Russian Federation: Tax Alert 18/95 - 8 November 1995

Last Updated: 20 November 1995

1. In this Tax Alert we summarize:

- tax implications applicable to lease arrangements as they are currently developing in Russia

- the rules for the deductibility of interest on loans payable by Russian companies, and

- amendments to the property tax rules for foreign companies

- possible changes in official attitudes to the tax status of sales out of customs (bonded) warehouses.


2. In Russia two major types of lease arrangements are recognized: `short-term' and `long-term', although they are not primarily distinguished by length of lease period. They are defined in accounting regulations, mainly in the Chart of Accounts, and their differing tax implications are greatly influenced by the accounting treatment.

3. A long-term lease is defined as a lease under which the lessee has the right to purchase the leased asset on expiry of the lease, or the right to pay the balance of outstanding lease payments during the course of the lease and thereby acquire ownership of the asset. This concept is therefore close to the concept of finance lease or hire-purchase, as generally understood, although there may be cases where such arrangements would not qualify as a Russian long-term lease.

4. A short-term lease, on the other hand, is a lease which does not confer on the lessee a right to acquire ownership of the leased assets, and is broadly similar to an operating lease.

5. A recent clarification of the tax authorities, effective from 1 January 1996 (sic), which specifically considers `leasing activity' suggests that `leasing' is to be treated on the basis hitherto applicable to `short-term' leases for accounting purposes, notwithstanding any purchase option, although there remain some differences in tax treatment.

6. Based on the Temporary Leasing Provisions of 29 June 1995, our understanding is that the term `leasing activity' or `finance lease' refers to specialised leasing activity, specifically, where an asset is purchased by leasing company at the behest of the lessee and is subsequently leased. `Leasing activity' does not refer to lease arrangements for terms substantially shorter than the prescribed useful life of the asset.

7. In this Tax Alert we do not examine the tax implications of `leasing activity' in detail, as these are likely to affect mainly specialised leasing companies, however, we would be pleased to provide further information if required. The treatment of the two principal kinds of lease as applicable to companies, other than specialised leasing companies, is summarized below.

`Long-term' leases

8. An asset subject to a long-term lease leaves the balance sheet of the lessor and is booked to the balance sheet of the lessee. Consequently, the lessee depreciates the asset and the depreciation may be deducted for tax purposes if the leased asset is used in production. The lease rental payments will not be tax deductible. The taxable income of the lessor is the excess of lease rentals receivable over the net book value of the asset at the time of transfer, recognised over the term of the lease on the basis of actual receipts.

9. While the asset remains on the balance sheet of the lessee, the lessee will be liable to property tax on the net book value of the asset. Any expenses incurred by the lessee on the leased asset should be either deducted or capitalised by the lessee, as appropriate.

10. Under current value added tax and special tax (together `VAT') legislation, a lease constitutes a service and is therefore subject to tax at the rates of 20% and 1.5%. VAT charged by the lessor would be treated as normal output VAT, and as input VAT of the lessee. However, because of the special treatment of input VAT on fixed assets the input tax would be creditable only after title to the leased asset passes to the lessee; that is, it would generally be recoverable over a six month period from the expiry of the lease.

11. This treatment contrasts with that under a sale by instalment or financed by commercial debt, for example, under which title to the asset would pass on commencement of the arrangement and the purchaser would be able to offset VAT from that point. Moreover, the accounting treatment of an instalment sale would normally permit a qualifying purchaser to claim an investment credit deduction for such instalment payments, which would not be possible under a long-term lease.

12. Currently lease rental income is not subject to turnover taxes.

`Short-term' leases

13. An asset subject to short-term lease remains on the balance sheet of the lessor, who is entitled to depreciation on the asset. The lessee is entitled to deduct lease rentals for profits tax purposes if the asset is used in production. Under this treatment, all VAT invoiced by the lessor is recoverable as input tax on payment by the lessee.

14. Since the asset remains on the balance sheet of the lessor, property tax is payable by the lessor. Expenses incurred by the lessor in relation to the leased asset may be deducted or capitalised, as appropriate. The lessor should seek to establish lease rentals at a level exceeding depreciation, otherwise the tax authorities may seek to adjust rentals for profits tax and VAT purposes to their conception of `market value'.

15. As with long-term leases, short-term lease rentals are not subject to turnover taxes.


16. Only a brief summary of the tax implications applicable to various lease arrangements can be provided here. A range of tax-efficient structuring possibilities may be available, subject to commercial and contractual constraints. Where a foreign entity is involved in the transaction, additional complexities would arise.

17. When considering the use of leasing arrangements in Russia, therefore, we recommend that professional tax and legal advice are obtained at an early stage.


18. New rules for interest deductibility were introduced with effect from 1 January 1995. Currently interest incurred by Russian companies may be deducted for profits tax purposes in the following circumstances:

- bank interest limited to the Central Bank rate plus 3% for Rouble loans or LIBOR plus 3% for loans taken in hard currency, except interest paid on

- overdue loans

- loans received for the purchase of fixed assets, tangible or intangible, which should be capitalised as part of the value of the relative fixed asset within the limits applicable to the bank loans, or

- interest on loans funding non-production expenses, although often it is impossible in practice to identify convincingly such a purpose

- interest on debt granted by suppliers of goods, works or services, with the exception of interest paid on overdue debt.

