Up Again Russia: Government Relief and Tax

Restructuring

1. Legislative changes: are there any additional processes or support which have been introduced as a response to the pandemic which I may not have considered previously?

On 3 April 2020, the Russian government introduced a moratorium on filing creditor bankruptcy petitions in respect of certain debtors, including:

  • those in the most affected sectors,
  • system-forming organisations;
  • strategic organisations; and
  • organisations improving the sustainability of the development of the Russian economy.

The moratorium will be effective from 6 April 2020 until 6 October 2020 and may be extended by the Russian government.

The major legislative changes are mentioned in various sections of this guide. At the same time, the range of measures introduced by the Russian authorities is very broad and directed at different sectors of business in different spheres. Therefore, the application of each measure depends on particular circumstances related to the case in question.

Tax

2. What is the position with respect to the applicability of emergency tax measures, including

a. what they are and apply to;

b. when they are expected to be phased out on or following a return to business; and

c. whether any transitional periods are likely to apply.

Tax support measures

The current list of emergency tax support measures affecting all categories of taxpayers includes:

  • postponement of tax return submission (excluding VAT tax returns) and tax calculations that cover the period from March and May 2020 by three months;
  • delay for submitting VAT returns and calculation of insurance contributions for the first quarter of 2020 until 15 May 2020;
  • a moratorium on tax field audits until 30 June 2020;
  • suspension of initiating compliance audits to check that currency laws of the Russian Federation have been observed until 30 June 2020; and
  • postponement of the deadline for companies to file tax monitoring applications for 2021 for three months.

There are also additional tax support measures applicable to selected categories of taxpayers only.

Tax support measures for companies from the most affected industries (the list of the industries most affected by the pandemic has been adopted by the government):

  • Companies may apply for a tax deferral (from three months to one year) and instalment (from three to five years) regarding taxes, advance payments and insurance contribution that fell due in 2020 (excluding VAT, MET, tax on additional income from hydrocarbon production and excise duty). It also covers companies that are strategic, of system importance, city-forming, or not operating in affected spheres. Companies are entitled to tax deferral/instalment when at least one of the conditions is fulfilled (e.g. reduced earnings of 10%, losses).

Support measures for small and medium-sized enterprises:

  • All SMEs can apply reduced rates (15%) to insurance contributions for salaries exceeding the minimum statutory wage starting from 1 April 2020.

If an SME operates in the industries most affected by the pandemic, they can also apply the following measures:

  • a six-month delay for the payment of income tax for 2019;
  • a delay for the payment of taxes (excluding VAT, taxes paid as tax agents) to be paid in the first quarter of 2020 (for six months), and for taxes to be paid in the second quarter and first half of the year (for four months);
  • a delay for the payment of social insurance contributions for March-May 2020 (for six months), and for June-July 2020 (for four months);
  • a delay for the advance payment of transportation tax, property tax, land tax for the first quarter of 2020 (no later than 30 October 2020) and second quarter of 2020 (no later than 30 December 2020); and
  • subsidies received by SMEs will not be included in the tax base (profit tax).

An initiative on amending to certain double tax treaties

There is an initiative to increase the taxation rate to 15% for dividends and interest paid out from Russia to so-called transit jurisdictions starting from 2021. Specifically, with respect to Cyprus, Luxembourg and Malta, the process of changing the double tax treaty has already started.

Other measures

Currently there are a number of other measures under discussion, most of which are yet to be adopted (taxation of interests accrued on deposits exceeding RUB1 million, 15% personal income tax increase for high-earning Russian citizens, and exclusion of VAT exemption for license agreements). These measures are discussed in more detail in question 6 below.

3. Are there specific steps that businesses should take to prepare for these tax measures being phased out – for example new timing of

a. payment obligations (and therefore likely pressure on cash flow); and/or

b. filing of returns?

Most of the tax support measures may be applied by the taxpayers without any additional steps.

Tax support measures envisaging postponement of deadlines for filing tax returns and tax payments are considered in question 2 above.

4. Should the impact of emergency tax measures be reconsidered by businesses – e.g. are there certain legal transactions (such as sales or reorganisations) that parties should preferably postpone or accelerate?

Proposed changes to the double tax treaties (see question 2 above) shall be taken into account when considering dividends distribution or restructuring.

5. Are there any additional measures proposed, in particular any that are targeted at particular sectors (e.g. aviation)?

The Russian president suggested reducing the insurance contributions rate from 14% to 7.6% and the income tax rate from 20% to 3% for IT companies. The respective draft law has not yet been published.

