Cross-border set-off and debt-relief arrangements
Valeria Khmelevskaya
by Valeria Khmelevskaya
Many foreign companies operating in Russia are faced with the need to settle their intercompany debts for the purposes of the subsequent sale/liquidation of the company, its financial rehabilitation or due to the sanctions-related inability to settle its debts otherwise. When it comes to intercompany settlements the companies are normally presented with two key options: set-off and debt-relief arrangements.
Set-off
One of the options for settling intercompany debts of a Russian company is offsetting its debts against debts of a foreign shareholder. Debts under supply/service agreements may be used. Furthermore, advance payments for goods/services that were ultimately not supplied/delivered by foreign suppliers/providers to Russian customers may likewise be offset, while earlier they had to be returned to Russian bank accounts otherwise leading to severe fines.
Should there be no debts of a foreign shareholder, it may make a contribution to the assets of a Russian company in the amount of the latter’s outstanding debts with a consequent set-off of this contribution. However, the following risk must be considered.
De jure, such contribution is treated neutrally from a tax standpoint under the Russian law. At the same time, a number of clarifications of Russian authorities indicate that such arrangements may be treated as debt relief. Should the tax authority “requalify” the set-off arrangement as debt relief, what follows is an additional charge of profits tax (as a general rule, 20%) and imposition of a 20-40% fine and late payment interest. Moreover, depending on the additional tax amount the management of a Russian company may be held criminally liable (the threshold is RUB 15M).
A more favorable option for set-off could be to make a contribution to the share capital of a Russian company. However, if a shareholder is considered an “unfriendly person” (inter alia, EU and US companies) such operation would require a permission of the subcommission of the Government Commission for Control over the foreign investments in the Russian Federation as it is considered a restricted “transaction with shares”.
Debt relief
Unlike contribution to the assets of a Russian company debt relief is generally treated as a taxable event under Russian law. The amount of debt forgiven is generally considered as taxable non-operating income of a debtor and is therefore subject to 20% profits tax. At the same time this leads to no risks as was described above in regard to set-off.
If the company forgives the debt to a Russian company in which it owns a ≥50% share and the debt has been accrued in connection with provision of funds or transfer of goods/property rights that are retained in property for at least a year the debt amount is not considered taxable income of a Russian company. At the same time, this exemption notably does not apply to debt amounts under loan agreements. In 2022 such debt amounts forgiven by foreign company were exempt from taxation but this exemption was not extended for 2023, however, prolongation of the exemption for 2023 is awaited, still possible and could be introduced retroactively.
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Auditing & Accounting, Tax
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). Contact Valeria.
