Accounting and Reporting

As we pre­vi­ously re­por­ted, for­eign pro­viders of elec­tron­ic ser­vices may face prac­tic­al dif­fi­culties with pay­ing VAT to the Rus­si­an budget.As a solu­tion to this prob­lem, in its Let­ter No. SD-4-3/[email protected]* dated 30 March 2022 the Fed­er­al Tax Ser­vice of Rus­sia (the “FTS”) gave a num­ber of re­com­mend­a­tions on pay­ing VAT for elec­tron­ic ser­vices provided by for­eign en­tit­ies.The FTS re­com­mends that Rus­si­an cus­tom­ers of elec­tron­ic ser­vices cal­cu­late, with­hold and pay VAT them­selves as tax agents. It is also re­com­men­ded that Rus­si­an cus­tom­ers (i.e. leg­al en­tit­ies and self-em­ployed en­tre­pren­eurs) in­form for­eign ser­vice pro­viders that they act as tax agents and pay VAT to the Rus­si­an budget.It is cla­ri­fied that in such a case, Rus­si­an tax au­thor­it­ies will have no grounds to re­quire that the for­eign en­tity re­peatedly pay VAT to the budget and re­cog­nise the rel­ev­ant trans­ac­tions in its VAT tax re­turns. By vol­un­tar­ily with­hold­ing VAT, Rus­si­an cus­tom­ers re­tain the right to de­duct the in­put VAT. This po­s­i­tion is in line with the stand­ard ap­proach pre­vi­ously set out by the FTS in its Let­ter No. SD-4-3/[email protected]* dated 24 April 2019.   At the same time, this re­com­mend­a­tion of the FTS seems to be more rel­ev­ant for fu­ture pay­ments for elec­tron­ic ser­vices to for­eign ser­vice pro­viders and does not re­solve the prob­lem with pay­ing VAT for the first quarter of 2022, if the cus­tom­er failed to vol­un­tar­ily pay VAT to the budget due from pay­ments made to the for­eign ser­vice pro­vider.Fur­ther­more, this re­com­mend­a­tion will not ap­ply to for­eign ser­vice pro­viders if elec­tron­ic ser­vices are provided to cus­tom­ers who are in­di­vidu­als.Fi­nally, in its new let­ter the FTS does not cla­ri­fy wheth­er pro­vi­sions re­gard­ing the vol­un­tary pay­ment of VAT to the budget and the eli­gib­il­ity of Rus­si­an cus­tom­ers for VAT de­duc­tion ap­ply if the for­eign pro­vider of elec­tron­ic ser­vices is not re­gistered with Rus­si­an tax au­thor­it­ies. Ac­cord­ing to the lit­er­al in­ter­pret­a­tion of Art­icle 171 (2.1) of the Rus­si­an Tax Code, VAT de­duc­tion is pos­sible only sub­ject to sup­port­ing doc­u­ments show­ing the iden­ti­fic­a­tion de­tails of a for­eign e-ser­vices pro­vider as be­ing tax-re­gistered in Rus­sia.Thus, the new cla­ri­fic­a­tions provided by the FTS demon­strate the com­mit­ment of Rus­si­an tax au­thor­it­ies to ad­dress­ing the prob­lems that for­eign busi­nesses cur­rently face. However, they do not solve all chal­lenges in pay­ing VAT to the Rus­si­an budget, in­clud­ing for the first quarter of 2022. Giv­en the above, for­eign pro­viders of elec­tron­ic ser­vices should dis­cuss with their for­eign banks in ad­vance wheth­er it is pos­sible to pay VAT to the Rus­si­an budget, and to con­sider al­tern­at­ive pay­ment op­tions (e.g. via in­ter­me­di­ar­ies).We will con­tin­ue to mon­it­or the situ­ation and keep you in­formed of any fur­ther changes.* In Rus­si­an

On 17 March 2022, the UK Treas­ury an­nounced the sus­pen­sion of the ex­change of tax in­form­a­tion with Rus­sia.The sus­pen­sion of the ex­change of tax in­form­a­tion means that Rus­sia will not re­ceive in­form­a­tion un­der any of the cur­rent ex­change of in­form­a­tion mech­an­isms with the UK, in­clud­ing the Ex­change of In­form­a­tion on Re­quest (EoIR) and Coun­try-by-Coun­try Re­port­ing (Cb­CR).Fol­low­ing the UK, the Chan­nel Is­lands (Jer­sey and Guern­sey) and the Isle of Man are also sus­pend­ing ex­change of tax in­form­a­tion with Rus­sia.Com­ment­sIt is worth not­ing that the UK sus­pen­ded the ex­change of fin­an­cial in­form­a­tion un­der the Com­mon Re­port­ing Stand­ard (CRS) with Rus­sia in 2019. There­fore, the cur­rent de­cision does not en­tail any sig­ni­fic­ant changes for Rus­si­an tax­pay­ers in terms of is­sues re­lated to the ex­change of in­form­a­tion un­der the CRS.The ter­min­a­tion of the ex­change of in­form­a­tion on re­quest (EoIR) could have a neg­at­ive im­pact on the con­firm­a­tion of eli­gib­il­ity for tax re­lief un­der the cur­rent double tax­a­tion treaty. More gen­er­ally, it lim­its ac­cess to in­form­a­tion on UK coun­ter­parties of Rus­si­an tax­pay­ers, which is in­form­a­tion that can be re­ques­ted as part of audits in Rus­sia.In the ab­sence of the pos­sib­il­ity to re­quest in­form­a­tion from for­eign tax au­thor­it­ies, Rus­si­an tax au­thor­it­ies will