19. There is as yet no official clarification as to the LIBOR rate to be used in calculating the limit, especially where no LIBOR rate corresponds with the term of the actual debt. Informal advice from within the State Tax Service has suggested that, given the variety of LIBOR rates and the absence of any clarification, taxpayers are entitled to apply the rule previously applicable, which referred only to the Central Bank of Russia Rouble rate. This approach should be defendable in the circumstances, but is also aggressive.

20. The more conservative approach that we would recommend would be to apply the limitation by reference to the most closely analogous LIBOR rate or, if there is no such rate, a rate generally obtainable in a major financial market for similar financing.

21. We have information that consideration is being given to changing the rules on the deductibility of interest on hard currency debt retroactively from 1 January 1995.

22. It should be noted that some recent double tax treaties, and the protocols and exchanges of letters forming part of them, purport to secure for entities entitled to benefit much broader deductibility of interest than is available under Russian domestic legislation. It should be noted, however, that the effect of such provisions is relatively untested and requires careful consideration before reliance is placed on them.


23. The new Instruction No. 38 on property tax payable by foreign legal entities in Russia (`FLEs') has been issued and registered with the Ministry of Justice, although not yet officially published. We expect it, however, to be in force in time for, and to apply to, 1995 calculations, at least for the final quarter. We summarise below the main differences between the old and new Instructions.

Definition of taxpayers

24. Under the old Instruction, property tax was payable only by an FLE which had a representation or division on the territory of Russia. The new instruction expands the definition to FLEs include those which own assets located in Russia.

25. FLEs having representations are now required to maintain registers of fixed assets in a standard format, including the date of purchase or receipt of property from the head office, initial value, current value on the first date of each quarter, depreciation rates, etc.

26. FLEs with no presence in Russia are required to report to the State Tax Service and to the local authorities responsible for the region in which assets are located.

Taxable property

27. The new instruction provides that taxable property shall include:

- leased property under a long-term lease (see above)

- property belonging to the FLE under any Joint Activity Agreement

- notional work in progress calculated by reference to a formula, where its actual value cannot be determined.

28. Tax is not due on property brought into Russia under foreign trade contracts until ownership passes to the importer, or to the ultimate customer for goods consigned for sale through commission agents, when the importer or purchaser becomes liable to the tax.

Depreciation limits and property valuation

29. Under the old Instruction FLEs were allowed to use the depreciation rates established at head office level in their country of origin, whereas the new instruction introduces the following maximum limits:
-    Category A: buildings                              5%

-    Category B: cars, office furniture and equipment   25%

-    Category C: other property                         15%
30. These rates are applied to the Rouble written down value of property bought for Roubles. If it was acquired for foreign currency (including funds from head office), the property is to be accounted for in the currency of purchase, with yearly recalculation of its value into Roubles at the exchange rate at the end of the reporting period.

31. The value of equipment for property tax should include transportation and installation costs, customs duties and similar costs. If there are no documents confirming the value of property, the market value shall be taken.

Taxable event

32. The following definitions of the time at which property first becomes taxable is provided in the new Instruction:

- for property received from head office, the date of the customs declaration on import

- for property purchased, the time title of ownership is acquired

- for property under long-term lease, the date the lease commences.


33. FLEs having a presence in Russia are required by the new Instruction to pay property tax from an account with a bank in Russia. This requirement is similar to that introduced by the new profits tax instruction this summer, although it is at present unclear how the tax authorities would seek to enforce this requirement. We would, however, recommend that taxpayers comply where possible. Where compliance would create significant difficulties, we would be pleased to discuss possible solutions.

34. The Instruction recognises that exemptions may be provided from property tax under double tax treaties and confirms that treaties have priority over any conflicting Russian tax legislation. It may be noted, however, that the form of application for treaty exemption annexed to the Instruction requires confirmation by the tax authorities in the country of residence of the FLE, as is the case for profits tax. We recommend those eligible for exemption commence application procedures as soon as possible, where the amount of tax in question justifies the time and effort involved.


35. The explanations set out above demonstrate that the tax authorities are becoming more precise and sophisticated in their regulations, whilst not necessarily recognizing the extent of the compliance burden placed on taxpayers relative to the revenue in question. Taxpayers are expected to maintain high levels of tax knowledge and compliance, in a penalty environment that remains highly adverse.

36. If you have any doubts about the property tax status of your company in Russia, or need help with compliance, please call or fax your usual contact in our tax department.


37. A foreign legal entity ('FLE') importing goods into Russia on terms under which ownership title passes to the customer in Russia before the goods enter Russian territory has long been exempt from tax on such profits, even if the FLE maintains a place of business or affiliated agency in Russia. Sales out of a warehouse situated on Russian territory are, however, specifically subject to profits tax.

38. Under a 1992 Finance Ministry ruling, for profits tax purposes a customs (bonded) warehouse was not to be treated as being on Russian territory, so that sales out of such warehouses might also be treated as profits tax exempt. In addition, such sales were in practice generally treated as not subject to VAT, since the VAT would be paid by the customer when clearing the goods out of the customs warehouse.

39. Recently there have been indications that the attitude of tax inspectors on this issue is beginning to change, and that sales out of customs warehouses may in future be treated as taxable. Although arguably in conformity with the law, this would represent a significant change in approach and, in relation to VAT especially, could produce some illogical results. We are seeking clarification, but in the meantime, any client who is relying on previous practice is invited to contact us to discuss how any exposures might be limited.

This publication is intended for general guidance only and should not form the basis of specific decisions.

For further information contact the firm on +7 503 232 5511, or enter a text search "Coopers and Lybrand" and "Business Monitor".

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions