08 January 2018
Tax authorities
1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction?
Federal Tax Service of Russia (hereinafter – the FTS), including its local branches throughout the country (https://www.nalog.ru/eng/) is responsible for the enforcement of all tax legislation in the Russian Federation. Ministry of Finance of the Russian Federation as parent body of FTS provides general management in the field of finance of Russia, including state tax policy guidance.
Pre-completion clearances and guidance
2. Is it possible or necessary to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction?
Ministry of Finance of the Russian Federation provides tax legislative interpretation and provide clearance through letters to specific transactions or areas of law involving a particular statutory provision, or the tax treatment on a particular transaction that has been carried out, or is intended to be carried out. The FTS is also liable to inform the taxpayers about tax legislation, rights and obligations of the taxpayers, tax reporting and payment of taxes.
Obtaining clarifications from the tax authorities before completing a corporate transaction is always optional. Taxpayers can apply for clarification on the tax position of a proposed corporate transaction in writing or orally from the FTS. The issues for tax clarification should be within the powers of the FTS. The applicant addresses the issue to the local department of the FTS and describes the situation. Since April 2015 the FTS has opened for taxpayers a free federal common number of Call Center for obtaining information and clarification. The FTS does not consider documents for proposed transaction.
Clarifications of the Ministry of Finance of the Russian Federation bind the tax authorities under subparagraph 5 of paragraph 1 Article 32 if the Tax Code of the Russian Federation. Written explanation of the authorized body may serve as a circumstance excluding the fault of the person in the commission of a tax offense (subparagraph 3 of paragraph 1 of Article 111 of the Tax Code of the Russian Federation). If a taxpayer follows a clarification and the court or the tax authorities subsequently deviate from it, the taxpayer is not liable for fines and late payment interest (clause 8 of Article 75 of the Tax Code of the Russian Federation).
Disclosure of corporate transactions
3. Is it necessary to disclose the existence of any corporate transactions to the tax authorities?
The legislator identifies two main types of disclosure: disclosure of information in the form of quarterly reports and statements of material facts and the so-called mandatory disclosure.
The disclosure of information in the form of quarterly reports and reports on material facts, the reasons for its appearance and the order of execution of the corresponding duty are contained in Article 30 of Federal Law No. 39-FZ of April 22, 1996 "On the Securities Market". Thus, any joint-stock companies (JSC) are obliged to disclose information in the form of quarterly reports and statements of material facts, regardless of any individual characteristics of the particular JSC, including the status of the company and the number of shareholders.
In particular casestax control (including disclosure of information) in connection with transactions between interdependent personsis appliedunder the section V.1 "Interdependent persons: General provisions on prices and taxation." of Federal Law No. 227-FZ of the Tax Code of the Russian Federation of July 18, 2011.For the purposes of taxation, controlled transactions are transactions between related parties, as well as transactions equivalent to them. Related persons are recognized persons whose peculiarities of relations can influence the conditions and (or) the results of transactions carried out by these persons and (or) the economic performance of these persons or the activities of the persons represented by them.In the course of controlling transactions between interdependent persons, the tax authority has the right to demand documents from the taxpayer, documents and information from contractors and other persons.
The mechanism of transactions with shares in the authorized capital of the company provides for additional measures of state control and disclosure of information. Taxpayers, in addition to the duties above-mentioned, are required to notify the tax authority accordingly at the location of the organization, the place of residence of the individual in the manner and within the time limits provided for in Article 25.14 of the Tax Code:
1) on their participation in foreign organizations;
2) on controlled foreign companies for which they are people with significant control.
In addition, foreign entities owning immovable property in Russia that is subject to property tax are required to disclose information regarding their direct and indirect shareholders to the Russian tax authorities.
Main taxes on corporate transactions
Transfer taxes and notaries’ fees
4. What are the main transfer taxes and/or notaries’ fees potentially payable on corporate transactions?
There is no transfer tax in Russia.
The tax on the sale of shares could be considered as transfer tax. Please see question 6 Sales Tax.
Transaction costs for the parties typically include notaries’ fees.Responsibility for meeting these costs can be agreed by the parties.
Corporate and capital gains taxes
5. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions?
Profit tax
Profits tax is imposed on a company’s profits, which consists of business/trading income, passive income and capital gains. Russian tax residents are taxed on their worldwide income; foreign entities are taxed on income from commercial activities undertaken in Russia and on passive income from Russian sources.
Capital gains
There is no specific capital gains tax in Russia. Capital gains are taxed as ordinary income at the normal corporate rate (20%). Therefore, thecompanycan:
Offset the gain against losses on a participatory interest in Limited Liability Company (hereinafter – LLC) from other transactions, including trade.