have for the pur­pose of audits only those doc­u­ments and in­form­a­tion avail­able to the tax­pay­er, which the tax­pay­er was able to ob­tain from for­eign coun­ter­parties or from pub­lic sources. As prac­tice shows, tax au­thor­it­ies may refer to the fact that such in­form­a­tion is in­suf­fi­cient, and, as a res­ult, tax be­ne­fits will be denied. At the same time, in some cases a lack of ac­cess to for­eign in­form­a­tion may, on the con­trary, pre­vent tax au­thor­it­ies from mak­ing ad­di­tion­al tax as­sess­ments, which has been en­vis­aged as one of the pur­poses of sus­pend­ing the data ex­change.The ces­sa­tion of the ex­change of coun­try-by-coun­try re­ports (Cb­CR) will res­ult in Rus­si­an tax au­thor­it­ies not be­ing able to ob­tain a re­port from the UK side, re­quir­ing the au­thor­it­ies to re­quest it dir­ectly from Rus­si­an tax­pay­ers be­long­ing to UK-led mul­tina­tion­al groups of com­pan­ies (MGCs, a Rus­si­an equi­val­ent of MNE). At the same time, the right not to sub­mit a coun­try re­port at the re­quest of tax au­thor­it­ies with ref­er­ence to Art­icle 105.16-3(6) of the Rus­si­an Tax Code will be lost. In prac­tice, this could lead to an in­crease in the ad­min­is­trat­ive bur­den on Rus­si­an tax­pay­ers and the pos­sible im­pos­i­tion of pen­al­ties in the event of fail­ure to provide the re­ques­ted in­form­a­tion, giv­en the ex­ist­ing prac­tic­al dif­fi­culties with the ex­change of in­form­a­tion in an MGC with Rus­si­an par­ti­cip­a­tion.Rus­sia may an­nounce mir­ror meas­ures in the near fu­ture.For ex­ample, in re­sponse to the UK’s ac­tions, Rus­si­an tax au­thor­it­ies may in­clude the UK in the List of States (Ter­rit­or­ies) that do not ex­change in­form­a­tion for tax pur­poses with the Rus­si­an Fed­er­a­tion, ap­proved by Or­der No. MMV-7-17/[email protected] of the Fed­er­al Tax Ser­vice dated 11 Oc­to­ber 2019 (the “List”).The in­clu­sion of the UK in this List will have im­plic­a­tions for the tax­a­tion of con­trolled for­eign com­pan­ies (CFCs).Thus, on the basis of Art­icle 25.13(4)(2) of the Rus­si­an Tax Code, Brit­ish com­pan­ies whose shares are traded on stock ex­changes will be re­cog­nised as CFCs.In ad­di­tion, with­in the mean­ing of Art­icle 25.13-1(7) of the Rus­si­an Tax Code, the in­clu­sion of a coun­try in the List means that the ex­emp­tion of profits of the CFC will not be avail­able ac­cord­ing to the fol­low­ing cri­ter­ia:   In or­der to de­term­ine the profits of a CFC us­ing fin­an­cial state­ments, the fin­an­cial state­ments must be audited.As a res­ult, the sus­pen­sion of the ex­change of tax in­form­a­tion will af­fect the at­tract­ive­ness of the UK as a jur­is­dic­tion to host hold­ing com­pan­ies and CFCs. If the cur­rent re­stric­tions re­main in place over the longer term, Rus­si­an groups with UK ele­ments may need to re­con­sider their struc­ture, in­clud­ing tak­ing in­to ac­count the pos­sible re­lo­ca­tion of UK com­pan­ies to oth­er jur­is­dic­tions.In prac­tice, how­ever, this trend could also be ex­ten­ded to oth­er European jur­is­dic­tions. Ac­cord­ing to me­dia re­ports, Ger­many* and the US* have also an­nounced the sus­pen­sion of the ex­change of tax in­form­a­tion.We will con­tin­ue to mon­it­or de­vel­op­ments and keep you in­formed of fur­ther changes.* In Rus­si­an

On 22 March 2022, Pavel Krashe­n­in­nikov, Head of the State-build­ing and Le­gis­la­tion Com­mit­tee of the Rus­si­an State Duma, sub­mit­ted a bill*, which makes it pos­sible to ter­min­ate and sus­pend ob­lig­a­tions due to sanc­tions im­posed on Rus­sia. The bill also es­tab­lishes the pos­sib­il­ity for parties to be re­leased from li­ab­il­ity for breach of con­tract.The fol­low­ing de­scribes this le­gis­lat­ive ini­ti­at­ive in more de­tail:Ter­min­a­tion of ob­lig­a­tion­sAc­cord­ing to the bill, an ob­lig­a­tion is ter­min­ated in full or in part if its per­form­ance “ob­ject­ively be­comes defin­it­ively im­possible” “in the con­text of ‘un­friendly’ ac­tions of for­eign states and in­ter­na­tion­al or­gan­isa­tions as­so­ci­ated with the im­pos­i­tion of re­strict­ive meas­ures” against Rus­si­an in­di­vidu­als and com­pan­ies (i.e. for­eign sanc­tions).Ex­emp­tion of li­ab­il­ity for breach of ob­lig­a­tion­sThe bill provides an ex­emp­tion from li­ab­il­ity for a breach of ob­lig­a­tion for a per­son who proves that prop­er per­form­ance has “ob­ject­ively proved to be tem­por­ar­ily im­possible” in the con­text of for­eign sanc­tions. In this case, the ob­lig­a­tions