In a Word

Training for Adopters

Nov 30, 2011:

Prospective adoptive parents, guardians and trustees will have to undergo formal training. This is the essence of a new law which comes into force on the 1st of September 2012. Foreigners wishing to adopt Russian children will be allowed to undergo such training in their home country.

Changes to Russia - Luxembourg Double Tax Treaty

Nov 23, 2011:

Russia and Luxembourg have signed the draft protocol to the double tax treaty of 1993.

The protocol reduces the withholding tax on dividends from 10% to 5%. It proposes that dividend treatment will apply to any other income, including interest, which is considered income from shares by the tax legislation of the payer’s state as well as to payments in connection with investment trusts or other forms of collective investment (except for those relating to real estate).

In addition, the amendments seek to hinder treaty shopping and to further the exchange of information between tax authorities.

As the protocol stands, tax officials will not be able to refuse to provide information to each other ‘solely on the grounds that the information is at the disposal only of a bank or other financial institution, nominee holder, agent or trustee, or that such information reveals the owners of a particular entity’.

Article 29 of the treaty, retitled as ‘The limitation of Benefits’, will introduce limitation on benefits for entities which ‘mainly’ exist to obtain benefits under the agreement.

To become effective the protocol must be ratified. In Russia, it means that it must be approved by Parliament and signed by the President.

Thin Capitalization Case Resolved

Nov 16, 2011:

The Presidium of the Supreme Commercial Court has resolved the long-awaited ‘thin capitalization case’ in favour of tax authorities and obliged JSC Severniy Kuzbass to pay $5 million in tax, interest and penalty. The court has overruled the decisions of three lower courts who all decided in favour of the taxpayer.

We anticipated this outcome and wrote about the case here and here .

Yesterday’s ruling not only deals a blow to tax minimisation through foreign companies but puts into question something that, until yesterday, few dared doubt: the superiority of tax treaties over domestic law.

Tax Incentives for Education and Health Care

Nov 16, 2011:

The Russian government has approved a list of educational and medical activities which will be exempt from income tax. Last year, the law was passed to exclude the medical and educational organizations from income tax until January 1, 2020. The list of activities that could use the special regime had to be set by the Government.

According to the regulation, a wide range of organizations will be able to benefit: those engaged in general medical practice, nutrition or physical therapy, sport medicine, medical massage, transportation of organs and tissues, storage and transportation of donated sperm. Also, the list includes various types of medical examinations and expertise, laboratory work, medical statistics, nursing. The list also includes therapeutic and surgical cosmetology, chiropractic and dentistry.

With regard to educational activities, the list includes the full spectrum from preschool to postgraduate education as well as supplementary and vocational programs.

How They Work

Nov 15, 2011:

Russian tax authorities have lost over $500 million in tax cases brought to court in just six months of 2011, said deputy head of the Federal Tax Service Daniel Egorov.

Earlier, Vladimir Putin urged taxmen to ‘quickly’ write off more than $1.3 billion of erroneously accrued or expired taxes. This will affect every fourth citizen or almost every adult taxpayer.

The Budget Surplus Reached 3.2 GDP

Nov 13, 2011:

Russia’s federal budget surplus has reached 3.2 percent of the country’s GDP. In October, the surplus has increased by third and now it is $48 billion. The National Reserve Fund, invested abroad in low-yield securities and used when oil and gas incomes fall, is $27 billion, the National Welfare Fund, invested in riskier assets and used to balance the deficit of the Pension Fund, is $94 billion.

Taxation of Russian Branches

Nov 13, 2011:

The Federal Commercial Court of the Moscow District has ruled that the Russian branch of CMS Cameron McKenna has to pay additional $1 million in taxes, interest and penalties.

The Court of Cassation has handed down the verdict that the cost of services rendered by the CMS’s London office was not a deductible expenditure of the Moscow branch but income of the head office in London. Consequently, a 20% tax on profits of a foreign organization operating in Russia through a permanent establishment was due.

Golden Parachutes Will Be Taxed

Nov 9, 2011:

In 2012 golden parachutes will be taxed by 13% income tax. So far severance payments to top management - general directors, executive directors, their deputies and the chief accountant – have been exempt of taxation. Today the Council of Federation, the upper house of the Russian Parliament, has approved the bill closing this loophole. From the 1st of January, any pay above three months average salary to a leaving employee will be subject to personal income tax.

Russia Joins Fight Against Tax Evasion

Nov 7, 2011:

Russia, as other G20 countries, has agreed to sign a Convention on Mutual Administrative Assistance in Tax Matters.

Drafted by the Organisation for Economic Cooperation and Development (OECD) and Council of Europe, the Convention includes a number of tax collections tools: automatic exchange of information, simultaneous international tax checks and assistance in cross-border tax recovery. The member countries have agreed to provide each other with huge amount of financial information such as the amount of taxes due (both corporate and personal), dividends, salaries and pensions. This information can be used in court.

It's been estimated that the deal could bring the G20 nations an extra $100 billion in tax revenues a year. The Convention will become law in Russia after ratification by Parliament.

Tax Consolidation

Nov 4, 2011:

The law on tax consolidation, a special regime which treats a group of majority-owned companies as a single entity for tax purposes, has been adopted by the State Duma. The law seeks to mitigate the impact of the new law on transfer pricing for very large companies.

The eligibility threshold has been set so high that only few very large companies will be able to benefit from this new establishment.

To consolidate, a group must have paid at least 10 billion roubles ($3.5 billion) of federal taxes in the preceding year with revenue exceeding 100 billion roubles ($35 billion) and total assets in excess of 300 billion roubles ($100 billion).

Consolidation will concern corporate income tax only. Losses in one company can reduce income tax in the whole group, while gains in one company will affect the others. The proportion of taxes paid by each group member will depend on its headcount (payroll) and the proportion of the value of its assets in relation to the group as a whole.

Consolidation is optional and revocable.

The law, subject to approval by the Federation Council and the President, will enter into force on 1 January 2012.