Most important Russian court cases on tax matters concerning cross-border transactions in 2023

In 2023 court tax disputes were resolved, as a rule, in favour of the tax authorities, with the number of court cases generally tending to decrease.

The practice in connection with settlements has changed in a negative direction. In court case No. А40-32377/2020, a Russian company set off the loan amount (principal amount and interest) due to foreign shareholder against the monetary contribution of this shareholder into the company’s assets (additional capital). The courts concluded that the real purpose of the transaction was debt relief, since the monetary contribution had to be made in monetary form and was actually paid, as indicated by the courts. As a result, the Russian company was unable to deduct the interest as an expense and had to consider it as income resulting from debt relief. The company was effectively required to pay 40% tax on the interest amount, plus a penalty and late payment interest.

Continuing the topic of taxation of interest not actually paid to the lender, in case No. А67-5356/2023, the interest accrued under a loan agreement was capitalised into the principal debt of a Russian company-borrower, and was considered by the courts as a non-monetary form of interest payment to a foreign lender. Because they treated this case as tax evasion, the courts also refused to apply the Double Taxation Treaty with Cyprus allowing tax exemption with respect loan interest. This resulted in additional charge of 20% withholding tax, together with a penalty and late payment interest.

Generally, tax incentives draw high attention from the Russian tax authorities. In case No. А45-11993/2023, the courts refused to apply tax incentives to a debt relief scheme under a loan agreement, as the company forgiving the debt was incorporated in an offshore state. Under the Russian tax code, a free-of-charge transfer of assets to a Russian subsidiary from its parent company with a share of 50% or more may be exempt from profits tax, unless the parent entity does not reside offshore. Beginning in 2024 offshore zones according to Russian law also include the so-called “unfriendly states” (EU countries, the United States, etc.).

Applying “debt push-down”– for example, when a loan taken by an acquiring company is actually paid by the target (acquired) company after a merger of the acquiring company and the target company – may lead to significant tax risks in Russia, as confirmed in court cases No. А40-47086/2022 and No. А45-22926/2020. The debt push-down approach resulted in additional tax charges due to the denial of deductibility of loan interest for profits tax purposes. In one of the above cases, requalification of the loan interest into dividends also took place, whereby withholding tax was charged, albeit at the reduced 5% WHT rate under the DTT with Cyprus.

We expect that the Russian courts will continue to take a predominantly fiscal position in tax disputes, which may eventually be explained by, among other reasons, the rising level of expertise by tax authorities and by the possible deficit of the Russian budget.

Valeria Khmelevskaya is a Partner, Lawyer and Tax Consultant admitted to practice in Russia. She has over 20 years of experience of consulting in matters of Russian and international tax law. She is also the Deputy Head of the Management Board and the Chair of the Committee for Taxes and Financial Reporting of the German-Russian Chamber of Commerce (AHK) and recommended attorney of the Austrian Foreign Trade Centre Moscow (Advantage Austria).