se­cur­ing the de­faul­ted trans­ac­tion are also un­en­force­able un­less the parties agree oth­er­wise after the bill comes in­to force.Ter­min­a­tion of con­tractThe bill in­tro­duces the right to uni­lat­er­ally ter­min­ate a con­tract if the oth­er party to the con­tract has not per­formed, or per­formed im­prop­erly, its ob­lig­a­tion be­cause such per­form­ance is tem­por­ar­ily im­possible in the con­text of sanc­tions. The party au­thor­ised to do so must give a ter­min­a­tion no­tice to the oth­er party with­in a reas­on­able time. The col­lat­er­al se­cur­ing the ob­lig­a­tions of the parties, which shall sur­vive the uni­lat­er­al ter­min­a­tion of the con­tract or are con­nec­ted with the ter­min­a­tion, shall con­tin­ue to ex­ist, un­less oth­er­wise provided for by law or the con­tract.Se­cur­ity de­positThe bill sub­stan­tially mod­i­fies the treat­ment of se­cur­ity pay­ments.  Un­der this draft law, after 23 Feb­ru­ary 2022, the parties may enter in­to an agree­ment for a se­cur­ity pay­ment to se­cure oth­er ob­lig­a­tions. The pay­ment could con­sist of the de­pos­it of shares, bonds, oth­er se­cur­it­ies or gen­er­ic items.Re­pay­ment by Rus­si­an joint-stock com­pan­ies of loans is­sued by their for­eign con­trolling per­son­sThe bill en­titles Rus­si­an joint-stock com­pan­ies, in­stead of re­pay­ing a loan to lenders who are for­eign con­trolling per­sons of such com­pan­ies, to place ad­di­tion­al shares of a cer­tain cat­egory or type in fa­vour of such lenders. At the same time, joint-stock com­pan­ies are al­lowed to is­sue pref­er­en­tial shares whose nom­in­al value may ex­ceed 25% of the share cap­it­al.The bill does not re­quire proof of a caus­al link between the im­pos­i­tion of sanc­tions and the de­cision to place ad­di­tion­al shares in fa­vour of a lender in­stead of re­pay­ing the loan and pay­ing in­terest on it.Pro­tec­tion not for al­lAc­cord­ing to the bill, the above sup­port meas­ures do not ap­ply to per­sons who “con­trib­uted to the ‘un­friendly’ ac­tions of for­eign states and in­ter­na­tion­al or­gan­isa­tions re­lated to the im­pos­i­tion of re­strict­ive meas­ures” against Rus­si­an in­di­vidu­als and or­gan­isa­tions. The bill does not cla­ri­fy ex­actly what is meant by “con­trib­ut­ing”.Let­ter from the Cham­ber of Com­merce and In­dustry of the Rus­si­an Fed­er­a­tion­In con­nec­tion with the bill, the Cham­ber of Com­merce and In­dustry of the Rus­si­an Fed­er­a­tion has sus­pen­ded its re­view of ap­plic­a­tions for the is­su­ance of find­ings of force ma­jeure un­der con­tracts that were con­cluded with­in the frame­work of do­mest­ic eco­nom­ic activ­ity in con­nec­tion with sanc­tions on for­eign com­pon­ents and equip­ment (Let­ter No. PR/0181* of the Cham­ber of Com­merce and In­dustry of the Rus­si­an Fed­er­a­tion dated 22 March 2022).* In Rus­si­an

On 24 March 2022, the Rus­si­an Fed­er­al Tax Ser­vice is­sued Let­ter No. CD-4-2/[email protected]*, which (the “Let­ter”) es­tab­lishes a vir­tu­al morator­i­um for on-site tax audits, in­clud­ing re­peat audits, of ac­cred­ited IT com­pan­ies un­til 3 March 2025 in­clus­ively.The only ex­cep­tion is where an audit is sched­uled with the con­sent of the head or deputy head of a high­er tax au­thor­ity or the Rus­si­an Fed­er­al Tax Ser­vice. The lower tax au­thor­ity must sub­mit a reasoned re­quest in or­der to sched­ule an on-site audit.At the same time, any on-site audits launched be­fore the Let­ter was is­sued are sub­ject to com­ple­tion in the pre­scribed man­ner. No ex­ten­sion or sus­pen­sion of these audits ac­cord­ing to Art­icle 89 of the Rus­si­an Tax Code should oc­cur.   Fur­ther­more, the audit sus­pen­sion is tem­por­ary in or­der to re­duce the ad­min­is­trat­ive bur­den on IT com­pan­ies in the peri­od between 2022 and 2024, and does not mean that this peri­od will not be audited in prin­ciple. In prac­tice, by schedul­ing an audit in March 2025 after the morator­i­um ex­pires, the tax au­thor­it­ies will have the right to audit the 2022-2024 peri­od as well.The Let­ter con­tains no ad­di­tion­al cri­ter­ia for the morator­i­um, apart from re­quir­ing an IT com­pany to have a state ac­cred­it­a­tion cer­ti­fic­ate. In oth­er words, the morator­i­um will also form­ally ap­ply to ac­cred­ited IT com­pan­ies that are not eli­gible for cor­por­ate profits tax or in­sur­ance con­tri­bu­tion in­cent­ives un­der Rus­si­an law.The chosen leg­al form of the doc­u­ment in­tro­du­cing the morator­i­um is also note­worthy: the Let­ter