Deduct the expenses incurred for the purposes of the transaction.
Losses (except for losses derived from activities subject to a 0% profits tax rate as organizations that carry out educational and (or) medical activities) may be carried forward for an unlimited period but cannot exceeds a cap (for 2017-2020, the cap is 50% of the tax base of the current period) The carryback of losses is not permitted.
A participation exemption is available for capital gains realized on the sale of unlisted shares and participations in Russian companies and listed shares in high-technology Russian companies (and, until 2023, listed bonds of Russian companies and listed investment units that are considered high-technology) acquired after 1 January 2011 and held for more than 5 years.
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.
6. What are the main value added and/or sales taxes potentially payable on corporate transactions?
VAT
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.
Sales Tax (Capital Gain)
The tax on the sale of shares is paid only as a result of profit from the transaction. For individuals, the tax on the sale of securities is 13% and is called personal income tax. For legal entities - the levy from the profit from shares in the amount of 20%. The tax on the sale of shares is levied on the difference between the income from the sale and the value of the purchased security, less actual costs if the transaction was made through a broker. The fiscal fee for shares is held at the end of the year.
Other taxes on corporate transactions
7. Are any other taxes potentially payable on corporate transactions?
Property tax
Property tax is a regional tax. The procedure for calculating the property tax is established by Chapter 30 of the Tax Code of the Russian Federation. The local authorities state the rates for property tax within the limits established by the indicated chapter of the Tax Code of the Russian Federation, the procedure and terms for payment of the tax. The tax base includes immovable fixed assets and certain movable fixed assets owned by the taxpayer, excluding land. The tax base generally is calculated based on the depreciated book value of the assets as of the balance sheet date and the tax rate for the property cannot exceed 2,2%.
Land tax
Companies that own land are subject to land tax, payable on a yearly basis. Land tax is a municipal tax, and its application is governed by the Tax Code of the Russian Federation and local regulations. The general rate is 1.5% and the tax base is the cadastral value (initial value) of the land as determined on 1 January of the reporting year. A reduced rate of 0.3% applies to land that is used for the agricultural purposes and dwellings under the Tax Code of the Russian Federation. The rates can be reduced by regional authorities.
Stamp duty
Stamp duty may be levied on certain transactions and documents. It is typically nominaland set by the State organs depending on the document being registered or activity performed by the State organsat the relevant time, e.g. registration of changes to the M& A cost RUB800,00.
Taxes applicable to foreign companies
8. In what circumstances will the taxes identified in Questions 4 to 7 be applicable to foreign companies. In other words, what “presence” is required to give rise to tax liability?
Profit tax
Permanent establishments of foreign legal entities (PEs) acting in Russia are generally taxed in the same way as Russian companies. 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.
The mechanism to allocate the taxable profits to available branches does not apply to PEs. This is because each PE is considered to be a standalone enterprise.
Foreign companies without PEs are also subject to Russian taxes, including VAT. Unless a double tax treaty provides otherwise, certain types of income are subject to withholding taxon corporate transaction such as:
Dividends, interest and royalties paid by a Russian company.
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.
These types of income are generally taxed at the domestic tax rate of 20%.
These rates can be reduced or eliminated by an applicable double tax treaty.
Property tax
Foreign legal entities acting through PEs are subject to property tax in generally the same way as Russian companies.
For certain types of administrative, business and trading premises, real estate owned by foreign companies and not allocated to a PE in Russia and certain other premises, the tax base is the cadastral value (initial value) of the real estate and the tax rate for the property cannot exceed 2%.
Land tax
Foreign companies that own land in Russia can be subject to land tax.
Notaries' fees
Notaries' fees apply regardless of whether a foreign company has any presence in Russia.
Dividends
9. Is there a requirement to withhold tax on dividends or other distributions?
According to Article 43 of the Tax Code, a dividend is any income received by a shareholder (participant) from an organization in the distribution of profits on shares owned by a shareholder (participant) in proportion to the shares of shareholders (participants) in the authorized (share) capital of this organization.
Companies that pay dividends must withhold profit tax from dividend distributions. The tax rates are:
- 0% - provided that, as of the date of the decision to pay dividends, the organization receiving the dividend for at least 365 calendar days continuously owns no less than 50% of the share capital of the dividend paying company. This preferential rate can also be applied to depositary receipts for shares of Russian issuers in the event that the conditions of ownership described above are met.
- 13% - is applied when dividends are received from Russian and foreign organizations, when the above conditions for applying the 0% rate are not met;
- 15% - in respect of dividends paid by Russian issuers in favor of foreign companies, unless an applicable double tax treaty provides for a lower rate.
