Tax on corporate transactions in Russian Federation: overview

A Q&A guide to tax on corporate transactions in the Russian Federation.

This Q&A provides a high level overview of tax in the Russian Federation and looks at key practical issues including, for example, the main taxes, reliefs and structures used in share and asset sales, dividends, mergers, joint ventures, reorganisations, share buybacks, private equity deals and restructuring and insolvency.

To compare answers across multiple jurisdictions, visit the Tax on corporate transactions Country Q&A tool.

This Q&A is part of the Multi-jurisdictional Guide to Tax on Transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-mjg.

Evgeny Timofeev, Goltsblat BLP/Berwin Leighton Paisner
Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?

The most important authority responsible for enforcing taxes on corporate transactions is the Federal Tax Service, along with its local branches throughout the country. The Federal Customs Service is responsible for the collection of taxes on exports and imports. The Ministry of Finance (Ministry), although not directly involved in tax collection, is responsible for the development of state tax policy and provides guidance on the application of tax laws.

 

Pre-completion clearances and guidance

2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?

Taxpayers can apply in writing to the Ministry for clarification on the tax position of a proposed transaction. However, the Ministry does not examine transactional documents and the clarification only addresses situations as the applicants describe them. The Ministry can also provide clarification on whether double tax treaties apply to a proposed transaction.

Clarifications bind the tax authorities (Article 32(1)(5), Tax Code), though in practice these provisions are interpreted as non-binding on the authorities. However, if a taxpayer follows a clarification and the court or the tax authorities subsequently deviate from it, the taxpayer is not liable for fines or late payment interest. This benefit is only available if the clarification is:

  • Based on correct and complete information.

  • Addressed to either:

    • the taxpayer concerned;

    • the general public.

 

Main taxes on corporate transactions

Transfer taxes and notaries' fees

3. What are the main transfer taxes and/or notaries' fees potentially payable on corporate transactions?

Transfer taxes

There are no specific transfer taxes payable on corporate transactions. In certain cases, minor amounts are charged for registering amendments to the state registry of legal entities. The state registry contains basic information on legal entities, including:

  • Their legal form.

  • The date the participations are formed (for some legal forms).

  • The amount of chartered capital.

  • The appointed general director.

Notaries' fees

In most cases transfer of a participation interest in limited liability companies (LLCs) is subject to compulsory notarisation. In this case, depending on the value of the transaction the notary fee can amount to between 0.15% to 0.5% of the value of the transaction (though a minimum of RUB1,500 and a maximum of RUB150,000 is charged) (as at 1 March 2012, US$1 was about RUB29.1). However, as notaries assume significant risks acting on corporate transactions, they generally provide other notary services for a negotiable price, so the resulting expenses can reach thousands of US dollars or more (depending on the size of the transaction).

Notary fees are minor for other formalities which are due in relation to the alienation of shares in joint stock companies or a participation interest in LLCs.

State duties

State duties can apply where state registration or state authorisation is required to complete a transaction (for example, where it is necessary to register amendments to the state registry of legal entities) (see above, Transfer taxes). In most cases, they are minor. The most important duty applies to state registration on the issue of securities (including shares). This is charged at 0.2% of the par value, but is subject to a maximum of RUB200,000. It does not apply to the issue of participations in LLCs, since these are not considered to be securities under securities law (see Question 4).

 

Corporate and capital gains taxes

4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?

Profit tax

Russian companies are subject to profit tax on their worldwide income. Entities with branches must apportion their profits among the regions in which they operate. This is calculated according to a formula which takes into account the:

  • Number of employees at each of the locations.

  • Value of fixed assets at each of the locations.

As of 2012 profits tax consolidation is allowed for a group of entities who between them own at least 90% of the group's shares, and subject to a list of other prerequisites, including:

  • Minimal annual revenues of RUB100 billion.

  • Taxes paid by the group amounting to not less than RUB10 billion.

  • Assets amounting to not less than RUB300 billion.

The criteria above apply cumulatively to the group.

The consolidated tax base is calculated on the basis of the cumulative income and expenses of all members. Pre-consolidation losses cannot be deducted. Tax liabilities are apportioned between the consolidated members, in a manner similar to the abovementioned allocation of profits between subdivisions. Transactions within the consolidated taxpayer group are not subject to transfer pricing control as regards profits tax liabilities.

Calculating profit tax. In calculating tax, the company can deduct expenses provided that they are:

  • Economically justified (that is, incurred to promote activities aimed at generating income).