is of an in­tern­al nature and ad­dressed to lower tax au­thor­it­ies. To date, we are not aware of any fur­ther le­gis­lat­ive ini­ti­at­ives in this area.The Let­ter im­ple­ments one more tax sup­port meas­ure for the IT in­dustry an­nounced in Rus­si­an Pres­id­ent De­cree No. 83 dated 2 March 2022, on which we pre­vi­ously re­por­ted. Also, in pur­su­ance of that De­cree, Law No. 67-FZ dated 26 March 2022 has set the cor­por­ate profits tax rate at 0% for the peri­od between 2022 and 2024. The Min­istry of Fin­ance and the Min­istry of Di­git­al De­vel­op­ment are cur­rently ne­go­ti­at­ing the de­tails of an­oth­er meas­ure an­nounced in the De­cree: ex­tend­ing the list of IT activ­it­ies sub­ject to pref­er­en­tial treat­ment where fur­ther de­vel­op­ments can also be ex­pec­ted.Our ex­perts con­tin­ue to closely mon­it­or this is­sue and will keep you in­formed of any fur­ther changes.* In Rus­si­an

On 26 March 2022, Rus­sia’s Pres­id­ent signed Fed­er­al Law 67-FZ* in­tro­du­cing an anti-crisis pack­age of tax sup­port meas­ures for busi­nesses and in­di­vidu­als.Be­low is our over­view of the main changes rel­ev­ant to in­di­vidu­als. Earli­er, we have cir­cu­lated our over­view of cor­por­ate tax changes.Per­son­al in­come tax­Tax­a­tion of in­terest on bank de­pos­it­sThe new Law ex­empts in­di­vidu­als from tax­a­tion on in­come re­ceived in 2021 and 2022 in the form of in­terest on de­pos­its (i.e. ac­count bal­ances) with banks loc­ated in Rus­sia.The Law also ad­justs the pro­ced­ure for cal­cu­lat­ing the amount of in­terest sub­ject to per­son­al in­come tax in fu­ture peri­ods. For in­stance, the highest of the key rates of the Cent­ral Bank of the Rus­si­an Fed­er­a­tion (CBR) set on the first day of each month in a tax peri­od will be used to cal­cu­late the non-tax­able threshold for each tax peri­od, rather than the CBR key rate set on the first day of such a tax peri­od as ap­plic­able be­fore ad­op­tion of the Law.These meas­ures are aimed at re­du­cing the tax bur­den on in­di­vidu­als due to a sig­ni­fic­ant in­crease in the CBR key rate in 2022 and are also de­signed to en­cour­age the pub­lic to hold their mon­ies on bank de­pos­its with Rus­si­an banks. Ma­ter­i­al gain­In­come in the form of ma­ter­i­al gain re­ceived in 2021-2023 is now ex­empt from per­son­al in­come tax.Note that this refers to any ma­ter­i­al gain, al­though in its ori­gin­al ver­sion the bill ex­emp­ted only ma­ter­i­al gain from sav­ings on in­terest for us­ing funds bor­rowed from em­ploy­ers. Re­ceiv­ing as­sets from con­trolled for­eign com­pan­ies (CFCs)Per­son­al in­come tax will not ap­ply to in­come in the form of as­sets (ex­clud­ing cash) and/or prop­erty rights re­ceived in 2022 from a for­eign com­pany or un­in­cor­por­ated en­tity in re­la­tion to which the tax­pay­er is a con­trolling per­son and/or par­ti­cipant as of 31 Decem­ber 2021. The ex­emp­tion will ap­ply to the as­sets or prop­erty rights that were owned by a for­eign com­pany (en­tity) as of 1 March 2022.In­di­vidu­als are there­fore giv­en the op­por­tun­ity for a tax-free trans­fer of as­sets from CFCs. When trans­act­ing in the re­ceived as­sets at a later stage, an in­di­vidu­al will be able to re­cog­nise the ex­penses for re­ceiv­ing such as­sets ac­cord­ing to their CFC’s ac­count­ing data, but up to the mar­ket value of the as­sets re­ceived.Oth­er taxesThe fol­low­ing meas­ures re­lated to prop­erty tax, land tax, trans­port tax and tax ad­min­is­tra­tion are identic­al to those ap­plied to com­pan­ies:Prop­erty tax and land tax­Ca­das­tral value as of 1 Janu­ary 2022 will be used to cal­cu­late per­son­al prop­erty tax and land tax for the 2023 tax peri­od.However, this rule will not ap­ply if the ca­das­tral value de­creases in 2023, or if the in­crease in the ca­das­tral value is due to a change in the char­ac­ter­ist­ics of a prop­erty. There­fore, the ef­fect of in­fla­tion on the tax base is elim­in­ated.Trans­port taxThe Law has ab­ol­ished the mul­ti­pli­ers 1.1 and 2 where trans­port tax is cal­cu­lated for 2022 for vehicles worth between RUB 3m (EUR 32,472**) and RUB 10m (EUR 108,240).There­fore, the mul­ti­pli­ers will only ap­ply to vehicles worth over RUB 10m (EUR 108,240).Tax ad­min­is­tra­tion­Ac­cord­ing to the Law, there will be no fines for fail­ure to provide doc­u­ments con­firm­ing the amount of CFC profits, or for provid­ing doc­u­ments con­tain­ing false in­form­a­tion for the 2020 and 2021 fin­an­cial years (i.e. the 2021 and 2022 tax peri­ods).Note that fines for fail­ure to provide such doc­u­ments un­der the gen­er­al pro­ced­ure or at the tax au­thor­it­ies’ re­quest amount to RUB 500,000 (EUR 5,412) and RUB 1m (EUR 10,824), re­spect­ively. It is likely that the can­cel­la­tion of fines for the 2021-2022 tax peri­ods is at­trib­ut­able to the po­ten­tial dif­fi­culties that con­trolling per­sons may face in ob­tain­ing fin­an­cial state­ments due to the re­stric­tions im­posed.* In Rus­si­an** As of 5 April 2022

