Russian Law News | News | Key Changes in Russian Tax Legislation

Key Changes in Russian Tax Legislation

February 2009

Significant amendments have been introduced to Russian tax legislation in recent months. The changes affect most taxes levied in Russia, including corporate profits tax, VAT, payroll and other taxes. Certain of these measures are part of the Russian government's "anti-crisis" package of reforms and are intended to provide immediate tax relief for companies.

The most dramatic step is a reduction in the corporate profits tax rate from 24 percent to 20 percent (and to 15.5 percent in some regions). As a result, Russia has one of the lowest corporate income tax rates among developed market economies. This should encourage domestic companies and international investors to retain profits in Russia, rather than transferring them to other jurisdictions via interest or royalty payments. On the other hand, such a substantial tax reduction for Russian subsidiaries may result in the application of "CFC" (controlled foreign company) rules in the jurisdictions of foreign parent companies. (Such rules seek to tax income which is retained abroad in low-tax countries.) As a result, the group as a whole may face higher overall taxes.

Other important changes in Russian tax laws for 2009 include:

Interest deductibility limits have been raised from 15 percent to 22 percent for loans in foreign currency, and from 14.3 percent to 19.5 percent for debt denominated in rubles;
The one-time capital investments allowance on fixed assets has been increased from 10 percent to 30 percent in relation to fixed assets with a useful life from three to 20 years;
A favorable depreciation method has been introduced for all fixed assets except buildings, intangible and certain other asset classes;
An obligatory pre-trial procedure for resolving tax disputes has been introduced, which requires internal appeals to the tax authorities before resorting to litigation in the courts; and
Substantial changes to the mineral extraction tax and VAT benefits for foreign investors have been adopted.

1. Profit Tax

Reducing Corporate Profits Tax Rate

Starting from January 1, 2009, the general rate of corporate profits tax in Russia is 20 percent. This is a combined rate which consists of two parts: federal and regional. The federal portion is 2 percent (as opposed to 6.5 percent before 2009) and the regional portion is 18 percent (as opposed to 17.5 percent before 2009). In addition, regional authorities have the right to decrease the regional part of the tax for some categories of taxpayers. As such, the minimum rate of corporate profits tax paid to regional budgets is 13.5 percent; the minimum combined rate is 15.5 percent.

Increasing the Limits for Interest Deductibility

Russian tax law imposes certain limitations on the amount of interest which may be deducted. However, a company is entitled to choose one of several methods for the calculation of deductible interest. Most companies prefer to deduct interest within the express thresholds set forth in the Tax Code. Under the new rules (which are retroactive to September 1, 2008), for debt obligations in foreign currency, the limit is 22 percent per annum; for debts in rubles, it is equal to 1.5 times the "refinancing rate" of the Central Bank of Russia (which is currently 13.0 percent).

Increasing Capital Investments Allowance on Fixed Assets

Companies may claim a lump sum of up to 30 percent (as opposed to 10 percent before 2009) of their investments in the acquisition or modernization of fixed assets, as a one-time deduction from taxable income. This rule applies to fixed assets with a useful life from three to 20 years. However, the tax savings will be reduced if the assets are sold within a five-year period after implementation.

Changes to Tax Depreciation Rules

Apart from the existing straight-line depreciation method (used by most taxpayers in the past), a non-linear ("reducing balance") method has now been introduced for all fixed assets, except buildings, installations, transmitters and intangible assets. The new method may be advantageous for companies with turnover in permanent fixed assets, as it allows deducting the value of the assets faster than under the straight-line method.

In addition, please note that:

All taxpayers are required to make changes in their tax accounting systems, indicating the depreciation method to be used;

The selected method must be used for the whole pool of fixed assets (except for buildings, installations, transmitters and intangible assets that require only the straight-line method);

The selected method may be changed only once in each period of five years. This is still better than the old rules, which prohibited taxpayers from changing the established method of depreciation;

The non-linear method envisages that depreciation must be calculated for each group and subgroup of fixed assets in aggregate. Previously, depreciation was calculated for each item separately; and

When the aggregate book value of a group's assets is decreased to 20,000 rubles or less, the entire amount may be written off as an expense. Previously, when the net book value of assets fell to 20 percent of the historical cost, the amount of net book value was depreciated evenly over the remaining useful life of the assets.