6. Which taxes might be increased to address the financial burden caused by the crisis, for example,

a. are there political commitments or policy trends that might indicate the likely focus of any tax increase in the future (e.g. to maintain low corporation tax, but to increases taxes on personal wealth)

b. measures to broaden the tax base, such as digital services taxation and a pre-emptive response to the OECD/ G20 Inclusive Framework on BEPS (“BEPS 2.0”)

There are a number of measures aimed at addressing the tax burden:

  • A 13% personal income tax on interest accrued on deposits exceeding RUB1 million (USD14,300) multiplied by the Bank of Russia key rate, starting from 2021. The respective law was adopted by the State Duma.
  • Starting on 1 January 2021, income tax in Russia will increase from 13% to 15% for citizens who earn more than RUB5 million per year (around USD73,000). These changes were announced during the President’s speech on 23 June.
  • Exclusion of VAT exemption for license agreements. Currently this initiative has only been announced by the government.

7. Are there other actions that ought to be considered by businesses in your country e.g.

a. revisit past tax filings to claim carry back of losses;

b. revise or update preliminary tax assessments;

c. claim bad debt relief for VAT output tax

See question 2 above for changes in the deadlines for submissions of tax returns and payment of taxes.

At present, Russia continues to adopt new tax support measures for businesses. Companies are encouraged to check the list of such measures.

Finance

8. What do you need to consider in terms of your funding requirements for returning to business and are there any return to business financial assistance packages being made available by government?

There are a number of measures aimed at financing companies to continue operating, as stated below.

Credit holidays: SMEs operating in the most affected sectors  (i.e. the companies operating in the sectors included by the government in the list of those most affected by COVID-19, by Government Resolution No. 434 dated 3 April 2020, as amended. The list of such sectors includes: air and auto transportation; culture, leisure and entertainment; sports and fitness; travel and tourism services; and food service) (Affected Sectors) are entitled to receive a six-month deferral of payments under any credit facilities entered into before 3 April 2020. During this deferral period, the lenders under these facilities are not allowed to accelerate, enforce security or exercise other creditor rights and remedies resulting from the non-payment or other default occurred during the deferral period.

Bank loans at reduced rates: Core operating companies (sismemoobrazujushie predpriyatiya) are entitled to receive working capital bank loans on the following key terms:

  • up to RUB3 billion (per company);
  • up to 12 months; and
  • up to 5% interest per annum.

Such working capital loans may be secured by a state guarantee of the Russian Federation.

The list of the core operating companies can be found on the official website of the Ministry of economic development of the Russian Federation here.

Bank loans to cover salary payments

Companies operating in the Affected Sectors may receive loans to cover salary payments at a reduced interest rate:

0% per annum for the first six months, but no later than 30 November 2020; and

3.5 % per annum for the subsequent period.

The loan proceeds shall be used to cover salary payments only. The principal amount of the loan which may be provided to the borrower is calculated according to the minimum wage and the number employees.

State aid

SMEs operating in the Affected Sectors may obtain state aid to:

  • cover salary payments; and
  • preserve liquidity in case of other immediate needs (e.g. utility charges, rent payments) during April and March.

9. How will funding a return to business, including taking on additional indebtedness, impact on your financial or other covenants?

Obtaining additional financing may trigger a default under credit documentation where such incurrence of financial indebtedness is restricted or results in a failure to comply with leverage or other financial covenants. On the occurrence of such default, lenders may, subject to the terms of the underlying documentation:

  • accelerate the entire outstanding loan,
  • cancel the lender's outstanding commitments to provide further financing; and
  • enforce the security provided.

10. Are there any remedies such as equity cure or margin ratchets that you should be checking on to provide liquidity to prevent a default or improve their financial position?

Availability and implementation of such cure or remedy procedures depends on the terms of each particular loan documentation. Normally, leverage (i.e. debt to equity) financial covenants may be cured by making necessary equity injections. Subject to the terms of documentation, loan-to-value ratios or margining undertakings may be cured by providing additional collateral.

In other cases, if such loan documentation does not provide for sufficient default remedy options, further steps of the borrower to negotiate new terms (e.g. renegotiating repayment schedule, execution of standstill agreements, weakening financial covenants or other restructuring) would be required.

11. What practicalities do you need to consider in relation to audit requirements?

In accordance with the amendments to the corporate legislation, mandatory internal audits for public joint stock companies have been deferred until 1 January 2021

12. What is the process if I need any amendments made or waivers given under my loan documentation (including in respect of financial covenants)?

