Review of the latest letters from the Russian Ministry of Finance

Transcription

1 Review of the latest letters from the Russian Ministry of Finance Issue 2 (49), February 2014 Transferring a share in LLC to a mutual investment fund - when does a taxable event occur? Penalties to Ukraine are now more costly Long-cycle production when should income be recognised?

2 Transferring a share in LLC to a mutual investment fund - when does a taxable event occur? /2/55649 of 17 December 2013 The Russian Finance Ministry states the following position: When transferring a share to a closed mutual investment fund, the transferor does not bear any taxable income or expenses; Upon further sale of a unit in the closed mutual investment fund, taxable base equals the difference between unit's sale price and cost of share in LLC that was earlier transferred. The Ministry of Finance has confirmed that no taxable event occurs when transferring a share to a closed mutual investment fund as no property is sold [1] and, consequently, no taxable income or related expenses arise. To substantiate its position, the Russian Ministry of Finance cited Federal Law No. 156-FZ of 29 November 2001 On Investment Funds stating that property is to be transferred to a closed mutual investment fund under trust management. The situation is different when selling a unit of a closed mutual investment fund. The taxpayer selling a unit (i.e. securities) carries taxable income under Article 280 of the Russian Tax Code and related deductible expenses, the amount of which is determined under Article 227 of the Russian Tax Code [2] (equal to the residual value of property transferred to a closed mutual investment fund as per tax accounting). We recommend concentrating on these specifics when structuring the transfer of property to closed mutual investment funds. Penalties to Ukraine are now more costly /55702 of 18 December 2013 The Ministry of Finance states that a 20% tax is to be withheld in the Russian Federation when paying forfeits (penalties, interest) to a Ukrainian counterpart. Uncertainty arises owing to the specifics of the Russia Ukraine Double Tax Treaty [3], which states that «other income» may be subject to a withholding tax. However, the Treaty does not clarify the meaning of «other income». The Russian Ministry of Finance indicates that Ukraine, represented by the State Ukrainian Tax Administration, has specified that income in the form of forfeits (penalties, interest) should be treated as taxable income under Clause 20 «Other Income» of the Treaty, adding that it (the Russian side) supports this position. Earlier in 2011 [4], the Ministry of Finance explained that «other income» should only include income generated in the form of wins, prizes, charity, gifts, alimony, social insurance benefits, inherited funds, property, and proprietary and nonproprietary rights and earnings from derivatives. Penalties were not included on this list. We recommend focussing on the adjusted position of the Russian and Ukrainian competent bodies regarding the meaning of «Other income» for the purposes of the Russia Ukraine Treaty. [1] A mutual investment fund is a complex legal structure, but it can be reasonably stated that when transferring property to a mutual investment fund, no sale takes place for tax purposes (under Article 39 of the Russian Tax Code). [2] This Article clearly states that the taxpayer/shareholder (member, unit holder) does not carry taxable income (loss) when transferring property (proprietary rights) to pay for the placed shares (equity, units). [3] The Double Tax Treaty of 8 February [4] Minutes from consultations on developing unified approaches to interpretation of provisions in the Russia Ukraine Treaty, 11 August 2011 February

3 Long-cycle production when should income be recognised? /1/218 of 13 January 2014 The Russian Ministry of Finance indicated that when performing works (rendering services) with a long production cycle in the absence of a stage-bystage commissioning schedule, the taxpayer assigns the relevant contract price to reporting periods when the contract is being executed, evenly or proportionally to a percentage of actual costs of the reporting period in the aggregate amount of costs. Production with a long technological cycle shall be understood for profits tax purposes as production with commencement and completion dates occurring in different tax periods irrespective of the number of days during which this production was carried out. The Russian Ministry of Finance has repeatedly provided similar clarifications (e.g., in Letter No /1/21186 of 7 June 2013). It is necessary to focus on the following. The Russian Ministry of Finance treats production with long technological cycles as production with commencement and completion dates occurring within different tax periods (irrespective of the number of days during which this production was carried out). The position of fiscal bodies is clear: recognition of taxable income should not be deferred. However, the Russian Tax Code does not contain such criteria as commencement and completion dates of the production process (para 2 of Article 271 and Article 316 of the Russian Tax Code) and leaves some grounds for a different interpretation that concentrates on the duration of the production cycle. Court practice on this issue is somewhat negligible. In its Resolution in case No. А /2007 of 10 April 2009, the North Western Circuit Federal Arbitrazh Court supported the position of the tax authorities, which also focused on the commencement and completion dates of production, stipulating that taxpayers must pay additional profits tax for Thus, we recommend bearing in mind that the position of the tax authorities on this issue is quite conservative and may be supported by the court authorities. February

4 Contacts Group Financial Services Contacts Ekaterina Lazorina Russia Tax and Legal Services Leader Vladimir Burov Consumer and Industrial Products David John CEE Tax and Legal Services Leader Enrika Schevchenko Natalia Kozlova Natalia Sherbakova (St. Petersburg) Technology, Communication, Entertainment and Media Natalia Vozianova Energy, Utilities and Mining Denis Gorin Alexei Smirnov Ekaterina Malygina Stefano Tonetti Private Company Services Alina Lavrenteva Mergers & Acquisitions Artem Petrukhin Ekaterina Koropova Galina Naumenko International Tax Structuring Natalia Kuznetsova Mikhail Filinov

5 Group Transfer Pricing Contacts Svetlana Stroykova Andrey Kolchin Tax Management and Accounting Services Kirill Nikitin Indirect Tax Services and Customs Vladimir Konstantinov International Assignment Services Karina Khudenko Legal Practice Yana Zoloeva Legal Practice Leader Maxim Kandyba Yana Proskurina Human Resource Consulting Ruxandra Stoian 2014 PricewaterhouseCoopers Russia B.V. All rights reserved. In this document "PwC" refers to PricewaterhouseCoopers Russia B.V., which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. The information contained in this flash report does not constitute professional advice. PwC is not responsible for any damages that may be incurred by any parties if their actions or failure to act were based on their reading of this flash report. For assistance with specific questions, we advise that you contact a PwC professional in the relevant line of service.