Tax and accounting aspects of the setup/modernization of a manufacturing plant

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Tax and accounting aspects

of the setup/modernization

of a manufacturing plant

Helge Masannek Director Tax & Legal, Rechtsanwalt RUSSIA CONSULTING 3rd October 2013

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

Financing

 Charter capital, payment into the equity, financial help, loan  Undercapitalization

 Loan: loan forgiveness, interest deduction ceiling, thin capitalization rules



Construction projects in accounting



Depreciation of fixed assets

 Basic principles, depreciation groups

 Accelerated depreciation, depreciation premium, leasing



Property tax

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

Financing

 Charter capital, payment into the equity, financial help, loan

 Undercapitalization

 Loan: loan forgiveness, interest deduction ceiling, thin

capitalization rules



Construction projects in accounting



Depreciation of fixed assets



Property tax

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

Charter Capital

 Dividend payments

– Value of the share in the charter capital of at least 80.000 Euro

(German parent company), 100.000 USD (Austrian parent company), investment of 76.225 Euro (French parent company)

– Reduction of the withholding tax rate from 15% to 5% (10%)

 Registration efforts in case of charter capital increase

– Decision of the shareholder(s), amendment of the charter, registration at the tax authority

 Risk: undercapitalization

– Key date: 31st December of the third year and every following financial (calendar) year

– Undercapitalization if net assets < charter capital

– Result: Until 30th June of the following year decision about decrease of charter capital or liquidation

– Recommendation: On time payment into equity

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

Payment into Equity/Finacial Help

 Payment into equity:

– Simple procedure – only decision of shareholder required

– Increases net equity of the company

– Statutory basis (article 27 Law on Limited Liability Companies)

– Disadvantages: refund not possible, not possible in case of ZAO/OAO

 Financial help:

– Payment in favor of the subsidiary

– Accounted as income not being subject to profit tax

– Increases result in financial accounting (in case of profit – dividend payment possible)

– Possible in case of ZAO/OAO

– Problem: gifts between legal entities are prohibited by article 575 Civil Code RF

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

Loan Financing

 Requirement: written loan agreement

 Undercapitalization risk:

– Loan does not improve net assets (increases liabilities, interest reduces net assets)

– Loan forgiveness:

– In general possible, improves net assets

– Problem: forgiveness = income of the Russian entity

– Tax fee: Forgiveness of the primary debt if given by parent company

– Subject to profit tax:

– Forgiveness of loans by other lenders (e.g. sister company)

– Forgiveness of interests

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

Loan Financing

 Transfer Pricing:

– Interest is subject to TP-regulations (in Russia, but usually also in country of lender)

 Interest deduction ceiling regulations:

– Ruble loans: 14,85% (180% of the refinancing rate of the Central Bank RF)

– Loans in foreign currency: 6,6% (80% of the refinancing rate of the Central Bank RF)

– Regulations extended until 31st December 2013

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

Loan Financing

 Thin Cap-Rules

– Admissible debt-equity-ratio: 3/1

– Exceeding debts: requalification of interests into dividends, i.e. not

deductable for profit tax purposes, payments are subject to withholding tax (5-15%)

– Applicable to:

– Loans from parent company, loans secured by parent company etc.

– Exception:

– Loans from sister companies

– But recently negative court practice, especially in case of SPVs solely for financing purposes

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

Financing



Construction projects in accounting



Depreciation of fixed assets



Property tax

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 Construction period: Payments to the contractor are advanced payments (KS-2- and KS-3-protocols show only the construction process)

 VAT: Refund of input VAT possible on the basis of VAT invoices issued by the contractor

 Finanlization and acceptance of a contractually stipulated building stage:

 Transfer of the costs from “accounts receivables” to “assets under construction” (acct. 08)

 Acceptance of the construction work:  Signing of KS-11- or KS-14-protocol

 Activation of the construction assets in the account “fixed assets”  Depreciation starts

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

Financing



Construction projects in accounting



Depreciation of fixed assets

 Basic principles, depreciation groups

 Accelerated depreciation, depreciation premium, leasing



Property tax

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

Depreciable Fixed Assets:

 Useful life of at least 12 months  Value: at least 40.000 Ruble

 Examples: Building, production facilities,…  Land is not subject to depreciation



Depreciation groups:

 10 groups, depending upon the useful life (1-2 years up to >30 years)  Classification according to Regulation on Classification of Fixed

Assets (e.g. industrial building in reinforced concrete technique – usually >30 years useful life, 10th_group)

 Method of depreciation: linear or non-linear  Tax consequences of depreciation:

 Allowance for depreciation – expenses for profit tax purposes  Reduction of book value regarding property tax

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Accelerated depreciation & depreciation premium:

 Depreciation premium:

– 30% in the first year for fixed assets of 3rd – 7th group (3-20 years useful life)

– 10% in the first year for fixed assets of other groups

– Attention: Recovery of depreciation premium in case of sale to affiliated entities within 5 years

 Accelerated depreciation:

– Up to a factor of 2 – e.g. fixed assets used in multiple shifts or under aggressive circumstances if activated until 31st December

2013

– Up to a factor of 3 – leasing (exception: fixed assets of 1st, 2nd or 3rd group)

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

Financing



Construction projects in accounting



Depreciation of fixed assets



Property tax

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Subject to property tax: movable and immovable fixed

assets (buildings, facilities, equipment)

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Tax rate: stipulated by subjects of RF, up to 2,2% of the

book value

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Exceptions: e.g.



Land plots



New:

Movable fixed assets accounted after 1st January

2013

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 Accounting Outsourcing  Tax Consulting  IT Services / ERP  Interim Management  Office Sublease  Recruiting  Outstaffing

 Visa and Work Permit

Thank you for your Attention!

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Helge Masannek Lawyer,

Tax & Legal Director

+7 / 495 / 956 55 57

MasannekH@russia-consulting.eu

Foto

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