Interest, royalties paid to a nonresident are subject 15% withholding tax, unless the rate is reduced under a tax treaty. Russian companies are exempt from the withholding obligation on Russian-source income on foreign legal entities within Eurobond-like structures, under certain conditions. 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.
Share acquisitions and disposals. Taxes potentially payable
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. The applicable rate is 20%. The seller must provide the buyer with details of their initial cost base.
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. 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.
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.
Exemptions and reliefs
11. Are any exemptions or reliefs available to the liable party?
Various types of tax incentives are available in Russia. For example, the standard corporate profit tax rate is 20%. There is a reduction in the profits tax rate to 15.5% along with the benefits, is available for investment projects in many regions.
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).
It is possible to qualify for the participation exemption for dividends (capital gains) as described above in question 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.
Tax advantages/disadvantages for the buyer
12. Please set out the tax advantages and disadvantages of a share acquisition for the buyer.
Advantages
One of the possible advantages of buying a stake in the authorized capital of the company to which they belong, usually deals with the opportunities associated with reducing tax costs.
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. The buyer can take into account, for profit tax purposes, the costs associated with preparing for the purchase and sale transaction and its execution under the rules established in Chapter 25 of the Tax Code for specific types of assets. 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.
Disadvantages
The buyer ofacquires both the known and unknown liabilities of the company, the onset of deferred risks, credit history; problems in relations with state bodies; side effects of the circumstances hidden during the transaction. Careful due diligence should identify most or all of the target company's liabilities.
Tax advantages/disadvantages for the seller
13. 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(subsection 12 of clause 2 of article 149 of the Tax Code of the Russian Federation) and the documentation is simple. The seller can take into account, for profit tax purposes, the costs associated with preparing for the purchase and sale transaction and its execution. In this case, the seller is guided also by the rules established in Chapter 25 of the Tax Code for specific types of assets. Variability of types and forms of legal transactions. This circumstance allows the Seller to accurately reflect the agreements reached during the transaction and ensure their full observance of the right to judicial protection.
Disadvantages
It requires the seller of a share to keep separate records of transactions that are taxable and not subject to the tax (clause 4 of article 149 of the Tax Code of the Russian Federation).
Transaction structures to minimise the tax burden
14. 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 first transfer the shares to a subsidiary incorporated in a low-tax jurisdiction, and then disposes of that subsidiary .
In addition participation in special purpose vehicles (SPVs) sold direct to the purchaser an exempt transaction for 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 (initial capital) set by the State depending on the document being registered or activity performed by the State. At the relevant time 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
15. 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.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.
Valuationfees.
Registrationfees.
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
The disposal of assets is usually subject to VAT. However, there are certain exemptions. For example, acquisition of technical means, including motor vehicles, materials that can be used solely for the prevention of disability or the rehabilitation of disabled people is exempt from VAT.
State duties
Minor duties may be due on the registration of the sale of real property.
Exemptions and reliefs
16. 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 exportofassets.
Capital contributions (however, these can trigger VAT liabilities for repayment of previously recovered VAT.
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 VAT and customs duties (the equipment cannot be disposed of in any other way than liquidation, unless exported).
Tax advantages/disadvantages for the buyer
17. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer.
Advantages
The main advantage of an asset acquisition 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, andamortised over several years.
Disadvantages
The disadvantages of an asset acquisition for the buyer include:
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.
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.
It may take time and effort to comply with state registration and tax registration or de-registration procedures for the transfer of immovable property.It should be noted that the signing of the contract of sale and even the registration of acquired rights does not protect the buyer against the risks of presentation by the former owner of claims in relation to the real estate object. In addition, the law, among other things, provides for the right of the previous right holder to suspend registration of the transfer of property rights until the courts have examined the merits of the dispute on the validity of the transaction or other dispute in relation to the real estate object. Thus, the execution of even a transaction, which is perfect by the time the dispute arose, can be significantly hampered or even completely ruled out as a result of the unscrupulous behavior of the seller or other interested persons.
Tax advantages/disadvantages for the seller
18. 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 asset deals concerning land, the land acquisition cost is deductible for profit tax purposes on thesale.
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
19.What transaction structures (if any) are commonly used to minimise the tax burden?
No transaction structures 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.
Shareholders - individuals can refuse holding companies in low-tax jurisdictions and consider alternative options for structuring ownership of real estate objects using foreign mutual funds (trusts).
Legal mergers. Taxes potentially payable
20. 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. 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.
Exemptions and reliefs
21. 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
22. 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 .
