Dmitry Nazarov
Your Russian daughter-company will probably need some financing someday—whether it is during the initial phase of your new business in Russia, an economic downturn, or to boost your company’s active development to take advantage of the possibilities the Russian market offers. Receiving an external credit line or other provisions is often not an available option and shareholders therefore decide to finance the company on their own.
Here is a short summary of the most efficient options of how a foreign parent company can finance its Russian entity.
Loan
A loan is issued based on a simple legal agreement. Operation is subject to currency control if one of the parties is a non-resident, and requires registration of the contract at the bank if the amount is over RUB 3,000,000. After receiving the transfer, the company records the obligation in liabilities in the balance sheet, making the financial indicators less attractive.
The repayment of the interest-free loan and the body of interest-bearing loan is exempt from tax.
In the context of interest-bearing loans, interests can be included in tax expenses within the determined limit. Interest payoff is set equal to dividend pay-out and bears tax if net assets are three times less than liabilities on controlled transactions (thin capitalisation rule).
--> Convenient for temporary financing. From a taxation standpoint, payment of interest on a loan issued to an individual resident is often more profitable than payment of dividends.
Grant Financing
Grant financing is made on the basis of a decision by a general meeting of shareholders and does not require registration with the Tax Office.
Parties must follow currency-control procedures if one of them is a non-resident. After receiving the funding, the company records other income in the Profit and Loss report, making financial indications more attractive.
No additional tax burden is created if the funds are received from a shareholder who holds an equity interest of over 50%.
Capital Increase
Capital increase is made on the basis of a decision by a general meeting of shareholders.
- Change in the charter capital must be registered with the Tax Office.
- Change in the additional capital does not require registration; participants may increase it unproportionally only if it is allowed in the company’s Charter.
Parties must follow currency-control procedures if one of them is a non-resident. After receiving the funding, the company records the equity increase in the balance sheet, making financial indications more attractive.
This creates no additional tax burden under certain conditions. Since 2019, capital injections can be returned to the shareholders.
--> It is common practice to increase the charter capital to re-allocate the shares of owners and to comply with tender terms.
XLNC MAGAZINE | No. 07 | Spring 2021