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Amendments to the Russian Thin Capitaliazation Rules

4 April 2016

A bill that amend Russia’s thin capitalization rules passed its third reading in the State Duma and was signed into law by President Putin last month.

The most significant change would involve expanding the scope of thin capitalization rules to include loans from foreign related companies, which do not hold a direct or indirect interest in a Russian borrower, a position which corresponds to the recent Russian court practices.

What is considered as “controlled debt”?

The following types of loans are considered to be controlled debt:

a debt obligation to a foreign inter-related entity which has a direct or indirect participating interest in the borrower company. The threshold of participation is increased from the current percentage of 20% to 25%
a debt obligation to an entity which is inter-related with the above-mentioned foreign entity
a debt obligation in relation to which the above-mentioned foreign entity and (or) an inter-related entity thereof acts as a guarantor or otherwise undertakes to guarantee the fulfilment of the borrower’s debt obligation
The courts may also treat a debt as controlled debt, if it is established that payments to the above-mentioned companies represent the ultimate purpose of payments on those debt obligations, ie they are the beneficial owners of the income in question.

Interest which is not deductible for corporate income tax purposes under the thin cap rules is considered as dividends paid to the relevant foreign entity with a direct or indirect equity interest in the debtor. This may help in applying reduced rates under a double tax treaty, taking into account the amount of investment by the foreign participant.

The 3:1 ratio applied in standard cases and the 12.5:1 ratio applied for leasing companies remain the same, while the definition of leasing activities has been clarified. Thus an entity is deemed to be engaged in leasing activities, if its taxable income from such leasing activities represents at least 90% of all taxable income earned in the relevant tax period.


There are exemptions to the above rules in respect of:

  • a debt to an inter-related Russian legal entity or individual, which is a Russian tax resident during the entire reporting period and such parties had no outstanding debt under comparable liabilities during the relevant period
  • a debt to an independent bank and from the date of origination of the liability, it has not been continuously repaid by a foreign inter-related person

    Entry into force

The amendments will enter into force on 1 January 2017. However, the exception to the thin capitalization rules for debts to banks will be effective as from 2016.


Source: Redimus