The standard key steps will be as follows:

  • The borrower approaches the lender with a request to:
    • waive a default which has occurred; or
    • consent to or amend the letter in connection with the entry into transactions or performance of actions that will result in a default.
  • The parties agree the terms of:
    • the waiver letter setting out the exhaustive list of defaults that are to be waived in connection with factual failure to comply with the borrower's obligations; and/or
    • consent or amendment letter covering all new actions and transactions to be consented and the terms to be amended in connection with potential failure to comply with the borrower's obligations.
  • The parties enter into the waiver or consent (amendment) letter in the form of the original loan agreement.

However, this procedure might be subject to adjustments, depending on the provisions of the particular loan documentation to be amended.

13. Dealing with creditors, including amendments and waivers – Bonds

a. If I can’t comply with the terms of my bond covenants who do I need to notify?

Generally, despite the wide influence of the COVID-19 pandemic on Russian legislation, no changes have been introduced to date in the legislation on the securities market regarding bond regulation.

The issuer is required to disclose information to the bondholders on occurrence of the bondholders' right to demand early redemption on its default. A default on bonds constitutes a material breach by the issuer of its obligations.

b. If I need to ask for a waiver or amendment to the terms of bonds issued by my business what steps do I need to take?

To amend the terms of issued bonds, the issuer is allowed to:

  • call a general meeting of bondholders and put to a vote the issue of:
    • debt restructuring on the bonds (including consent to changes in the terms and conditions of the bonds, termination of obligations under the bonds by compensation for release from obligation or novation);
    • waiving the right to demand early redemption; or
    • initiating a legal action against the issuer, including a petition to declare the issuer bankrupt (subject to a moratorium on filing creditor bankruptcy petitions which was introduced by federal law No. 98-FZ dated 1 April 2020 and related to the core operating companies and the companies operating in the Affected Sectors);
  • apply to the representative of the bondholders (e.g. a trustee), if the latter is appointed under the terms and conditions of the bonds or is entitled by the general meeting of bondholders to consent to changes in the terms and conditions of the bonds and consecutive amendments and disclosure.

c. What is the process for contacting bondholders and holding meetings to agree changes in the terms of my bond documents?

The general meeting of bondholders which is competent to consider such issues is called and held according to a standard procedure. Where a trustee is appointed to represent the bondholders (as is normally the case in eurobond and other international bond issues), the bondholders would need to be approached through the trustee, who will coordinate negotiations between the issuer and the bondholders.

The issuer must provide the following information to bondholders participating in the general meeting of bondholders:

  • changes in the terms and conditions of the bonds and requisite disclosure
  • the underlying corporate resolutions of the issuer's competent governing bodies

14. Is the availability of any return to business funding or relief either (a) conditioned on the use of proceeds for green or social purposes or (b) linked to sustainability-related outcomes? If so, what are the applicable purposes or outcomes?

Activities in the environmental sphere and the use of sustainable nature management measures.

The availability of funding or tax exemption for businesses affected by the spread of the COVID-19 pandemic does not depend on whether the organisation is using the proceeds for green purposes. The use of sustainable nature management measures also does not provide any advantages.

However, several measures for organisations operating in socially oriented areas have been adopted.

Nonprofit organisations (NPO) included in the register of socially oriented NPOs were temporarily exempted from paying certain taxes. This measure is directed to NPOs that both:

  • provide socially beneficial services; and
  • receive presidential grants, subsidies and grants under the programs implemented by federal and regional executive authorities and local governments.

Other support measures granted to organisations engaged in socially oriented activities are most often provided to small and medium-sized businesses, as mentioned above. In addition to federal support measures, regional authorities also support social businesses.

For example, in the Moscow region, an organisation is entitled to obtain support if:

  • it is a small or medium-sized business entity; and
  • carries out socially beneficial activities and contributes to the solution of social problems.

In Moscow, a small or medium-sized business entity that also has the status of a social enterprise may apply for a subsidy which should not exceed RUB1 million. The subsidies are provided to:

  • partially compensate for the expenses of paying interest on loans that were received for the development of small or medium-sized business;
  • pay utility bills;
  • pay lease payments; and
  • partially reimburse the cost of equipment.

Similar subsidies are also granted in the Leningrad region.

In the Republic of Bashkortostan, social service organisations are provided with subsidies to compensate the cost of organising works to prevent the threat of spread of COVID-19 on the territory of the Republic.

In the Republic of Dagestan, a reduced tax rate within the simplified taxation system of 1% (the object of taxation is income) was established for organisations that use the simplified taxation system to exercise socially beneficial activities.

Regional legislation also provides for other measures to support organisations engaged in socially oriented activities.