  • Properly documented.

There are limitations on certain expenses, for example:

  • Advertising expenses (other than media or advertising located in the open or advertising at exhibitions). These can only be deducted to the extent that they are within 1% of the company's sales.

  • Entertainment expenses. These are limited to 4% of the company's payroll.

  • Liability insurance expenses. These expenses are non-deductible unless insurance is obligatory under the applicable rules.

Thin capitalisation rules apply to interest payments to direct or indirect shareholders that control more than 20% of the company's capital. In that case, the borrower's debt-to-equity ratio cannot exceed three to one (12.5 to 1 for banks and leasing companies). The excess interest is not deductible and is considered to be a dividend and taxed as such (see Question 8).

Interest is deductible to the extent the rate used is at arm's length. For that purpose, the taxpayer can choose to apply the statutory limits, which are:

  • 1.8 times the Russian Central Bank refinancing rate (which is 8% as at March 2012) per annum for Russian currency loans.

  • 0.8 times the same refinancing rate per annum for foreign currency loans.

Interest is not capitalised irrespective of the purpose of the loan and can be expensed, provided that the loan was provided for bona fide business purposes.

The accrual method is generally used to calculate taxable profits (that is, income is recognised when it is earned and expenses deducted when they are incurred irrespective of the actual payments). Losses can be carried forward for ten years.

Profit tax rates. The rate that usually applies to most Russian legal entities and permanent establishments (PEs) of foreign legal entities is 20% (see Question 7, Profit tax). Some regions provide investors with tax incentives which can reduce the overall rate to as low as 15.5%, which is the minimum acceptable under federal law.

All dividends that companies receive are taxed at 9%, unless the participation exemption applies. The participation exemption exempts dividends from taxation if all of the following apply:

  • The amount of the investment in the subsidiary that pays the dividend is at least RUB500 million. This requirement is abolished in relation to dividends received as of 2011, from profits earned in 2010 or later.

  • A minimum shareholding of 50% is continuously held for at least one year before the decision to pay the dividends.

  • The subsidiary's country is not on the "black list" approved by the Ministry.

Interest on certain governmental or municipal bonds is taxed at preferential rates.

Specific categories of taxpayers, including medical/educational entities and residents of the specialist high-tech innovation zone (Skolkovo), are subject to 0% tax rate.

Capital gains

There is no specific capital gains tax. Capital gains are taxed as part of the company's worldwide general source income at 20%. Therefore, the company can:

  • Offset the gain against losses on a participatory interest in LLCs from other transactions, including trade.

  • Deduct the expenses incurred for the purposes of the transaction (see above, Profit tax).

However, losses incurred on the sale of securities (such as shares) cannot be offset against trading profits and can only be offset against capital gains on shares of the same class (listed or non-listed).

Capital gains on acquisitions made from 2011 are subject to 0% tax if at the time of disposal they have been continuously held by the taxpayer for at least five years. However, this exemption only applies to shareholdings made since the beginning of 2011 which are related to either:

  • Non-traded securities.

  • Traded securities of high-tech companies (the government determines what fulfils the criteria for high-tech companies).

In terms of capital gains taxation there are specific rules for determining the securities' price for tax purposes. For traded securities the price is linked to the respective quotations' range. For non-traded securities the price of the transaction is deemed acceptable if it is within a 20% window of the price calculated under one of the permitted methods (market quotations, calculation under specified formulas or independent appraisal) chosen by the taxpayer in its tax accounting policy.

Transfer pricing. At the start of 2012 Russia implemented a new transfer pricing framework that is more comprehensive and aligned with the approach of the Organisation for Economic Co-operation and Development (OECD) in most respects, including its methodology, comparability analysis and preparation of documentation. In contrast to prior regulations only related-party transactions are subject to price control, and transactions between non-related parties are controlled if they are made with regard to certain traded commodities, or with residents of low-tax jurisdictions. Note that the calculation of the value of securities for tax purposes is excluded from the scope of the general transfer pricing rules and should be determined under specific quasi-transfer pricing provisions.

 

Value added and sales taxes

5. What are the main value added and/or sales taxes potentially payable on corporate transactions?

Value added tax (VAT)

VAT applies to the:

  • Domestic supply of goods or services.

  • Provision of property rights, including intellectual property rights, rights of possession, and so on.

  • Import of goods into Russia.

The supply of goods is considered to take place in Russia if the transportation of the goods begins in Russia.

