RS Q & A Taxation of transfer of title to the collateral to a new owner

Taxation of transfer of title to the collateral to a new owner

Two foreign companies have representative offices in Russia. Both rep offices provide support services. Company A (residing in Germany) borrowed money from Company B (residing in Switzerland), pledging as collateral some real property (offices in Moscow which it has owned for over 3 years). The loan agreement was signed in Switzerland. Subsequently a decision was made to repay the debt by giving the Swiss company the offices in Moscow. The transfer of title agreement was also entered into in Switzerland.
What taxes do the parties in this deal have to pay in Russia when title to the collateral is transferred to the new owner – the Swiss company?

Transfer of title to real property in exchange for payment is recognised as a sale under clause 1 article 39 of the Tax Code of the Russian Federation

Under clause 1 article 38 the Tax Code of the Russian Federation sale of goods or services as well as any property, income, expenses or other circumstances that have monetary, quantitative or physical properties are recognised as taxable assets on which the tax payer has to have taxed if the tax payer has such assets.

At the same time every tax is paid on its own asset as per part two of the Tax Code of the Russian Federation.

Thus despite the fact that the real property in this case is transferred as repayment of the loan, the transfer is recognised as a sale by the pledger for taxation purposes and thus the pledger must pay income tax and VAT on it.

Value Added Tax (VAT)

In the situation in question, taking into account the fact that company A (residing in Germany) is registered with the tax authorities in Russia at the location of its rep office, the said company has to pay VAT on the transfer of the collateral to company B (residing in Switzerland) with the amount of the VAT having to be paid by the original owner of the transferred property. VAT is charged at 18% in this transaction ( clause 3 article 164 the Tax Code of the Russian Federation).

Income tax

In the situation in question real property is transferred to the new owner but no actual payment is made. In this case a foreign organisation is paid income in non-monetary form, which includes obligation offsetting, which means that the tax agent must pay calculate and pay income tax by deducting the amount from the income received by the foreign organisation in non-monetary form (subclause 8 clause 1 article 310 the Tax Code of the Russian Federation).

In letter No 19-11/088411 dated September 18th, 2008 of the Directorate of the Ministry of Taxation of Russia for Moscow, representatives of the tax authorities noted that the performance of the functions of a tax agent is the obligation of the new owner (the Swiss company has found itself in this situation) despite the fact that this organisation does not have a permanent rep office in Russia. The tax authorities also note that the functions of a tax agent must be performed after having registered with the Russian tax authorities responsible for the district where the real property is located.

It should be noted that tax authorities have given no other explanations regarding this issue that would either support or debunk this opinion. There are no arbitration court rulings dealing with this sort of situation either.

Taking into account the fact that there are no laws regulating this situation we recommend that the right granted to tax payers under subclause 2 clause 1 article 21 of the Tax Code of the Russian Federation and request that the Ministry for Finance of Russia provide additional explanations. In the event of a dispute with tax authorities the availability of such explanations will be interpreted as absolving the tax payer of any blame for violating the tax code (subclause 3 clause 1 article 111 of the Tax Code of the Russian Federation).

Prepared by experts of the GARANT Legal Consulting Service
For detailed explanations of the reply, please, contact the authors