The emerging Russian group taxation regime

3.1 The peculiarities of computation of certain taxes

Although a corporate group is not treated as a consolidated taxpayer by Russian law, its members can use some special provisions in Part Two of the RF TC. Let us examine them closer.

In international taxation two aspects of corporate group taxation are considered to be of essential significance. The first aspect is the possibility to offset the profits and losses of the members of the group; the second one is the possibility to defer the profit received or the possibility of tax exemption when transferring assets between companies – members of a corporate group11. Russian legislation is partly solving the problem of tax-free transfer of assets between some members of a corporate group.

3.2 The corporate profit tax

Obviously, the specific intra-group ties of a corporate group must be taken into account when profit tax is levied.12 There are a number of provisions that treat these problems in Chapter 25 RF TC (which regulates corporate profit tax). Some of the provisions are of significant importance for characterizing the Russian system of corporate taxation.

Sub-clause 11 clause 1 Art. 251 RF TC identifies the following assets not taken into account when defining the tax base if they are received by a Russian company without compensation; 1) from a company if the giving party owns more than 50 % of the charter capital (fund) of the receiving party; 2) from a company if the receiving party owns more than 50 % of the charter capital (fund) of the giving party. The received assets are not recognized as income for taxation purposes only if the given assets (excluding monetary means) are not transferred to the third party within a year from the date of receipt (the transfer of monetary means to the third party within a year from the date of receipt is not taken into account when applying this provision).

Thus, the clause in question provides an important ground for excluding the operations connected with intra-group transfer of assets from the tax base of the corporate profit tax.

However, the abovementioned provision has a limited scope. Firstly, the share of capital of the receiving (or giving) party must be quite high (more then 50 %). Secondly, ”tax free” transfers are only allowed between vertically integrated companies. If for example a need appears to transfer assets between two subsidiaries of the same parent company the transfer must be made through a parent company and assets (non-monetary) remain in its ownership for a year, in order to meet the requirements of the abovementioned sub-clause13. Thirdly, the possibility of a parent company’s indirect participation (through participation of several legal entities) in a subsidiary society is not taken into account in this case, despite the actual total participatory share (including indirect participation) may be much higher than the required threshold of 50 %.

The intra-group relations of a corporate croup are also taken into account when recognizing the interest on debts as expenses for tax purposes. Clause 2 of Art.269 RF TC states that if a taxpayer – a Russian company – has an unsettled debt to a foreign company, which owns directly or indirectly more than 20 % of the capital of this Russian company, and if the amount of the unsettled debt of a taxpayer – a Russian company – is three times more (for banks and leasing companies – 12.5 times more) than the difference between the sum of its assets and its liabilities (further – equity capital) on the last day of the fiscal period, special rules are applied when determining the sum limit of the interest subject to be included into expenses for fiscal purposes.

According to these rules the taxpayer is obliged to compute the sum limit of the interest recognized as expenses of the debt under control. This is achieved by dividing the sum of the interest added in each fiscal period for a debt under control by the capitalization coefficient calculated in accordance with the provisions of paragraph 3 clause 2 Art.269 RF TC.

The capitalization coefficient is calculated by dividing the sum of unsettled debt under control by the sum of equity capital (respectively to the share of direct or indirect participation of a foreign company in the charter capital of a Russian company) and dividing the result by 3 (for banks and leasing companies – by 12. 5).

The excess (not recognized as expenses for fiscal purposes) of the actual sum of interest over the sum limit of interest is treated as dividend (clause 4 Art.269 RF TC). Finally, it should be underlined that the provisions under discussion (that is the thin capitalization rules) are only applied in the framework of cross-border operations taxation regime.

3.3 The problems of transfer pricing.

A holding company in the narrow meaning of the term, that is as a parent company, and other organizations (legal entities) as members of a corporate group have certain specific contents in their legal status. This is confirmed, for example, by the analysis of Art.20 RF TC. According to clause 1 of this article, such relations between organizations that may influence the conditions or economic results of their activities or the activity of the persons represented by them, shall be deemed for the purposes of taxation to be inter-dependent.

In particular, organizations are deemed to be inter-dependent, if one of them directly and (or) indirectly participates in another organization and the total participatory share of such participation comprises more than 20 %.

When effectuating control over the calculation of taxes the tax authorities have the right to verify the correctness of the application of prices under transactions, if they are made between inter-dependent persons, see sub-clause 1 clause 2 Art.40 RF TC. When the prices of goods, applied by the parties to the transaction deviate towards an increase or decrease by more than 20 % from the market price of identical (or homogeneous) goods, the tax authorities has the right to render a reasoned decision concerning the extra tax. The results of the transactions are assessed on the basis of market prices. In its clauses 4-12 Art. 40 specifies the order and mechanisms of determining prices of transactions in such a case.

Thus, when determining the amount of tax liability of a parent company and subsidiary societies tax authorities acquire certain additional powers of control, proceeding from Art.20, 40 RF TC. In addition, it should be mentioned that Art.20 RF TC includes an open list of grounds for recognizing persons as interdependent (clause 2). For this reason, and in the light of the developing court practice of extended treatment of clause 2 Art.20 RF TC it is possible to conclude that companies – members of a corporate group (holding company) are very much likely to be recognized as inter-dependent for taxation purposes.

3.4 Joint tax liability

Sub-clause 16 clause 1 Art.1 RF TC is another provision of the RF TC that illustrates the specific legal status of corporate group members in Russian tax law. According to the provision tax authorities have the right to bring suits to courts14 concerning the recovery of indebtedness with regard to taxes, charges, forfeits and fines not paid for more than three months by certain organizations.

The RF TC provides for joint liability15 for members of a corporate group in regard to overdue tax indebtedness under certain additional conditions. However, the question of whether the given liability is subsidiary, joint or of another kind is still open in court practice. To illustrate this problem we can give two, contrary in their arguments, court decisions.

In the decision of the Federal arbitration court (FAC) of the East-Siberian region NoA33-11585/00-C3-02-858/01-C1 of 3.05.01 the court held that RF TC (sub-clause 16 clause 1 Art.31) does not provide the possibility of recovering tax indebtedness at the expense of the monetary means of a dependant company (”A”) which had receipts from the parent company (”B”). The FAC of the East-Siberian region (third instance) came to the conclusion that it was necessary to verify the presence of the monetary means that belonged to company ”B” on the account of company ”A” and subsequently make a decision in regard to recovering the indebtedness from the account of a dependent company (”A”). Since the court of first instance did not examine the case from the perspective of recovering tax indebtedness the case is to be returned for another examination in the arbitrazh court of first instance.

Contrary to this decision, the FAC of the North-Western region in NoA42-2476/00-17 of 13.03.01 held that ”...in this case the balance of payments between a parent company and a subsidiary association for services performed for each other and goods supplied is not important.

I believe that the position reflected in the latter court decision is much closer to the truth. The regulation model of the relations under discussion (as applied to a parent company and a subsidiary society) can be compared in its significance to the rule of paragraph 2 clause 2 Art.105 of the RF Civil Code. According to this paragraph a parent company which has a right to give obligatory instructions to a subsidiary association has joint liability together with the subsidiary association in regard to the transactions made by the latter to execute such instructions. To summarize, there is reason to believe that as the system of consolidated corporate group taxation emerges, the number of grounds for joint tax liability of its members will increase.