There are a number of circumstances when services are considered to be provided in Russia, including:

  • Services relating to real estate or movable property that is located in Russia.

  • Services relating to arts, sports, education, tourism and leisure that are effectively provided in Russia.

  • Advertising, consulting, marketing or similar services, software development, leasing of movable property (except motor vehicles), licensing of patents or trade marks where the buyers have their place of economic activity in Russia.

  • Where the supplier has its place of economic activity in Russia (for most other services).

These VAT rules also apply to PEs of foreign companies. If a foreign company that does not have a PE in Russia makes a supply which is subject to VAT, the VAT must be withheld at source and transferred by the Russian company that buys the service (the buyer can recover this VAT under the general conditions (see below)).

The VAT paid to suppliers (input tax) can be recovered by the buyer to the extent that it relates to goods or services bought for the purpose of the buyer's own taxable activities, by being either:

  • Offset against VAT received from its own customers (output tax).

  • Refunded or offset against future tax liabilities.

The following VAT rates apply:

  • 0% to export sales of goods and export-related services.

  • 10% to certain food, children's goods, medical goods, and mass media products and related services.

  • 18% to most goods and services.

Transactions involving securities (including transfers of shares) or transactions involving participations in LLCs are generally exempt from VAT. Sales of land and residential premises, debt financing, banking and insurance services, and software licensing are also VAT exempt (see Question 15, VAT).

VAT is calculated under the accrual method and is payable on a quarterly basis.

Sales tax

Russia no longer imposes sales taxes.

Excise tax

Excise tax is payable on certain goods, including:

  • Alcohol.

  • Tobacco.

  • Motor vehicles.

  • Petrol.

The producers of the goods are generally responsible for paying the tax. The tax is paid on the:

  • Import, sale, other transfer or consumption of these goods.

  • Contribution of taxable goods to the charter capital of subsidiaries or in simple partnerships (that is, joint ventures without separate legal personality).

  • Distribution of taxable goods as liquidation proceeds.

In most cases, the tax rates are fixed as certain charges per kilogramme, litre, tonne, unit of engine power, unit of quantity or another unit of measure.

Excise tax is charged on an accrual basis. Excise paid on acquisitions can be offset against excise charged to a buyer down the chain (if any) or deducted from taxable profit, depending on the type of goods in question.

 

Other taxes on corporate transactions

6. Are any other taxes potentially payable on corporate transactions?

Customs duties

Import customs duties apply to a wide range of imported goods. They are generally charged according to the goods' value at ad valorem rates. Rates range from 0% to 40%, with most being between 5% and 20%. Some goods are subject to per unit rates that are fixed in euros. Some other goods are subject to an ad valorem rate, but with a minimum per unit rate fixed in euros. Limited categories of exported goods (such as crude oil) are subject to export customs duties. In addition, customs clearance and other customs fees can apply. The person declaring the goods (declarant) at customs pays customs duties. They can also be paid by a customs broker, but the declarant remains ultimately liable.

Assets tax

The corporate assets tax applies to fixed assets accounted for on a company's balance sheet (other than land and the assets of some special types of organisations, including state bodies, religious bodies and other non-governmental organisations). The tax is generally imposed yearly on the assets' residual book value (even if different from fair market value). The maximum (and typical) assets tax rate is 2.2%. It can be reduced by regional legislatures.

Land tax

Companies that own land are subject to land tax, payable on a yearly basis. The general rate is 1.5% and applies to the cadastre value of the land. A reduced rate of 0.3% applies to agricultural and residential lands. The rates can be reduced by regional authorities.

Transportation tax

Owners of vehicles (cars, lorries, aeroplanes and ships) are liable for a transport tax, levied at various rates depending on engine power. The rates can vary considerably from region to region.

Other

Certain types of enterprises can elect to, or be required to, pay a particular tax instead of the generally applicable taxes. For example:

  • Small enterprises involved in certain types of activities (such as retail) must, if the municipal authorities so decide, pay unified tax on deemed income at the rate of 15%. Other small enterprises can elect to pay unified tax under the simplified tax system. In the latter case, they have a choice of paying the tax at either:

    • 6% on revenues;

    • 15% on the profit (with a limited list of deductible expenses).

    These two types of taxes apply instead of VAT, profit tax, and other generally applicable taxes.

  • Agricultural enterprises may elect to pay unified agricultural tax at 6% on their profits, instead of generally applicable taxes, including VAT and profit tax.

