Recently, multinational corporations have been faced with the issue of providing intra-group services to their subsidiaries located in the Russian Federation. Expenses under such services are often challenged by the Russian tax authorities within tax audits. Following requests from the business community, the Russian Federal Tax Service (FTS) has issued two letters to clarify uncertainties in this area.
Letter #1 on intra-group services
In Letter No.ШЮ-4-13 / 12599 dated 6 August 2020 (Letter #1), the FTS listed the criteria assessing the legality of including expenses for intra-group services. The letter contains a practical approach to checking expenses for intra-group services that should be deductible for income tax purposes.
The letter highlights the main “tests” that are already applied by the Russian tax authorities in the framework of tax audits, specifically:
- Reality test: meaning that services were actually rendered as provided for by the Service Agreement (SA) and reflected in other documents that prove the relationship between the parties. In this case, the taxpayer should justify the need to involve a foreign company in the service.
- Utility test: the actions actually performed (services rendered) were useful to the recipient of the services; namely, an independent person would agree to pay for them.
- Test for duplication of services: it is necessary to demonstrate that there is no duplication of costs for identical services. At the same time, to assess this, the Russian tax authority can conduct a functional analysis, analysing the experience and competencies that a Russian taxpayer receives, and not limited to establishing the fact that the names of departments coincide or there are employees in positions with similar names.
- Test for documentary confirmation: the FTS, as an example, provides a list of documents and information to confirm expenses that are currently already requested from taxpayers as part of inspections and for pre-audit analyses (business correspondence and emails, telephone call details, minutes of meetings, timesheets, reports, etc.).
- Test of market price level: the letter emphasises the need to check the transparency and documentary support of the pricing mechanism. The FTS emphasises that checks of market prices are not the subject of on-site and chamber tax audits. At the same time, the price factor, the mechanism and the principle of its formation are an integral characteristic of the service itself. Therefore, attention should be paid to checking the availability of a transparent methodology for forming the cost of services. The price for intra-group services can be defined as “cost plus margin”, whilst using such a pricing model should not be considered a cost allocation for the group.
Letter #2 on intra-group services
In the second Letter No. ШЮ-4-13/1749@ dated 12 February 2021 (Letter #2), the FTS provided additional clarifications in respect of deducting expenses for shareholding activity incurred by Russian companies that purchase intra-group services.
The letter contains a list of practical examples of the functions of a shareholder within the strategic management of the group, as well as the planning and control of the group’s business, which are considered shareholder activities and cannot be recognised as the provision of services.
Letter #2 concludes that the expenses of Russian shareholders for shareholder activities (with the exception of the expenses listed directly in Article 270 of the Russian Tax Code) cannot be considered economically unjustified, meaning that they are tax deductible in general, provided they are properly documented.
Taxpayers have received guidelines regarding what kind of activity can be regarded as shareholder activity. It is important to note that, in the event the tax authority challenges the deductibility of said expenses on shareholder activity, said payments can be reclassified into income from a Russian source and be taxable at source under Article 310 of the Russian Tax Code (“The specifics of the calculation and payment of tax on income received by a foreign company from a Russian source, withheld by the tax agent”).
If you would like to know more about the legal conditions of including expenses for intra-group services by multinational companies to subsidiaries in Russia, please contact the experts of ALTHAUS Group, the exclusive representative of WTS Global in Russia.