Amendments^[1] to Article 269 of the Tax Code which sets out how to calculate interest on debt obligations for profit tax purposes entered into force on March 10, 2015.

Overall, these amendments are intended to avoid:

1. excessive regulation of interest accrued on debt obligations for profit tax purposes, and
2. the adverse consequences related to the application of thin capitalization rules due the fall in ruble exchange rate in the second half of 2014.

You will find below a brief review of the main amendments introduced to Article 269 of the Tax Code.

Recognition of interest as expenses / revenues for profit tax purposes

Since January 01, 2015 interest on debt obligations (loans, credits, etc.) should have been recognized as expenses (revenues) based on actual rate. The law provides for two exceptions to this rule:

1. Interest is recognized as expenses for profit tax purposes if within the limits established by thin capitalization rules^[2]; and
2. Interest under controlled transactions (subject to transfer pricing rules) are recognized as expenses (revenues) for profit tax purposes subject to the arm’s length principle set out in Section V.1 of the Tax Code.

For controlled transactions with banks, the Tax Code set out acceptable interest ranges or so-called safe harbors. The amendments to Article 269 of the Tax Code extend the application of safe harbors to interest on any controlled transactions. This means that if the actual interest amount under a controlled debt obligation is within the set acceptable ranges, it is recognized as expenses (revenues) for profit tax purposes (taking into account thin capitalization rules, if applicable).

The acceptable interest range for debt obligations in rubles has also been broadened.

Changes to thin capitalization rules

The newly-introduced amendments have also affected thin capitalization rules. The law establishes that if a debt obligation arose before October 01, 2014, when determining the maximum interest amount that can be deducted for profit tax purposes for the period from 01.07.2014 to 31.12.2014:

1. the amount of controlled debt denominated in foreign currency should be calculated on the basis of an exchange rage not exceeding that of the Central Bank as of July 01, 2014;
2. the exchange rate differences from the revaluation of currency claims (liabilities) should not be taken into account when calculating equity capital amount.

The above amendments apply to relationships arisen starting from January 01, 2015.

Maximum interest amount

Another limitation on interest on debt obligations used to be in place until 2015: interest recognized as expenses were not to deviate substantially from the average level of interest on debt obligations issued in the same quarter (month) on comparable terms, or exceed 1.8 refinancing rate for debt obligations in rubles and 0.8 refinancing rate for debt obligations in foreign currency^[3]. For the period from 01.12.2014 to 31.12.2014, the maximum interest amount that can be recognized as expenses for debt obligations in rubles has been increased up to 3.5 refinancing rate.

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[1] Federal Law N 32-FZ On Introduction of Amendments to Part II of the Russian Tax Code dated 08.03.2015

[3] Article 269 (1) Tax Code