  • Investors investing in natural resources can elect for taxation under profit sharing agreements. Under these agreements, a certain percentage (at least 32%) of the profit derived during the project should be paid to the state, with most of the taxes paid under the general tax system being refundable. Tax on the extraction of mineral resources and other specific taxes can also apply.

 

Taxes applicable to foreign companies

7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what "presence" is required to give rise to tax liability)?

Notaries' fees

Notaries' fees apply regardless of whether a foreign company has any presence in Russia (see Question 3, Notaries' fees).

Profit tax

Foreign companies acting through PEs. PEs of foreign legal entities acting in Russia are generally taxed in the same way as Russian companies (see Question 4, Profit tax). The Tax Code's definition of a PE generally follows the OECD Model Tax Convention on Income and on Capital.

The differences between the taxation of domestic and foreign companies for profit tax include:

  • The thin capitalisation rules do not apply, meaning that the deductibility of interest payable to foreign companies is not subject to any restriction based on undercapitalisation.

  • The participation exemption applicable to dividends does not apply to PEs but can be claimed under a double tax treaty's non-discrimination clause (see Question 8).

  • The mechanism to allocate the taxable profits to available branches does not apply to PEs (see Question 4, Profit tax). This is because each PE is considered to be a standalone enterprise (unless the PEs are all involved in performing a single technological process) (see above).

Foreign companies without PEs. These foreign companies can also be subject to Russian taxes, including VAT (see below, VAT). Unless a double tax treaty provides otherwise, certain types of income are subject to withholding tax. These include:

  • Dividends, interest and royalties paid by a Russian company (see Question 8).

  • Liquidation proceeds paid by a Russian company.

  • Capital gains from the transfer of immovable property located in Russia.

  • Capital gains from the transfer of a stake in a non-traded Russian company, if more than 50% of its assets consist of immovable property located in Russia.

  • Lease payments in relation to movable or immovable property located in Russia.

  • Income from international transportation services (freight).

  • Civil law penalties payable by a Russian company for breach of contracts.

  • Other similar types of income.

These types of income are generally taxed at the domestic tax rate of 20%. Specific withholding tax rates apply to the following items of gross income:

  • 15% on dividends and interest on state and municipal bonds.

  • 10% on freight income.

These rates can be reduced or eliminated by an applicable double tax treaty.

VAT

Foreign companies are subject to VAT if goods or services are deemed to be supplied in Russia under the place of supply rules (see Question 5, Value added tax (VAT)). Since Russian VAT law provides for a withholding mechanism (in contrast to the reverse charge mechanism in EU countries), gross-up clauses are often included in contracts with foreign suppliers. However, where the foreign company supplies through a PE in Russia, the foreign company itself must pay the VAT.

Assets tax

Foreign legal entities acting through PEs are subject to assets tax in generally the same way as Russian companies. If no PE exists, the tax is only payable in relation to the Russian real estate.

Land tax and transportation tax

Foreign companies that own land or vehicles in Russia can be subject to land tax or transportation tax (see Question 6, Land tax and Transportation tax).

 

Dividends

8. Is there a requirement to withhold tax on dividends or other distributions?

Withholding tax

Companies that pay dividends must withhold profit tax from dividend distributions. The tax rates are:

  • 9% for dividends distributed to companies or resident individuals.

  • 15% for dividends distributed to foreign companies or non-resident individuals, unless an applicable double tax treaty provides for a lower rate.

If the participation exemption applies, the dividend distribution is exempt from profit tax, and therefore tax does not need to be withheld. The Tax Code limits the participation exemption to Russian companies. However, it may be possible for a foreign company to claim it under the non-discrimination clause of an applicable double tax treaty. This should be possible if the foreign company holds shares through its Russian PE. In certain cases (depending on the clause's wording) it may be possible for companies that hold shares directly. However, no official clarifications or case law currently exist.

Tax treaties can reduce the level of withholding tax. However, these benefits are only available to beneficial owners of dividends. None of the Russian tax treaties allow for a full tax exemption for dividends. The lowest tax rate available is 5%, and this rate usually applies subject to additional participation criteria set out in the relevant treaty.

Where a Russian company makes a dividend distribution to a foreign company or individual, the tax rate applies to the gross amount of the dividends. When the Russian company pays dividends to another Russian company or to a Russian tax-resident individual, it can deduct from the amount of distributable dividends the amount of dividend income it received from its own subsidiaries. The withholding tax rate then applies to the resulting net dividend distributable income. This does not apply if the dividends that it received were exempt from tax or deducted during the previous distributions. It may be possible for foreign companies that benefit from an applicable treaty's non-discrimination provisions to use this deduction.

