The article describes the main features of some specific and highly relevant fields of Russian corporate taxation. Among the treated issues are the transfer pricing rules and the emerging joint tax liability regime.

1 Introduction

The processes connected with the consolidation of financial, production and human resources have long since acquired a global character, and Russia is no exception. The creation of vertically integrated corporate structures of a holding type could be treated as an organizational and legal indicator of the abovementioned economic processes. This puts forward the problems of legal regulation of corporate integration and corporate group taxation.

It should be pointed out that in Russian legislation the comprehensive regulation of the legal status of a corporate group has not arrived at its final form. The draft of the federal law ”On holding companies” was not approved1. The Civil Code of RF (RF CC), establishing the basis for regulating corporate relations, does not contain, however, special provisions on holding companies. A number of Federal Laws ”On joint stock companies” No208-FL of 24.12.95 (rev.2 of 31.12.05), ”On bankruptcy” No127-FL of 26.10.02 (rev. of 24.10.05)3, ”On securities market” No39-FL of 22.04.96 (rev. of 27.12.05) and some others mention corporate groups as an existing kind of structure without revealing their characteristics4. The arising lacunas in statutory regulation are being partly compensated by local regulation at the level of certain corporate groups, which are establishing it in their own interests within the framework of RF CC and complying with antimonopoly legislation.

Despite the more recent legislation, in cases when Russian lawyers face the need to give a formal definition of a corporate group (holding company) they often refer to the temporary ruling ”On holding companies which are created by transforming state companies into joint stock companies”, approved by RF President Decree ”On measures of implementing industrial policy when privatizing state companies” No1392 of 16.11.92. According to clause 1.1 of this document a holding company is a company (irrespective of its organizational and legal form) whose assets include the controlling block of shares of other companies. This definition, as well as the abovementioned Decree, looks quite obsolete in the present economic context of Russia.

This situation in civil and commercial legislation illustrates the general insufficient development of corporate group taxation in Russia. We sometimes feel that tax legislation is outstripping the development of civil and commercial norms, trying to do the job of other branches of law, in particular civil and commercial, when defining intra-group ties for taxation purposes.

Shitkina I.S. Corporate management and corporate control in a holding company, In ”Economy and Law” (in Russian). Moscow. 2003. No3. P.3.

Here and further the latest revisions of normative acts are only mentioned.

Previous Federal Laws dealing with bankruptcy are No3929-1 of 19.11.92 and N6-FL of 8.01.98.

Some issues of corporate group formation are solved in a special way in respect to subjects engaged in production under the conditions of so called natural monopoly (Federal Law ”On natural monopolies” No147-FL of 17.08.95).

2 The status of a corporate group in Russian tax law in the context of international approaches

In Russian tax law a corporate group, as a financial complex (industrial and economic) or as a combination of related legal entities, is not treated as a special legal subject, despite the notions of ”consolidated group of taxpayers” or ”consolidated taxpayer” appearing in the draft Tax Code of the Russian Federation (RF TC). In particular, the suggestion was to provide for a possibility to form a consolidated group of taxpayers consisting of a parent company and subsidiary societies, if the parent company’s share of participation was not less than 80 %. Such a group could be organized on the basis of an agreement between a parent company and subsidiary societies and was subject to registration by the tax administration5.

However, these innovations have not been included in the adopted variant of RF TC6. Taking this into account the term ”organization” defined in Art.11 and used further in the text of RF TC for companies cannot be applied to a corporate group as a whole. Thus, from a tax law perspective a corporate group is just a group of inter-dependent, in the sense of Art.20 RF TC7, organizations (legal entities).

Evidently, not recognizing a corporate group (holding company) as a consolidated taxpayer (what we see now in RF legislation) is not a decision that has no alternatives. Establishing special tax provisions for corporate groups is common practice as we can see, in particular, from the materials of the 2004 IFA conference devoted to group taxation. These provisions do not mean ensuring benefits and preference; the reasonable approach means first of all creating an economically grounded taxation system of integrated corporate groups. A complicated corporate structure and intra-group transfers should not lead to additional tax burden hindering financial and production integration. This problem is the concern of the Russian legislator and it influences court practice.

Two essentially different ”consolidation” models of corporate groups attract the attention of Russian scholars8. According to the first, consolidation is carried out by ”widening the tax personality” of the parent company, that is, briefly speaking, for purposes of computing corporate profit tax subsidiary societies are equaled in their legal status to branches of a legal a parent company (some kind of similar measures can be found in the old French tax regime established by Financial Law No71-1025 of 24.12.71). According to the second model, for taxation purposes the whole corporate group is not recognized as a single taxpayer in regard to corporate profit tax, but the model in question ensures its centralized computation and payment. Tax liability of a consolidated taxpayer can be imposed on one of the companies which is a current member of a corporate group (this model could be compared to the regime established by French financial law 87-1060 of 30.12.87, later incorporated in the Code Général des Impôts, Articles 223-223 Q, 223 R-223 U).