On 26 March 2022, Rus­sia’s Pres­id­ent signed Fed­er­al Law 67-FZ* (the “Law”) in­tro­du­cing an anti-crisis pack­age of tax sup­port meas­ures for busi­nesses.Be­low is our over­view of the main changes for cor­por­ate tax­pay­ers. The tax changes that are rel­ev­ant for in­di­vidu­als will be over­viewed in a sep­ar­ate pub­lic­a­tion.Cor­por­ate profits taxAp­plic­a­tion of trans­fer pri­cing rulesAc­cord­ing to the new Law, the rev­en­ue threshold for re­cog­nising cross-bor­der trans­ac­tions between re­lated parties as con­trolled trans­ac­tions for trans­fer pri­cing (the “TP”) pur­poses has been in­creased from RUB 60m to RUB 120m (EUR 649,529 to EUR 1.3m)** per cal­en­dar year.For the busi­ness com­munity, this has been a long-an­ti­cip­ated meas­ure to re­duce the ad­min­is­trat­ive bur­den of doc­u­ment­ing small in­tra-group trans­ac­tions. However, in the cur­rent mar­ket situ­ation it is most likely meant to neut­ral­ise to some ex­tent the de­pre­ci­ation of the rouble ex­change rate in cross-bor­der flows.Moreover, do­mest­ic trans­ac­tions will not be sub­ject to TP con­trol dur­ing the peri­od of 2022-2024, where at least one party to a do­mest­ic trans­ac­tion en­joys in­vest­ment tax re­lief un­der Art­icle 286.1 of the Rus­si­an Tax Code.Fi­nally, the Law ex­tends the ap­plic­a­tion peri­od un­til 31 Decem­ber 2023 for ex­ten­ded “safe har­bour” ranges for arm’s length in­terest rates on inter-group loans es­tab­lished dur­ing the COV­ID-19 pan­dem­ic.In ad­di­tion, the lower range for rouble cross-bor­der loans has also been set at 0%. Pre­vi­ously, this meas­ure ap­plied only to do­mest­ic rouble debt ob­lig­a­tions.By click­ing here you will find the com­par­ab­il­ity ana­lys­is of the arm’s length ranges un­der the gen­er­al rules and un­der the Law.Cla­ri­fied rules for cal­cu­lat­ing thin cap­it­al­isa­tionThe Law provides for a tem­por­ary freeze of for­eign ex­change rates when cal­cu­lat­ing ex­cess­ive in­terest for con­trolled debts de­term­ined in ac­cord­ance with Art­icle 269(2) of the Rus­si­an Tax Code for the peri­od from 1 Janu­ary 2022 to 31 Decem­ber 2023.Ac­cord­ing to the Law, the amount of con­trolled debt de­nom­in­ated in for­eign cur­rency is de­term­ined at the of­fi­cial rate set by the Cent­ral Bank of the Rus­si­an Fed­er­a­tion (the “CBR”) as of the last re­port­ing date of the rel­ev­ant re­port­ing tax peri­od, but not ex­ceed­ing the of­fi­cial rate set by the CBR as of 1 Feb­ru­ary 2022.At the same time, the amount of equity as of the last day of each re­port­ing tax peri­od will be de­term­ined without re­gard to the FOREX dif­fer­ences that arose dur­ing the peri­od from 1 Feb­ru­ary 2022 to the last day of the re­port­ing tax peri­od, on which the cap­it­al­isa­tion ra­tio is de­term­ined.Sim­il­ar rules were ap­plied in 2020 and 2021 dur­ing the COV­ID-19 pan­dem­ic, when the rate was fixed as of 28 Feb­ru­ary 2020.Ex­ten­ded list of non-tax­able for­giv­en debt­sThe tax­able in­come of Rus­si­an tax­pay­ers will tem­por­ar­ily ex­clude in­come from debt for­give­ness un­der the loan agree­ments made be­fore 1 March 2022 with a for­eign en­tity and/or for­eign cit­izen that in 2022 ad­opts the de­cision to for­give the debt.The tax­able in­come will also ex­clude debts for­giv­en by a new for­eign lender (leg­al en­tity or in­di­vidu­al), ac­quired by that lender as a res­ult of a debt as­sign­ment be­fore 1 March 2022.The Law does not set any ad­di­tion­al cri­ter­ia for such an ex­emp­tion (e.g. the min­im­um per­cent­age of dir­ect or in­dir­ect share­hold­ing owned by the for­eign lender in the Rus­si­an debt­or). Thus, the­or­et­ic­ally this rule may ap­ply both to in­tra-group loan ob­lig­a­tions and ob­lig­a­tions to third parties.New in­cent­ives for IT-com­pan­iesUn­der the Law, IT com­pan­ies will en­joy a 0% cor­por­ate profits tax rate dur­ing the peri­od between 2022 and 2024, in­stead of 3%. In­ter­est­ingly, the Law does not in­tro­duce any new eli­gib­il­ity cri­ter­ia for this in­cent­ive, thus the