 

Share acquisitions and disposals

Taxes potentially payable

9. What taxes are potentially payable on a share acquisition/share disposal?

Profit tax

A Russian company disposing of securities (such as shares of a Russian joint stock company or foreign company, or a participation in the capital of an LLC) is subject to Russian corporate profit tax unless the participation exemption applies (see Question 4, Profit tax).

A foreign company that transfers shares or participations (or derivatives from them), other than through a PE in Russia, is only subject to withholding tax on any gain from that disposal if more than 50% of the assets of the non-traded Russian company consist of Russian real estate (see Question 4, Profit tax). In addition, profits from the transfer of Russian shares or derivatives on foreign securities exchanges are not deemed to be Russian-source income, even if this real estate value test is met.

An applicable tax treaty can reduce or eliminate profit tax. If a treaty exemption is not available, the Russian company that acquires the shares or participations withholds profit tax equal to 20% of the gain from the disposal proceeds (or of the gross proceeds, if the selling company does not provide the acquirer with the cost base in the shares or participations). If the buyer is another foreign company with no PE in Russia, there is no established mechanism to pay the tax. A person that disposes of shares or participations is not liable for any other taxes on the disposal, such as VAT or stamp duty.

Change in ownership as a result of acquiring shares or participations does not restrict the acquired company's ability to use its tax attributes, such as net operating losses and recovery of excess input VAT.

 

Exemptions and reliefs

10. Are any exemptions or reliefs available to the liable party?

The general corporate profit tax rate is 20% (with 2% payable to the federal treasury and 18% to the regional treasuries) (see Question 4, Profit tax). Regional legislative authorities can decrease the regional profits tax rate from 18% to 13.5% (effectively reducing the general profit tax rate to 15.5%).

Subject to the limitation on the ability to carry losses forward (the term of a loss carry-forward is limited to ten years following the year in which the loss is incurred), losses on the disposal of securities by companies can be offset against gains from the disposal of securities of the same category (for example, listed or non-listed shares). Special rules apply to licensed security brokers and dealers.

The limitation on losses being offset against gains of securities of the same category does not apply to the disposal of participations in LLCs.

Capital gains on acquisitions made from the beginning of 2011 are subject to 0% tax if, at the time of disposal, they have been continuously held by the taxpayer for at least five years. However, this exemption only applies to shareholdings made from the beginning of 2011 which are related to either non-traded securities or traded securities of high-tech companies (the government determines what fulfils the criteria for high-tech companies).

 

Tax advantages/disadvantages for the buyer

11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.

Advantages

The major tax advantage of the acquisition of shares or participations is exemption from VAT. Although VAT is not supposed to be a significant burden unless the taxpayer is a final consumer, difficulties in claiming VAT recovery make this exemption an important consideration.

In addition, the documentation for the disposal of shares or participations, which consists of a contract and a transfer notice, is simple, and the transaction is well understood by the parties, governmental agencies and courts. Governmental filings that take time and effort are sometimes required but are generally manageable (see below, Disadvantages).

Disadvantages

The buyer of shares acquires, in addition to the assets of the target company, both the known and unknown liabilities of the target. Careful due diligence should identify most or all of the target company's liabilities.

The tax authorities can usually easily trace transactions with the shares of joint stock companies, as a registrar of shares (either the issuer itself or an independent service provider) must keep all documentation that gives rise to a transfer of title on the shares. Transactions concerning participations in LLCs are documented by amending the federal legal entities register held by the tax authorities and are subject to compulsory notarisation.

There is also a non-tax related disadvantage. Some of the warranties widely used in contracts under English law may not be enforceable in Russia as they are generally unknown to Russian law. This can usually be avoided, where a foreign entity controls the Russian target, by buying the shares of the foreign entity instead.

 

Tax advantages/disadvantages for the seller

12. Please set out the tax advantages and disadvantages of a share disposal for the seller.

Advantages

For sellers, the disposal of shares or participations is exempt from VAT and the documentation is simple (see Question 11, Advantages).

Disadvantages

The seller has restrictions on using losses, incurred due to disposal of securities, to offset gains from ordinary activities or disposals of shares of a different type (see Question 10).

