Baker & McKenzie: Amendments Made to Parts I and II of the Russian Tax Code

On September 2, 2010, Federal Law № 229-FZ dated 27 July, 2010 entered into force (the "Law"). The Law introduces some substantive and technical changes into the Russian Tax Code.

Corporate Profits Tax

Interest Deductibility Limits
The interest deductibility limits capping the amount of interest expenses deductible for Corporate Profits Tax purposes have once again been changed, as follows:

Currently the Russian Central Bank refinancing rate is 7.75%. Thus, the interest deductibility cap on foreign currency denominated loans will be reduced from 15% to 6.2%. Very likely this will result in a disallowance of a certain portion of many foreign currency denominated loans.

Natural Resource Development Expenses
The list of expenses for the development of natural resources has been extended in the Law, and now expressly includes expenses on construction (drilling) and/or dismantling (conservation) of wells (except for those deemed depreciable property).

The period for deducting expenses relating both to the preparation of territory for the development of natural resources and to compensation for damage caused to natural resources, and also the period for deducting expenses on obtaining a license if following a license auction a license agreement is not concluded, has been reduced from five to two years.

The Law removes the notification procedure for deducting expenses on natural resources development that prove non-productive. Such expenses may be deducted by the taxpayer from the first day of the month following the month when such operations were halted.

Other Corporate Profits Tax Issues
From January 1, 2011, the threshold level for assets recognized as depreciable property will be increased from 20,000 RUR to 40,000 RUR.

The amendments have also affected the procedure for making advance tax payments. Taxpayers with sales income not exceeding on average ten million RUR every quarter (previously three million RUR) can switch to quarterly advance tax payments instead of monthly advance payments.

Tax Administration

Electronic Documents
The Law substantially broadens the application of electronic documents. Documents requested by the tax authorities during a tax audit can now be provided in electronic form through telecommunication transmission channels.

Taxpayers will also be able to prepare VAT invoices in electronic form (with the mutual consent of the parties to the contract, and provided they have compatible technical devices for receiving and processing such VAT invoices). Electronic VAT invoices will contain the same information as hard copy invoices and be authenticated by a digital signature. The forms of electronic VAT invoices, and the procedures for their filling out, issue and receipt, are all to be determined by the Russian Government, the Ministry of Finance and the Federal Tax Service.

Switching from paper copies to electronic documents may require additional software of a specialized communication operator. These changes are a very important step in moving away from the existing cumbersome process of hard copy VAT invoices with original signature and manual corporate stamps.

Other Tax Administration Issues
Various minor tax penalties (e.g., for gross violation of tax accounting rules, failure to report information to the tax authorities) have been increased.

To stimulate innovation, the amount of the investment tax credit is increased from 30% to 100% of the cost of equipment used in innovative activities. The Law provides for certain other changes in tax administration.

Should you have any questions, please do not hesitate to contact in Moscow Alexander Chmelev on +7 495 787 27 00, Alexander Bychkov on +7 495 787 27 00, Sergei Zhestkov on +7 495 787 27 00, Maria Kostenko on +7 495 787 27 00, Arseny Seidov on +7 495 787 27 00, in St.Petersburg: Ivan Smirnov on +7 812 303 90 00.

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