gen­er­al con­di­tions set out in Art­icle 284(1.15) of the Rus­si­an Tax Code will con­tin­ue to ap­ply to IT-com­pan­ies.This meas­ure has been in­tro­duced in pur­su­ance of Rus­si­an Pres­id­ent De­cree No. 83 dated 2 March 2022, on which we pre­vi­ously re­por­ted.FOREX dif­fer­encesThe pro­ced­ure for re­cog­nising FOREX dif­fer­ences has been changed: for­eign ex­change dif­fer­ences re­cog­nised in profit (in 2022-2024) or loss (in 2023-2024) shall be re­cog­nised on ter­min­a­tion (i.e. dis­charge) of claims (i.e. ob­lig­a­tions) de­nom­in­ated in for­eign cur­rency.Thus, un­real­ised for­eign ex­change gains and losses are ex­cluded from tax re­port­ing, which sig­ni­fic­antly re­duces the im­pact of es­tim­ated val­ues on the amount of tax. The asym­metry in the time peri­ods is not co­in­cid­ent­al: these changes al­low the re­cog­ni­tion of all for­eign ex­change losses arising in 2022 while lim­it­ing the amount of for­eign ex­change gains start­ing from 2022.Monthly pay­ment­sThe Law en­titles tax­pay­ers to switch to monthly ad­vance pay­ments based on ac­tu­al profits dur­ing 2022, start­ing from a re­port­ing peri­od of three months.Note that the nor­mal pro­ced­ure is to make such a switch from the be­gin­ning of a tax peri­od (i.e. year). A sim­il­ar meas­ure was taken in 2020 due to the pan­dem­ic and is aimed at re­du­cing po­ten­tial tax over­pay­ments.VATA zero rate of VAT has been set on cer­tain tour­ism ser­vicesA 0% VAT rate ap­plies to (i) ser­vices re­lated to the pro­vi­sion of a tour­ism in­dustry fa­cil­ity for lease or use if it is put in­to op­er­a­tion after 1 Janu­ary 2022 and in­cluded in the re­gister of tour­ism in­dustry fa­cil­it­ies for a peri­od of up to five years; and (ii) ser­vices in­volving the pro­vi­sion of tem­por­ary ac­com­mod­a­tion in ho­tels or oth­er ac­com­mod­a­tion fa­cil­it­ies un­til 30 June 2027.The list of tax­pay­ers that may ap­ply for ac­cel­er­ated VAT re­fund has been ex­pan­dedAll tax­pay­ers who are not un­der re­or­gan­isa­tion or li­quid­a­tion or sub­ject to any bank­ruptcy pro­ceed­ings at the time of ap­ply­ing for a VAT re­fund will be eli­gible for an ac­cel­er­ated VAT re­fund up to the amount of taxes they paid for the pre­ced­ing year.VAT may be re­fun­ded in ex­cess of the taxes paid for the pre­ced­ing year sub­ject to the pro­vi­sion of a bank guar­an­tee or surety­ship.The meas­ure is aimed at en­sur­ing that tax­pay­ers can quickly re­plen­ish their work­ing cap­it­al with the amount of the VAT re­fund. The Fed­er­al Tax Ser­vice es­tim­ates that the tax re­fund will take, on av­er­age, eight days from the date when the ap­plic­a­tion is filed.It is im­port­ant to note that un­der the gen­er­al pro­ced­ure taxes will be re­fun­ded only upon com­ple­tion of a desk tax audit and in prac­tice such a re­fund takes at least two to three months, while the ac­cel­er­ated re­fund pro­ced­ure (i.e. re­fund upon ap­plic­a­tion) was pre­vi­ously avail­able only to lim­ited tax­pay­ers who met cer­tain re­quire­ments.Oth­er taxe­sProp­erty tax and land tax­Ca­das­tral value as of 1 Janu­ary 2022 will be used to cal­cu­late cor­por­ate prop­erty tax and land tax for the 2023 tax peri­od.However, this rule will not ap­ply if the ca­das­tral value de­creases in 2023, or if the in­crease in the ca­das­tral value is due to a change in the char­ac­ter­ist­ics of a prop­erty. There­fore, the ef­fect of in­fla­tion on the tax base is elim­in­ated.Trans­port taxThe Law has ab­ol­ished the mul­ti­pli­ers 1.1 and 2 where trans­port tax is cal­cu­lated for 2022 for vehicles worth between RUB 3m (EUR 32,476) and RUB 10m (EUR 108,254).There­fore, the mul­ti­pli­ers will only ap­ply to vehicles worth over RUB 10m (EUR 108,254).Tax ad­min­is­tra­tion­Ac­cord­ing to the Law, there will be no fines for fail­ure to provide doc­u­ments con­firm­ing the amount of CFC profits, or for provid­ing doc­u­ments con­tain­ing false in­form­a­tion for the 2020 and 2021 fin­an­cial years (i.e. the 2021 and 2022 tax peri­ods).Note that the fines for fail­ure to provide such doc­u­ments un­der the gen­er­al pro­ced­ure or at the tax au­thor­it­ies’ re­quest amount to RUB 500,000 (EUR 5,412) and RUB 1m (EUR 10,825), re­spect­ively. It is likely that the can­cel­la­tion of fines for the 2021-2022 tax peri­ods is at­trib­ut­able to the po­ten­tial dif­fi­culties that con­trolling per­sons may face in ob­tain­ing fin­an­cial state­ments due to the re­stric­tions im­posed.Also, there will be no fines for tax un­der­pay­ment