Russia: Draft law on the thin capitalization rule submitted to State Duma

The Draft Law No. 675906-6 regarding the introduction of changes to article 269 of part 2 of the Tax Code in respect to the meaning of the concept of controlled indebtedness has been submitted to the State Duma on 16^th December 2014. A representative from the Finance Ministry has recommended that amendments will be made to the method for the thin capitalization ratio for foreign currency debts to exempt the devaluation impact after 1^st July 2014. This exemption is expected to be an interim measure and effective until the end of 2015. Under the proposed changes, debt may be recognized as controlled if a Russian borrower has a foreign direct or indirect shareholder. Under No. 376-FZ of 24, a foreign company that is Russian tax resident (Article 246.2 of the Tax Code) is considered as a Russian organization for profits tax purposes with effect from 1^st January 2015 and becomes subject to the thin capitalization rules. According to the December draft, the ratio of controlled debt to a borrower’s equity is to remain 3:1 (12.5:1 for banks and leasing companies). A threshold of 90% for income is introduced for leasing companies below which the 12.5:1 ratio cannot apply. For each draft, the above changes are proposed to enter into force on 1^st January 2016.