RS Q & A Thin capitalization - a feature of taxation

Thin capitalization - a feature of taxation

A foreign company based in France holds a 51% stake in a Russian company. The foreign company has provided a loan to the Russian company in the amount of 280 million roubles. The equity capital of the Russian company amounts to 500 thousand roubles.
What are the features of taxation of interest in the event of thin capitalisation?

Thin capitalisation rules were introduced into the Tax Code in the form of special rules for calculating interest on loans from foreign participants and/or persons affiliated with them. According to these rules, interest paid in excess of the limit calculated subject to the Tax Code are treated as dividends and are taxed at the rate of 15%.

In the given situation the foreign company is a direct lender and owns 51% of the share capital of the Russian organisation, the borrower. The amount of payables under the loan obtained by the Russian company from the foreign company is more than triple the equity capital of the Russian company. Therefore, the accounts receivable are recognised as controlled and interest paid in excess of the limit level calculated on the basis of the ratio of capitalisation and the share of foreign participation in the parent company of the Russian organisation is taxed in the same way as dividends paid to the foreign company, at a rate of 15% (for tax purposes equal to the dividends paid to the foreign company).

Moreover, the capitalisation ratio (K) is determined by dividing the corresponding outstanding controlled debt by the amount of equity capital corresponding to the share of direct or indirect participation of the foreign organisation in the charter capital of the Russian company, and dividing the result by 3:

K = 280,000,000 RUR / 500,000 RUR х 0.51 /3 = 366.014

The amount of interest owed on the controlled debt during the reporting period (A), which the Russian organisation can recognise in this period when calculating income tax, is determined thus:

A / K = A / 366.014

The remaining amount of interest, equal to 0.998 x A (defined as A – A / 366.014 = 0.998 x A), is recognised as dividends paid to the foreign company by the Russian organisation and is subject to taxation.

Since in this case the recipient of interest that qualifies as dividends is a foreign company, resident in France, the applied rate shall be the tax rate on dividends subject to the Agreement between the Government of the Russian Federation and the Government of the French Republic for avoidance of double taxation and to prevent tax evasion and violations in respect to income and property taxes (Paris, 26 November 1996), at the rate of 15%. The agreement also sets forth the conditions under which lower tax rates, 5% or 10%, can be applied to dividends.

Prepared by experts of the GARANT Legal Consulting Service
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