Joint ventures. Taxes potentially payable
23. What taxes are potentially payable on establishing a joint venture company (JVC)?
National regime of taxation has been established for joint venture companies and commercial organizations with foreign investment, meaning that they pay taxes established by the legislation in force in the territory of the Russian Federation for national enterprises. In addition, joint ventures with foreign capital are subject to a general legal regime of preferential taxation, as for Russian enterprises.
Exemptions and reliefs
24.Are any exemptions or reliefs available to the liable party?
Special tax regimes for example, territories of advanced social and economic growth, regional investment programs allow benefits such as a 0% profits tax rate. Residents of Skolkovo Innovation Center may benefit from 10-year tax holiday. A 0% profits tax rate applies to a range of educational and medical services. Technology and software companies may benefit from reduced social security rates.
Company with foreign participation has the right to apply a simplified taxation system with significant tax preferences. If the participation of a foreign legal entity exceeds 25% the option is not available;
The import of qualifying equipment as a contribution to the capital of a JVC is exempt from VAT and customs duties.
Transaction structures to minimise the tax burden
25. 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
26. 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 .
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. 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
27. Are any exemptions or reliefs available to the liable party?
It could be used the unutilised tax benefits of thepredecessors, 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
28. What transaction structures (if any) are commonly used to minimise the tax burden?
No transaction structures are commonly used to minimise the tax burden.
The law provides a basic legal framework for reorganisation that is generally consistent with merger, accession, demerger, division, separation.Reorganization as a legal process is generally considered by the liable parties to restructure the business for profit.The use of transaction structures to minimise the tax burden are not really suitable for reorganization, and this is due to several factors: the complexityof reorganization process and documentary support, the lack of a clear regulation of this issue, the fulfillment of all obligations of the companies before transaction.
Restructuring and insolvency
29. 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. Liquidation of an organization entails the termination of the rights and obligations of a legal entity without their transfer to third persons. Any proceeds to shareholders (corporation or individual) are subject to profit tax at 20% or 13% respectively, if they constitute a capital gain.
The tax authorities lose the right to issue collection orders for taxfrom the day of the court decision to start the insolvency proceedings and can only rely on the court decision.
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.
Generally, restructuring and insolvency procedures do not have any tax implications for the creditors of the business.
Share buybacks. Taxes potentially payable
30. What taxes are potentially payable on a share buyback? (List them and cross-refer to Questions 4 to 7 as appropriate.)
Any share buyback or participation from a shareholder is treated as an ordinary disposal of shares or participationsby the shareholders whose shares are bought back.
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 . 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.
Exemptions and reliefs
31. 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.
Article 214.1 of the Tax Code of the Russian Federation provides that when calculating the tax baseof personal income tax for transactions with securities, income from these transactions shall be reduced by documented and actually incurred by the taxpayer expenses related to the acquisition, sale, storage and redemption of securities.
Transaction structures to minimise the tax burden
32. What transaction structures (if any) are commonly used to minimise the tax burden?
No transaction structures 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
33. What taxes are potentially payable on a management buyout (MBO)?
MBOs are subject to profits tax in accordance with the general rules that applies to taxation of profits.
Exemptions and reliefs
34. Are any exemptions or reliefs available to the liable party?
Not applicable.
Transaction structures to minimise the tax burden
35. 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
36. Please summarise any proposals for reform that will impact on the taxation of corporate transactions.
Russian tax reform is under way, and there are positive trends for corporate transactions.
In fact, Russian law now allows you to use 90% of the legal instruments that were previously only available in English law. The number of transactions under Russian law is growing due to de-offshorization. The companies registered in offshore companies have ceased to admit to state purchases, the business connected with the state, leaves off-shores.
But further reforms are also necessary. Restrains the more active use of new tools lack of reliable protection mechanisms. Most often, the parties use the choice of foreign vessels in transactions due to the lack of established jurisprudence on new mechanisms. To avoid risks, many consultants offer to conclude additional contracts, disputes on which would be considered in international arbitration, or double taxation agreements: the mergers and acquisition treaty itself is under Russian law, and the guarantee obligation is in English. Thus, most of all questions from entrepreneurs to judicial practice, the confidence in the Russian judicial system should be increased.
Initiate legislation to abolish the tax on movable property of organizations, which is in fact "the tax on new investments" will provide significant support for corporate transaction and investment activities.
Online resources
The Federal Tax Service of Russia
Description: the website of the Federal Tax Service of Russia
Tax Code of the Russian Federation
Description: This is the Tax Code of the Russian Federation (in Russian).
Federal Law No. 39-FZ of April 22, 1996 "On the Securities Market"