2. Pre-trial Procedure for Resolution of Tax Disputes

Starting in 2009, it will become necessary to appeal the tax authority's decision to a higher tax authority prior to filing a lawsuit in the Russian courts. Before 2009, the taxpayer had a choice either to appeal to a higher tax authority or to file suit with a court, or to do both simultaneously. The new regulation is intended as a measure for reducing the workload of the courts. We note that:

The obligatory pre-trial appeal procedure applies only to certain decisions of the tax authorities, issued as a result of tax audits. Certain other matters (for example, the arrest of bank accounts) may still be appealed directly in court;

An internal appeal must be filed within ten days after the decision is issued (i.e., before the decision becomes legally effective); but if the decision has already entered into force, the appeal may be filed within a year from the moment of issuance of the decision;

The tax authority's decision enters into force upon the expiration of ten days after delivery to the taxpayer or, in the event of appeal, from the day of the higher authority's decision on appeal;

The appeal must be filed with the same tax authority that issued the decision, and this tax authority is responsible for passing the appeal to the higher tax authority for consideration;

The Tax Code does not oblige the tax authority to inform the taxpayer about the date of the appeal proceeding or to assure that the taxpayer will be present; accordingly, it is strongly advisable to submit a written request to the tax authority in advance, asking to attend the appeal hearing;

There is a risk that the administrative appeal may be disadvantageous for the taxpayer, as the higher tax authority could issue a ruling that worsens the taxpayers' situation; and

The higher tax authority must consider the appeal and issue its own ruling within one month (with possible extension to 45 days).

Generally, these changes appear to have increased the level of uncertainty regarding the procedural norms governing tax appeals. It is interesting that certain rules relating to the appeals process have been posted on the official website of the Federal Tax Authority, although tax legislation does not expressly authorize the tax authorities to issue such rules.

3. Changes to Mineral Extraction Tax

The following changes in the "mineral extraction tax" applicable to oil, gas and mining producers came into effect on January 1, 2009:

The tax base for the mineral extraction tax is based on net oil (i.e. oil-separated water, associated petroleum gas, etc.) Before these amendments were introduced, many disputes arose with the tax authorities as to whether the tax should be based on net or gross oil;

A zero rate may apply, irrespective of the accounting method (direct or indirect) used by the taxpayer. Previously, only companies using the direct method were entitled to the zero rate, which applies to oil fields with a level of depletion greater than 80 percent. The direct method envisages that the producer will use measuring instruments for oil extracted on each particular subsurface site, which is technically impossible for most oil producers;

Certain new oil fields will be fully exempt from the tax (including fields located north of the Arctic Circle, in the Sea of Azov, in the Caspian Sea, in the territory of the Nenets Autonomous district and on the Yamal peninsula), provided that specific requirements are met; and

Expenses associated with the acquisition of subsoil licenses may be deducted during a two year period. Previously, such expenses were only deductible via depreciation.

4. In-kind Contribution to Charter Capital of Russian Subsidiary

There have been changes in the types of equipment exempted from VAT when a foreign investor contributes equipment to the charter capital of a Russian company.

Previously, the Tax Code provided exemption from import VAT for "technological equipment" contributed by a foreign investor as an in-kind contribution to the charter capital of its Russian subsidiary. However, this exemption was often subject to disputes and challenges from the tax and customs authorities, and was not viewed as favorable from a public policy standpoint (since it did not provide any incentive for domestic manufacturing of such equipment).

Under the latest amendments, only equipment of a type not produced in Russia, and expressly included in a list to be adopted by the Russian government, may be exempted from import VAT. Presumably, the list will reflect the needs of certain key sectors (such as turbines for power generation) which the government is willing to see satisfied through imports, at least on a short-term basis.

These new rules will take effect no earlier than the first calendar quarter after the government has adopted the list of exempt equipment. Until that time, all "technological equipment" may continue to be contributed free of VAT, under the current regime.