The Ministry of Finance has published Letter No. 03-08-05/23521 regarding the applicability of the thin capitalization rules to interest payments made by a Russian company on a loan granted by a Russian bank issued on June 21, 2013. For example, a Russian company borrowed funds from a Russian bank which is held 90% by a Cyprus resident company. The loan agreement was provided by another Russian company which is affiliated with the Cypriot shareholder of the borrower and was protected with a guarantee.
According to the Tax Code, thin capitalization rules apply to controlled debts which include a debt liability of a foreign company that directly or indirectly owns more than 20% of the share capital of the Russian borrower, or its Russian affiliate issues a guarantee or assures the fulfillment of the debt obligation. The Ministry of Finance concluded that the interest may be deductible under general rules, but should consider the arm’s length principle.