In principle, other models of corporate group taxation are 1. the traditional German law regime of ”Organshaft”9; 2. the ”group contribution” regimes used in Sweden, Norway and Finland, and 3. the ”group relief” that is practiced in Great Britain and New Zealand, both of which allow the redistribution of income and (or) losses among the members of a corporate group.10 These could partly be used in Russian legislation provided that they can ensure the similar economic effect. But this will require further analysis in terms of their compatibility with the basics of the Russian corporate taxation system.

Indeed, we can presume that the Russian legislator has not yet determined his attitude as to the extent and use of the existing international approaches in the field. But the analysis of the draft RF TC shows that at the first stage of the tax reform the ”consolidation” model seems more adequate in the context of Russian legal condition. The RF tax legislation is currently developing step by step, introducing rules that ensure the special and economically founded tax regime for corporate groups, and solving some particular problems in the field without predetermining the future normative model.

See Russian Federation Tax Code. General Part (Draft). Comments S.D. Shatalov. (in Russian) Moscow, 1996. P.79–82.

Part One of RF TC (Chapters 1–20) of 31.07.98 establishing rules in respect to all taxes and charges has come into force since 1.01.99 (rev. of 04.11.05). Part Two of RF TC of 5.08.2000 contains Chapters (21–31) devoted to certain federal, regional and local taxes and charges (rev. of 31.12.05). Regional (tax on companies’ property, tax on transport, tax on gambling business) and local (land tax, tax on individual’s property) are additionally regulated at the level of Subjects of Federation and municipalities.

This provision is applied for restricting transfer pricing (see further – 2.2).

See the analysis: Vinnitskiy D.V. Corporate group taxation in Russia: issues and solutions, In ”Corporate Lawyer” (Moscow) issued by ”Wolters Kluwer” (in Russian). 2005. No1 (September).

Schultze-Schlutius H.G. Die Organtheorie. Essen. 1955; Schmidt, Müller, Stökker. Die Organschaft im Körperschaftsteuer- Gewerbesteuer- und Umsatzsteuerrecht. Herne / Berlin. 1999.

Yoshihiro Masui. General Report, in IFA, Group Taxation, Cahier de droit fiscal international Vol. 89b, 21–67 (2004).

3 Main features of the emerging group taxation regime in Russia

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.

Tax rates are 24 % (basic rate), 9 % (dividends received by residents, 15 % (dividends received by non-residents, and 20 % (other income of non-resident companies).

Anyway we believe that there are no significant reasons to impose corporate profit tax on assets transfer between two subsidiary societies, if the share of a parent company’s participation in each of them is more than 50 %. Such an adjustment of sub-clause 11 clause 1 Art.251 RFTC seems quite justified.

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 ” 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.

In this case joint liability is not connected in any way with legal responsibility for tax violation in the sense of Chapter 15 ”Tax violations and responsibility for tax violation” RF TC. It is only expressed in burden of a executing a positive obligation instead of a failed taxpayer. That’s why it is not necessary for tax authorities to comply its acts and decisions with the order and procedures provided for Decision on bringing taxpayer to responsibility (Art.100-101 RF TC). As it was rightly pointed out by the Federal arbitration court of the East-Siberian region in its decision NoA33-11585/00-C3-02-858/01-C1 of 3.05.01: ”...the argument of the court of first instance that to solve the problem of recovery of tax indebtedness in accordance with of sub-clause 16 clause 1 Art.31 RF TC it was necessary to follow the rules provided for by Art. 100, 101 RF TC, is wrong”. See also in regard to related problems: Vinnitskiy D.V. Russian Tax Law: Problems of Theory and Practice. (in Russian) – St. Petersburg: ”Yuridichesky Center Press”. 2003.

See footnote 19.

4 Conclusion

In conclusion, a reform of the Russian corporate taxation, aiming at taking into account specific intra-group relations, is quite possible to realize in the context of the established structure of the RF TC. In perspective, the system of consolidated taxation can be provided for in the RF TC as one of special tax regimes16 the application of which a corporate group meeting the established requirements can qualify for.

Thus, the tendencies in Russian corporate taxation show that the RF TC will further widen the list of rules, providing for the gradual formation of a group taxation regime for domestic and international holding companies.

Danil V. Vinnitskiy

Danil V. Vinnitskiy, LL.D., is a Professor of tax law at the Ural State Law Academy in Yekaterinburg, Russia.

It should be mentioned that in Russia tax disputes are settled in two kinds of courts: 1) in courts of general jurisdiction (usually for individuals) on the basis of RF Code of Civil Procedures and 2) in arbitration courts (usually for companies) on the basis of RF Code of Arbitration Procedures.