 

Transaction structures to minimise the tax burden

13. What transaction structures (if any) are commonly used to minimise the tax burden?

There are no specific structures commonly used to optimise taxes in relation to the disposal of shares or participations. Sometimes a Russian company that disposes of securities contributes them to the charter capital of a subsidiary in a low-tax jurisdiction, and then disposes of the securities offshore. In addition, some taxpayers sell shares of special purpose vehicles (SPVs) instead of assets to avoid VAT.

However, these structures carry significant tax risks. The tax authorities have a wide variety of ways to challenge or re-categorise the transaction (for example, defining it as a sham transaction or a fictitious transaction, claiming the transaction is not for a valid business purpose, and claiming that the transaction causes an unjustified tax benefit). In addition, contributing assets into the charter capital of a subsidiary (for example, an SPV) triggers VAT liability in relation to the input VAT recovered on the purchase, related to the asset's current residual value. However, the subsidiary can reclaim this VAT.

A taxpayer can use the following structure to achieve a debt pushdown. It can establish a debt-financed SPV before the transaction and use it to buy the target. When the two companies are merged, the merged company can deduct the interest incurred on the loan obtained by the SPV to finance the purchase from its trading profits. This is not a risk-free structure, because where the SPV is only established to achieve a debt pushdown, the interest deduction may be denied under the courts' anti-abuse doctrine. This risk may be mitigated by using an active company instead of the SPV.

In addition, where the acquisition cost significantly exceeds the residual book value of the target's assets, the merger may push the company created in the course of the merger into a negative net assets position (as the difference is recognised in accounting books as a loss). This provides grounds for obligatory liquidation (although the courts do not support this approach if they believe the situation is curable). This situation can sometimes be remedied by a step-up in the book value of the assets (although this leads to an increased assets tax charge).

 

Asset acquisitions and disposals

Taxes potentially payable

14. What taxes are potentially payable on an asset acquisition/asset disposal?

Profit tax

Capital gains from the disposal of assets are generally subject to profit tax (see Question 4, Profit tax). The taxable gain amounts to the excess of the sale over the acquisition price (for assets that are subject to depreciation, this is the residual book value) less other expenses of disposal, such as:

  • Agent fees.

  • Valuation fees.

  • Registration fees.

  • Storage and transportation costs.

A foreign company that disposes of Russian assets can sometimes avoid profit tax through an applicable double tax treaty. This is provided the Russian assets are not real estate and do not form part of a PE in Russia.

VAT and customs duty

If an asset is imported into Russia, the importer must generally pay VAT, customs duties and certain other customs fees (see Question 5, Value added tax (VAT) and Question 6, Customs duties). The disposal of assets is usually subject to VAT. However, there are certain exemptions (see Question 15).

Excise tax

The disposal of certain assets may trigger excise tax liability (see Question 5, Excise tax).

State duties

Minor duties may be due on the registration of the sale of real property of about RUB15,000 (see Question 3, State duties).

 

Exemptions and reliefs

15. Are any exemptions or reliefs available to the liable party?

Profit tax

The law provides a number of exemptions from profit tax on certain disposals of assets, including:

  • Capital contributions (these are not taxable for either the disposing party or the recipient).

  • Distributions of liquidation proceeds (up to the amount of capital contribution, that is, only the amount equal to the direct investment in the charter capital is tax exempt, and all excess proceeds are taxed).

  • Free transfers of assets from a parent company to a company in which the parent company holds a stake of more than 50% (the transferred assets must not be disposed of for at least one year, unless they are in cash).

  • Free transfers of assets or discharge of liabilities by a shareholder made for the purposes of improving the net asset position of the company.

VAT

Certain transactions are VAT exempt, including:

  • The export of assets.

  • Capital contributions (however, these can trigger VAT liabilities for repayment of previously recovered VAT (see Question 13)).

  • Distributions of liquidation proceeds.

  • Contributions to simple partnerships.

  • The disposal of land.

  • The disposal of residential property.

  • The provision of software, know-how, industrial designs and certain other IP rights under a licence.

  • Qualifying technological equipment imported as a capital contribution is exempt from customs VAT and customs duties (the equipment cannot be disposed of in any other way than liquidation, unless exported).

 

Tax advantages/disadvantages for the buyer

16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.

Advantages

The main advantage of an asset sale is that, if properly structured, the buyer does not assume any of the liabilities of the business from which the assets are acquired, including tax liability. Additionally, if the deal is structured as the acquisition of a business as a going concern (which would include all related assets, rights and liabilities), the difference between the price paid and the net balance sheet value of the business can be recognised in the tax books as goodwill, and amortised over five years.

