Cross-Border Arrangements with Russian Subs: What’s Important?

By Valeria Khmelevskaya and Gleb Stepanov, KBK Accounting

Currently, the Russian tax authorities tend to pay great attention to the crossborder arrangements of multinational enterprises (MNEs), and the most challenged are the intra-group services. The claims are usually related to business purpose of transactions, and whether the services were real. Cost-contribution arrangements or cost sharing are not foreseen by the Russian tax legislation in relation to Russian companies, any references and contractual provisions referring to cost allocation and the relevant keys might be grounds for denial of deduction of the relevant expenses (service fees) from the profits tax base (Russian corporate income tax) of the Russian customer entity.

There are also strict requirements regarding the documenting of services: apart from the statement and report on services provided, the tax authorities would like to see additional proofs, e.g. protocols, minutes related to the meetings, results of services provision, etc. The tax authorities may even approach employees, both current and former, to confirm the fact of provision of services in question. It might also be crucial to show the positive effect resulting from such services provision.

In some cases, the tax authorities may also refer to BEPS Action 10 / Chapter VII of the OECD TP Guidelines, whereby they may interpret their provisions more strictly than in other European jurisdictions. Starting from 2019, the transfer-pricing (TP) control of crossborder arrangements with the affliated Russian subs and other interrelated persons is affected if the total annual turnover between two respective persons exceeds RUB 60 million (approx. EUR 830,000). Should the pricing not comply with the market level, the additional tax charge may take place.

There are also reporting obligations, e.g., annual notification on controlled transactions and notification on participation in the international group companies. The Russian companies should also have TP files and, in certain cases, also dispose of and/or submit three-tier documentation similar to OECD requirements. Considering the current level of international information exchange, it might be crucial that the relevant transactions with Russian subs do not drastically deviate from transactions within MNE groups in other countries.

Valeria Khmelevskaya

GGI member firm
KBK Accounting
Auditing & Accounting, Tax
Moscow, Russia
T: +7 495 662 33 30
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W: www.kbk-accounting.de

KBK Accounting is a reputable outsourcing firm and provider of a wide range of services, including tax accounting and bookkeeping, tax advisory, reporting and compliance, HR, and interim management.

Valeria Khmelevskaya is a Partner, lawyer and tax consultant admitted to practice in Russia. She has over 17 years experience of consulting in matters of Russian and international tax law. Ms Khmelevskaya is also the Deputy Chair of the Committee for Taxes, Reporting and Controlling of the German- Russian Chamber of Commerce (AHK) and recommended attorney of the Austrian Foreign Trade Centre Moscow (Österreichische Außenhandelsstelle Moskau).

Gleb Stepanov

GGI member firm
KBK Accounting
Auditing & Accounting, Tax
Moscow, Russia
T: +7 495 662 33 30
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W: www.kbk-accounting.de

Gleb Stepanov is a lawyer and a member of the tax and consulting team.

Published: International Taxation Newsletter, No. 11, Autumn 2019 l Photo: Milissenta - stock.adobe.com