Contributed by Vladislav Donchenko, tax practice partner in Lex Alliance law company, Russia
Russian parliament adopted Federal Law dated 02.07.2021 № 305-FZ with many changes to the Russian tax law including changes to the Russian interest limitation rules (Article 269 of the Russian Tax Code). Thess amendments are relevant for cross border loans which could be considered as loans between related parties for the purposes of the Russian transfer pricing rules.
Under the current version of the Russian interest limitation rules cross border loans between related parties are subject to the following limitations.
Russian borrower is able to deduct interest expenses incurred under specified loans without any limitations if the interest rate established under the loan agreement is less then maximum level of the specific range prescribed by the Russian tax code.
The maximum level of the mentioned range should be calculated as following depending on the currency of the loan:
- EUR: EURIBOR increased by 7 percentage points;
- CNY: SHIBOR in CNY increased by 7 percentage points;
- GBP: LIBOR in GBP increased by 7 percentage points;
- CHF, JPY: LIBOR in corresponding currency increased by 5 percentage points;
- Other currencies: LIBOR in USD increased by 7 percentage points;
If the interest rate under the loan agreement exceeds maximum level of the range, Russian borrower is liable to submit transfer pricing investigation that proves market level of the expenses. Otherwise interested expenses should be limited to the amount calculated as multiplication of loan and maximum level of range.
From 2022 the following changes will come into force
Loans in EUR: the rate EURIBOR will be replaced with “euro short-term rate” (€STR) - the “benchmark” money market interest rate in euros, which is the weighted average rate for banks in the eurozone to borrow from financial institutions on an overnight basis;
Loans in GBP: the rate LIBOR in GBP will be replaced with SONIA (Sterling Overnight Index Average) – the “benchmark” interest rate in the sterling money market, which is the weighted average rate that UK banks borrow from financial institutions on an overnight basis.
Loans in CHF: the rate LIBOR will be replaced with SONIA (Swiss Average Rate Overnight) – weighted average interest rate of secured funding in Swiss francs. The rate reflects real transactions and quotes for REPO transactions in Switzerland, which are concluded on the Swiss Exchange.
Loans in JPY: the rate LIBOR will be replaced with TONAR (Tokyo Overnight Average Rate) – the “benchmark” interest rate, which is the weighted average rate in Japanese yen on overnight interbank loans from Japanese banks.
Loans in other currencies: the rate LIBOR in USD will be replaced with SOFR (Secured Overnight Financing Rate) – the “benchmark” money market interest rate in US dollars, which is the weighted average median rate for the volume of transactions of three different types of overnight repo secured by US Treasury government securities.
Please note that in addition to the interest limitation rules Russian tax law is able to limit interest expenses with thin capitalization rules.
What does it mean for you?
- Current loan agreements should be revised to be ensured that Russian borrowers will be able to deduct total amount of interest expenses;
- Intragroup loans should be additionally tested with Russian thin capitalization rules
- Recipients of the interest income from the affiliated Russian borrowers should be able to be considered as beneficial owners of income to apply reduced WHT rate or WHT exemption under a DTT
Lex Alliance tax team will be glad to help you to be aware from any Russian and international tax risks.Dated: [bxcode.pagedata.date]