Disadvantages

The disadvantages of an asset sale for the buyer include:

  • It may take time and effort to comply with state registration and tax registration or de-registration procedures for the transfer of immovable property.

  • The buyer usually pays a large amount of VAT on the purchase of the assets. Because the acquisition may take a significant amount of time and it is generally difficult for the buyer to fully recover this VAT upfront, asset purchases can result in a significant VAT cost.

  • If the asset purchase constitutes the acquisition of the business as a going concern, the buyer can potentially be held liable for all the liabilities of the business purchased, unless particular liabilities are expressly excluded from the transaction.

 

Tax advantages/disadvantages for the seller

17. Please set out the tax advantages and disadvantages of an asset disposal for the seller.

Advantages

The disposal of assets is generally a safer option to manage tax risks, in contrast with a share deal involving a specifically established SPV. Share deals have no particular VAT advantage over asset deals if the asset transaction is exempt from VAT (for example, it involves land or residential property (see Question 15, VAT)).

In asset deals concerning land, the land acquisition cost is deductible for profit tax purposes on the sale. In relation to the sale of shares, the cost of land is not deducted in the tax books of the SPV sold.

Disadvantages

Transfers of real estate can take time and effort as they require the completion of state registration and tax registration or de-registration procedures.

Where VAT is payable, this can represent a cash-flow issue for the buyer since the tax authorities have historically tended to deny VAT refunds under various pretexts, making it a lengthy and burdensome process, although this situation is generally improving.

 

Transaction structures to minimise the tax burden

18. What transaction structures (if any) are commonly used to minimise the tax burden?

Taxpayers can contribute assets to foreign subsidiaries located in low-tax jurisdictions (or jurisdictions where the disposals of such assets are tax exempt). They can then sell those subsidiaries offshore.

Taxpayers sometimes sell assets to a related low-taxed foreign entity, at a price much lower than the fair market price, with further resale to the buyer at the real price. However, this involves a significant transfer pricing risk and is not recommended.

The tax authorities generally challenge both these structures, particularly where Russian immovable property is involved.

 

Legal mergers

Taxes potentially payable

19. What taxes are potentially payable on a legal merger?

Profit tax and VAT

Legal mergers (which are a type of reorganisation) can generally be completed free from profit tax and VAT (see Question 4, Profit tax and Question 5, Value added tax (VAT)). Tax benefits and exemptions that were available to the merging companies before the merger continue to exist.

State duties

Certain minor state duties may apply (see Question 3, State duties).

 

Exemptions and reliefs

20. Are any exemptions or reliefs available to the liable party?

The merged company cannot be subject to fines for tax offences that the companies involved committed before the merger (unless the offences are identified by the tax authorities before the merger is completed). However, the requirement to file a notice of an upcoming merger with the tax authorities usually triggers a tax audit.

 

Transaction structures to minimise the tax burden

21. What transaction structures (if any) are commonly used to minimise the tax burden?

The parties can achieve a debt pushdown by using an SPV before the transaction (see Question 13).

 

Joint ventures

Taxes potentially payable

22. What taxes are potentially payable on establishing a joint venture company (JVC)?

State duties

If a joint stock company is established, state duties on registration of a company and issuance of shares apply (see Question 3, State duties). In relation to LLCs, only a minor duty on the registration of a company applies.

Excise tax

The contribution of certain assets to the JVC may trigger excise tax liability (see Question 5, Excise tax).

VAT and customs duties

If the import of assets is involved, VAT and customs duties may apply (see Question 5, Value added tax (VAT) and Question 6, Customs duties). If non-monetary assets are contributed by an entity, VAT previously recovered on the purchase of the assets (pro rata to their residual value) must be repaid to the treasury, but can be recovered again by the JVC (see Question 13).

 

Exemptions and reliefs

23. Are any exemptions or reliefs available to the liable party?

The import of qualifying equipment as a contribution to the capital of a JVC is exempt from VAT and customs duties (see Question 15, VAT).

 

Transaction structures to minimise the tax burden

24. What transaction structures (if any) are commonly used to minimise the tax burden?

No transaction structures are commonly used to minimise the tax burden.

However, it is common to establish the JVC abroad to make use of the flexibility of English law and to avoid certain features of Russian corporate law. The JVC generally owns 100% of the Russian company that performs the activities in Russia.

 

Company reorganisations

Taxes potentially payable

25. What taxes are potentially payable on a company reorganisation?

Any form of reorganisation can generally be completed free from VAT and profit tax, although minor state duties may apply (see Question 19).