as a res­ult of ap­ply­ing prices de­vi­at­ing from the arm’s-length ones in the con­trolled trans­ac­tions where in­come and/or ex­penses are re­cog­nised for the peri­od between 1 Janu­ary 2022 and 31 Decem­ber 2023, re­gard­less of the date of a rel­ev­ant con­tract.Ac­cord­ing to gen­er­al rules, such a fine will amount to 40% of the un­paid tax, but not less than RUB 30,000 (EUR 324).Fi­nally, for the peri­od between 9 March 2022 and 31 Decem­ber 2023, late pay­ment in­terest will not be doubled where com­pan­ies delay pay­ment of tax for over 30 cal­en­dar days. This meas­ure is ob­vi­ously aimed at neut­ral­ising a sig­ni­fic­ant rise in the rate of late pay­ment in­terest in this peri­od pro rata to the in­crease in the CBR key rate in 2022.* In Rus­si­an** As of 1 April 2022

In the cur­rent eco­nom­ic and polit­ic­al en­vir­on­ment, and tak­ing in­to ac­count the lim­it­a­tions now im­posed by many for­eign banks with re­spect to the trans­fer of funds to Rus­sia, we ex­pect that for­eign pro­viders of elec­tron­ic ser­vices may face prac­tic­al dif­fi­culties with pay­ing VAT to the Rus­si­an budget for the first quarter of 2022. Ac­cord­ing to the ap­plic­able le­gis­la­tion, the tax is due to be paid on or be­fore 25 April 2022.Ac­cord­ing to the in­form­a­tion at our dis­pos­al, In­ter­re­gion­al tax in­spec­tion No. 7 in charge of the elec­tron­ic ser­vices’ agenda is col­lect­ing in­form­a­tion from tax­pay­ers on ex­pec­ted prob­lems with pay­ments with a view to provid­ing tech­nic­al solu­tions.That be­ing said, for­eign pro­viders of elec­tron­ic ser­vices in Rus­sia should con­firm with their for­eign banks in ad­vance wheth­er it is pos­sible to pay VAT to the Rus­si­an budget in due time. Any prob­lems iden­ti­fied may be re­por­ted to the In­ter­re­gion­al tax in­spec­tion No.7 via the feed­back form in the tax­pay­er’s on­line ac­count.For­eign pro­viders of elec­tron­ic ser­vices may also dis­cuss with their Rus­si­an cus­tom­ers the VAT pay­ment mech­an­ism for the flows. For ex­ample, the Rus­si­an cus­tom­er may choose to vol­un­tar­ily with­hold the VAT due from the pay­ment made to the for­eign pro­vider, us­ing the mech­an­ism provided in the let­ter* of the Fed­er­al Tax ser­vice dated 24.04.2019 No. СД-4-3/[email protected] However, this ap­proach may be ap­plied only in re­spect of fu­ture pay­ments to the for­eign pro­viders.* In Rus­si­an

The Rus­si­an Fed­er­al Tax Ser­vice com­men­ted on the pos­sib­il­ity for com­pan­ies spe­cific­ally cre­ated as a res­ult of a busi­ness split to ap­ply IT in­cent­ives in its let­ter* No. SD-4-2/[email protected] dated 17 March 2022. Ac­cord­ing to this let­ter, IT in­cent­ives in the Rus­si­an tax le­gis­la­tion we pre­vi­ously re­por­ted on should be ap­plic­able both to ex­ist­ing com­pan­ies and those cre­ated after the in­tro­duc­tion of IT in­cent­ives in Rus­sia.In ad­di­tion, Rus­si­an tax au­thor­it­ies should not re­gard a busi­ness re­or­gan­isa­tion res­ult­ing in the es­tab­lish­ment of a new IT com­pany (sub­ject to the ap­plic­a­tion of IT in­cent­ives) as a bad-faith split of a busi­ness per­formed to ob­tain an un­jus­ti­fied tax be­ne­fit in Rus­sia with­in the mean­ing of Art­icle 54.1 of the Rus­si­an Tax Code. Pro­vi­sions of let­ter* No. BV-4-7/[email protected] is­sued by the Fed­er­al Tax Ser­vice on 10 March 2021 on the as­sess­ment of the key aim of busi­ness re­or­gan­isa­tions are thus not ap­plic­able to such newly cre­ated IT com­pan­ies.IT in­cent­ives should be ap­plic­able ir­re­spect­ive of whom the eli­gible IT activ­ity be­ne­fits (e.g. re­lated or un­re­lated com­pan­ies, oth­er per­sons be­long­ing to the group of com­pan­ies, etc.).Provided that a newly cre­ated IT com­pany does not overtly mis­in­ter­pret its busi­ness op­er­a­tions, Rus­si­an tax au­thor­it­ies should not doubt the eco­nom­ic jus­ti­fic­a­tion of the tax be­ne­fit re­ceived by such an IT com­pany, since the in­tro­duc­tion of IT in­cent­ives for eli­gible IT com­pan­ies was ini­tially in­ten­ded to sup­port IT busi­nesses by re­du­cing the ap­plic­able tax bur­den.In­ter­est­ingly, this po­s­i­tion of the Fed­er­al Tax Ser­vice con­tra­dicts its pre­vi­ous ex­plan­a­tions on the mat­ter (e.g. let­ters No. SD-19-3/[email protected] dated 9 April 2021 or No. SD-4-3/[email protected] dated 20 Feb­ru­ary 2021), where the tax au­thor­it­ies in­sisted that each case of re­or­gan­isa­tion of a busi­ness activ­ity res­ult­ing in the es­tab­lish­ment of a new IT com­pany