of comparable loans taken in the same period. These new tax deductibility rules for interest expenses are set to apply retroactively to January 1, 2008 and are, according to point 22 of Article 2 of the new law, to apply only until December 31, 2009.

Foreign businesses financing their subsidiaries by debt may wish to restructure their loan transactions to take advantage of the increased threshold for tax deductible interest, should their Russian projects generate sufficient profit margins. Care needs to be taken in this regard to avoid claims by the tax authorities that any debt structure is solely tax driven and is associated with an "unjustified tax benefit," as established by High Arbitration Court Ruling #53.

Reduced Rates under the Simplified System

Previously, certain regions of the Russian Federation were required to tax at a flat rate of 15 percent. The new law gives new legislative rights to these regions, permitting them to introduce differentiated tax rates ranging from 5 percent through 15 percent.

Change of Tax Depreciation Rules

Points 17 and 18 of Article 1 of the new law introduce significant changes to the Tax Code tax deprecation and amortization rules set forth in Articles 258 and 259.

Russian taxpayers will be entitled to claim as a periodic expense up to 30 percent of capital expenditures for certain categories of fixed assets. This capital allowance or accelerated depreciation is associated with a five-year clawback period. Within that period, the respective depreciable assets must not be sold; if they are sold, the tax-deducted expenses will be reversed and added to the tax base.

Immediate Tax Deduction of Hardware Costs

Article 259 of the Tax Code, in its new edition, states that qualifying IT development companies will be allowed to claim an immediate tax deduction for costs incurred in purchasing hardware.

Clarification of the Procedure for VAT Zero-rated Supplies

Another important change deals with changes to the tax administration procedure to confirm the VAT zero rate for exports out of Russia. Changes made to Article 165.1.3 of the Tax Code mean that, starting January 1, 2009, Russian taxpayers will be able to provide the tax authorities with special registers of customs declarations certified by a customs body, instead of originals or copies of the customs declarations. Many taxpayers had found it difficult, and in some cases impossible, to furnish such originals or copies to the tax authorities in a timely way in order to benefit from the VAT zero rate.

270 Days to Support Zero-rated VAT Exports

The number of days to document supplies as zero-rated VAT exports of goods, free customs zone or international customs transit as well as services directly related to the export of goods has been increased. Formerly, 180 days were allowed; the new law allows 270 days.

Under Article 27.3 of the new law, such extended timing will be available for supplies of goods placed into respective customs regimes from the period July 1, 2008 through December 31, 2009.

Reclaiming VAT Charged on Advances

The new law states that suppliers that have received partial payment for supplies, goods, works or services must, within five days, issue an invoice in order to allow buyers to reclaim so-charged input VAT.

This is a very positive change. It will maximize the speedy recovery of VAT and avoid freezing any VAT charged on advances until the final act of acceptance is signed. Importantly, partial settlements must be specified in the respective supply contracts between the supplier and the customer to allow VAT to be reclaimed on partial settlement. If the supply is not supported by the final acceptance act, then the previously reclaimed VAT amounts must be reversed, increasing the VAT liability payable by the customer.

No Cash VAT Payments in Case of Offsets

Article 172 of the Tax Code is amended whereby the currently existing requirement to wire to the state the VAT only by cash in case of non-monetary settlements for the purposes of the VAT recovery will be repealed for set-offs between taxpayers. This will re-open the door to bills of exchange and promissory note payments for troubled enterprises who have cash shortages; the new rule would alleviate any cash shortages that might arise from inability to reclaim input VAT.

Revised Scope of VAT Exemption for In-Kind Transactions

One of the few negative changes is the cancellation of the VAT exemption for technological equipment imported by investors as part of an in-kind contribution to the charter capital of Russian investees, when such technological equipment is actually manufactured in Russia. Conversely, based on the revised wording of Article 150 of the Tax Code, any import of qualifying technological equipment, whether or not contributed into charter capital, can be exempt from VAT if the government includes it in the to-be-adopted list of such equipment.

It is not clear when this change will become effective. Article 9.3 of the new law states that the new edition of Article 150 of the Tax Code shall come into force in 2009, but not earlier than one month after the Government of the Russian Federation enacts a list that specifies which qualifying technological equipment is not produced in Russia. Possibly, this provision of the law will be interpreted by the customs authorities so that the "existing" VAT in-kind incentive will be repealed from January 1, 2009, while the new VAT exemption under revised Article 150 of the Tax Code will require the new list of equipment to be first adopted by the government. As practice shows, it can take the government months to adopt such a list.

Reclaiming Partially Proven VAT Credits

The new law amends Article 176 of the Tax Code to state that Russian tax authorities have a right (but not an obligation) to split the VAT recovery on one VAT return into two parts. The authorities can allow for partial VAT reclamation with regard to input VAT amounts, while disallowing any unsupported portion of input VAT.

Should the tax authorities decide to exercise this right, many taxpayers would be able to avoid certain cash flow problems, receiving VAT reimbursement in a more timely way in comparison to the reimbursement typical for so-called "unquestionable tax credits."

These Swift Changes Present New Opportunities

The swift enactment of these changes in Russian tax legislation in response to the global financial crisis is quite remarkable and unprecedented. These positive steps will bring crucial and necessary benefits to Russian businesses and investors. Many businesses can take advantage of the new opportunities presented by the change. It is imperative to assess the impact this new legislation will have on tax strategies and business transactions, and to review and respond accordingly.