The procedure for reorganisations is very complex and can take many months. The tax authorities generally conduct thorough audits of any company to be closed down as a result of a reorganisation (see Question 20). Therefore, companies with high tax risks may prefer to avoid reorganisations.

The rules applying to demergers are the same as for other reorganisations.

 

Exemptions and reliefs

26. Are any exemptions or reliefs available to the liable party?

Legal successors of reorganised companies can generally use the unutilised tax benefits of their predecessors, including:

  • Unclaimed input VAT and excise tax credit.

  • Unused expenses and tax losses that can be deducted from profits.

The use of these benefits usually depends on the type of reorganisation and is subject to detailed rules in the Tax Code.

 

Transaction structures to minimise the tax burden

27. What transaction structures (if any) are commonly used to minimise the tax burden?

The law provides a basic legal framework for reorganisations that is generally consistent with mergers, demergers and similar transactions in other industrialised countries. However, because of the many uncertainties in the legal mechanics of reorganisations, the time required to complete reorganisation formalities and the interpretation of relevant legislation by governmental agencies, mergers and reorganisations are not commonly used. However, companies are now increasingly starting to implement these forms of restructuring.

 

Restructuring and insolvency

28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction?

Companies involved in restructuring and insolvency procedures are liable to the same taxes as they were before the restructuring or insolvency. In particular, asset sales to accumulate cash are subject to VAT and attract profit tax. However, on entering insolvency or liquidation procedures the tax authorities lose the right to issue collection orders for tax and can only rely on court proceedings.

Taxes becoming due after the insolvency procedures' introduction are current liabilities. These are payable in the usual manner and take precedence over older claims of any nature against the company. Failure to pay these taxes on time attracts late payment interest. Taxes that became due before the insolvency procedures' introduction do not attract late payment interest once the procedure has begun. The tax authorities can only collect these taxes under the same rules that apply to any commercial creditors.

Any proceeds to shareholders are subject to profit tax at 20% (see Question 4, Profit tax), if they constitute a capital gain.

 

Share buybacks

 

Taxes potentially payable

29. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 3 to 6 as appropriate.)

Any buyback by a joint stock company or an LLC of its own shares or participation from a shareholder or participant is treated as an ordinary disposal of shares or participations on the part of the shareholder or participant (see Questions 9 to 13).

Certain restrictions apply to buybacks under corporate law. If the redemption of shares is accompanied by a decrease of the company's capital and cash is paid back to the shareholders, the tax authorities tend to claim profit tax on the whole of the proceeds in the hands of those shareholders (see Question 4, Profit tax). The legality of this approach is questionable. However, it is not generally recommended to redeem shares and pay cash to the shareholders unless the process is carefully structured.

Special rules apply to repurchase agreement (REPO) transactions (these are agreements to sell securities and subsequently repurchase them at a price fixed in the agreement).

 

Exemptions and reliefs

30. Are any exemptions or reliefs available to the liable party?

The buyback distribution to the shareholder or participant, if it does not exceed the amount of that shareholder or participant's contribution, is exempt from profit tax if structured as a simple purchase and sale agreement (see Question 31).

 

Transaction structures to minimise the tax burden

31. What transaction structures (if any) are commonly used to minimise the tax burden?

The transaction structures are usually simple and are not subject to sophisticated tax planning techniques.

 

Private equity financed transactions: MBOs

Taxes potentially payable

32. What taxes are potentially payable on a management buyout (MBO)?

MBOs are subject to profits tax in accordance with the general rules (see Question 4, Profit tax).

 

Exemptions and reliefs

33. Are any exemptions or reliefs available to the liable party?

Not applicable.

 

Transaction structures to minimise the tax burden

34. What transaction structures (if any) are commonly used to minimise the tax burden?

MBOs are not commonly used, and therefore no specific transaction structures are used.

 

Reform

35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.

The Ministry has recently stated that SPVs receiving payment of interest on Eurobonds should not be regarded as beneficial owners, and that they can be denied double tax treaty protection on such payments. Considering the importance and ubiquity of this type of financing the government has announced that it is going to introduce a direct exemption of source taxation of interest on Eurobonds.

It is also expected that controlled foreign company (CFC) rules and a management and control test to determine tax residency will be introduced in the near future. However, no draft legislation has yet been released. Plans to exclude loss carry forward benefits where there is a change in control have also been announced.

 
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