should be re­viewed to en­sure that such a split of a busi­ness was not per­formed ar­ti­fi­cially with the sole aim of be­ne­fit­ting from the IT in­cent­ives’ ap­plic­a­tion.This switch in the per­cep­tion of the tax au­thor­it­ies is aimed at in­creas­ing the busi­nesses that may en­joy the ap­plic­a­tion of IT tax in­cent­ives and should thus en­cour­age tax­pay­ers to in­vest in the de­vel­op­ment of the IT lines of their activ­it­ies in Rus­sia. This new ap­proach, to­geth­er with the pre­vi­ously an­nounced new pack­age of tax sup­port meas­ures for IT com­pan­ies in Rus­sia, is gen­er­ally in­ten­ded to sup­port IT busi­nesses in the cur­rent tur­bu­lent eco­nom­ic en­vir­on­ment and to re­tain the IT work­force in Rus­sia.* In Rus­si­an

The Rus­si­an Fed­er­al Tax Ser­vice has, for the first time, ac­know­ledged that a loss-mak­ing trans­ac­tion may still be con­sidered arm’s-length for trans­fer pri­cing pur­poses in Rus­sia in its let­ter No. ShYu-4-13/[email protected]* dated 5 March 2022 (the “Let­ter”).Ac­cord­ing to the Let­ter, in the cur­rent eco­nom­ic en­vir­on­ment, where the ap­plic­able sanc­tions in­tro­duced at the US and EU level may in­flu­ence the eco­nom­ic con­di­tions of com­mer­cial trans­ac­tions, Rus­si­an tax­pay­ers may be forced to sell their goods pro­duced for ex­port­a­tion abroad with a dis­count, which may in cer­tain cases lead to a loss res­ult­ing from such trans­ac­tions.This be­ing said, the Fed­er­al Tax Ser­vice should con­sider that these cir­cum­stances may in­flu­ence the pri­cing ap­plied in, and the res­ults of such trans­ac­tions, when con­duct­ing the trans­fer-pri­cing con­trol over such trans­ac­tions and when con­sid­er­ing ap­plic­a­tions for ad­vance price agree­ments filed by tax­pay­ers.Com­ment­sAl­though Rus­si­an tax au­thor­it­ies have his­tor­ic­ally pro­nounced their in­ten­tion to con­sider the eco­nom­ic cir­cum­stances of the trans­ac­tions per­formed when con­duct­ing trans­fer-pri­cing audits, they have nev­er be­fore in prac­tice con­firmed the pos­sib­il­ity of re­cog­nising loss-mak­ing trans­ac­tions as per­formed in com­pli­ance with trans­fer-pri­cing re­quire­ments.This was not even the case dur­ing the COV­ID-19 pan­dem­ic, when tax au­thor­it­ies sug­ges­ted that tax­pay­ers ap­ply the ad­just­ments aimed at en­sur­ing the com­par­ab­il­ity of the com­mer­cial terms of tested trans­ac­tions, which was for­mu­lated rather vaguely in Rus­si­an tax le­gis­la­tion.However, this new ini­ti­at­ive, al­though rep­res­ent­ing a pos­it­ive shift in the per­cep­tion of Rus­si­an tax au­thor­it­ies, still leaves a vast num­ber of open ques­tions to be cla­ri­fied.For ex­ample, it is not clear what eco­nom­ic cir­cum­stances Rus­si­an tax au­thor­it­ies will ac­tu­ally con­sider when as­sess­ing the com­pli­ance of the trans­ac­tion with the arm’s-length prin­ciples. In prac­tice, ac­com­pa­ny­ing eco­nom­ic con­sequences of the sanc­tions, such as ex­change-rate volat­il­ity or tem­por­ary sus­pen­sion of cer­tain busi­nesses in Rus­sia, may have even stronger in­flu­ence on the res­ults of the com­mer­cial trans­ac­tions than the im­me­di­ate re­stric­tions in­tro­duced as part of the sanc­tions pack­ages.Moreover, the Let­ter ex­pli­citly ad­dresses the tax­pay­ers en­gaged in ex­port­a­tion of the goods pro­duced, while cur­rent eco­nom­ic con­di­tions will likely in­flu­ence the prices charged in and the res­ults of vari­ous types of trans­ac­tions per­formed in Rus­sia, in­clud­ing im­port­a­tion of goods to Rus­sia, pro­vi­sion of works and ser­vices, trans­ac­tions with in­tel­lec­tu­al prop­erty, etc. It is un­clear wheth­er sim­il­ar ap­proaches would ul­ti­mately be ap­plic­able to a wider range of cross-bor­der trans­ac­tions, fall­ing un­der trans­fer-pri­cing con­trol.Fi­nally, the Let­ter does not ad­dress the pos­sib­il­ity of per­form­ing cross-bor­der ad­just­ments aimed at re­duc­tion of tax pay­able to the Rus­si­an budget, cur­rently pro­hib­ited un­der the le­gis­la­tion in force. However, such ad­just­ments may in fact be re­quired in the cur­rent con­di­tions, es­pe­cially in cases when the Rus­si­an parties to the con­trolled trans­ac­tions hold en­tre­pren­eur­i­al status, and are thus gen­er­ally bound by the ob­lig­a­tion to en­sure arm’s-length prof­it­ab­il­ity to their routine coun­ter­parties.Our tax team will be closely mon­it­or­ing fur­ther anti-crisis de­vel­op­ments in the trans­fer pri­cing do­main and will re­port on any such changes.* In Rus­si­an