Russia: clarifications on deductibility of interest expenses related to loans taken to acquire sharesMarch 28, 2013
On 27 February 2013, the Ministry of Finance issued Letter No. 03-08-05/5690 clarifying the tax treatment applicable to interest paid on loans taken for the purposes of the acquisition of shares and capital contribution in foreign companies.
It also clarified the application of the participation exemption regime to dividends distributed by a company whose shares were acquired with borrowed funds.
A Russian limited liability company acquired shares in several Russian companies and in a company resident in Luxembourg. To acquire the shares in the Luxembourg company, the Russian company partially borrowed the necessary funds.
The Ministry of Finance clarified that the Tax Code does not contain any provisions limiting the deductibility of the interest on loans received by Russian companies for the purposes of capital contribution and acquisition of shares in Russian or foreign subsidiaries. Accordingly, the Russian company may deduct the interest expenses subject to compliance with the general requirements set forth in the Tax Code.
Also, the Ministry of Finance clarified that the Tax Code does not preclude the application of the participation exemption to dividends distributed by a company whose shares were acquired with borrowed funds, provided that the conditions set forth in article 284 of the Tax Code are satisfied.
Namely, the Russian company holds at least 50% of the shares in the company distributing the dividends for at least 365 consecutive calendar days or possesses depositary receipts granting the right for at least 50% of the whole amount of the distributed dividends.
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