Loans constitute a commonly used instrument of intragroup financing. They offer flexibility in terms of duration and remuneration that the parties are free to agree upon. As opposed to contributions into equity, the loan agreements do not require compliance with strict corporate regulation. Hence, implementation of the loan agreements is far less formalized and time-consuming.

However, when opting for intragroup loans, the parties should not disregard Russian specifics and restrictions in the fields of currency control and taxation. These elements are of importance when deciding on the structure of intragroup debt financing and its eventual implications.

Key words: Loan Agreement, Interest Taxation, Interest Deductibility, Currency Control Regulation, Repatriation Requirement, Debt to Equity Swap, Offset.


This article is focused on intragroup debt financing involving legal entities only. Loans to/ from individuals will remain beyond the scope of our analysis.

Russian civil law does not provide for any restrictions as to the right of Russia-based legal entities to enter into loan agreements with other legal entities irrespective of their status as Russian or foreign entities as well as related and non-related parties.

Loan agreements between legal entities shall be executed in a written form. The parties are free to agree on the loan amount, interest calculation method, duration and terms and conditions of loan principal repayment.

Main restrictions relating to intragroup loans arise out of currency control and tax regulations.

Considering that currency control and tax requirements differ depending on the status of Russian legal entities acting as the borrowers or the lenders under the loan agreements, the below analysis will be distinguished for inward and outward loans.


Currency control requirements

Currency control rules ensure control over ruble and foreign currency transactions between Russian residents and non-residents and prevent the outflow of capital from the Russian territory. Loans between Russia-based companies,

considered as Russian residents for currency control purposes, can be made in rubles only1. At the same time, since such loans are not recognized as "currency operations", they are beyond the scope of currency control regulation.

Loans extended by foreign companies of the group, qualifying as currency non-residents, to Russian companies can be nominated and paid both in rubles and in a foreign currency.

Loan agreements between residents and non-residents are subject to the prior registration with a Russian bank, if the loan amount equals or exceeds 3 million rubles or its equivalent in a foreign currency2. Registration is the responsibility of the resident party.

In order to register a loan agreement, the resident party shall provide the following documents to the Russian bank: (i) a loan agreement or an extract thereof that contains information sufficient for the registration (including details of the parties, loan amount, date and number of the loan agreement, etc.); (ii) other information that may be requested by the bank3.

Upon completion of the registration formalities, a unique registration code is provided to the resident party in respect of the registered loan agreement. Registration procedure shall be completed and the unique registration code notified to the resident party within 2 (two) business days from the date of receipt by the bank of necessary documents and information4.

In relation to a registered loan agreement, a resident party shall provide the bank with the supporting documents that evidence, inter alia, its performance, termination, change of the parties or change of its value, including the change of an interest rate, together with a supporting documents' certificate drawn according to a pre-established form5. Supporting documents may include documents used by the resident in accordance with legal, accounting and customary rules (i.e. addenda, offset and/ or assignment agreements, etc.).

Under Russian Federal Law No. 173-FZ dated 10 December 2003 "On Currency Regulation and Currency Control" (the "Currency Control Law"), the "use of rubles and/or foreign currency as a means of payment" between a resident and a non-resident is qualified as a "currency operation" and, as such, is subject to currency control, which is exercised by a Russian account bank of the resident party6.

Therefore, for any further debiting or crediting operations under the registered loan agreement the resident party will be liable to notify the unique registration code to the bank. For debiting operations, payment instructions and documents related to the transaction shall also be provided7.

If a loan agreement's value is lower than 3 million rubles, the above registration requirements do not apply. In such cases a resident party shall provide the bank with the documents that serve as the basis for the transaction (i.e. loan agreement) and enable the bank to identify the code of the executed transaction8.

If the value of a loan agreement does not exceed 200 thousand rubles or its equivalent in a foreign currency, the resident is only required to inform the bank of the code and type of the executed transaction9.

Tax implications


Any loans, both inward and outward, extended in monetary form as well as interest accrued thereon shall not be subject to Russian VAT10.

Taxation of the interest income

Provision and repayment of loan principal are neutral for the corporate income tax purposes.

Interest income paid by Russian borrowers to Russian lenders is exempt from any withholdings at the borrower's level and assessed to Russian corporate income tax at 20% rate with the lenders11.

Interest income paid by Russian borrowers to foreign lenders is qualified as Russian source income for the latter and subject to withholding tax levied at 20% domestic rate, unless otherwise stipulated by an applicable double tax treaty (the "DTT")12. Double tax treaties generally provide for (i) withholding tax exemption or (ii) lower rates of withholding tax to be retained in Russia, being the country of the interest origin. Eventual application of Russian "thin capitalization" rules may alter withholding taxation of interest (see below).

In order to benefit from the DTT provisions, a foreign lender shall provide a Russian borrower with a tax residency certificate issued by an authorized state authority, to be legalized by an apostil and translated into Russian.

The interest recipient shall also procure the Russian borrower with an evidence that it is considered as a beneficial owner of the received interest income.

It is worth mentioning that the Russian tax authorities have not still elaborated any consistent and clear position with respect to the treatment of the beneficial owner status of the foreign income recipient. All official clarification letters remain very general and refer mainly to the formal criteria of beneficial owner status without paying regard to any specifics of particular types of activities. For instance, beneficial ownership of foreign companies of multinational groups vested with holding and financing activities may be not so easy to prove, since Russian tax authorities tend to scrutinize such activities for the marks of "conduit" or "paper" companies and to reject the applicability of DTT benefits, if such marks can be identified.

The list of documents which may justify the beneficial owner status of a foreign recipient of income is not explicitly stated by Russian law. Based on current practice, such documents should confirm (i) corporate independence of the foreign entity and (ii) its financial self – sufficiency. They should also evidence that the foreign company has the respective assets and personnel and conducts real economic activities.

As of January 01, 2021, Russia started application of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (known, in international practice, as the "Multilateral Instrument" or "MLI") with a large number of jurisdictions. In this respect, the principal purpose test (PPT) will be implemented when deciding whether DTT benefits should be granted (with a small number of countries Russia will also apply simplified limitation of benefits provision). Under the PPT, the benefits arising out of a DTT shall not be granted, if the application of such benefits was one of the main objectives of any structure or transaction. Considering existing position of the Russian tax authorities and available court practice grounded on similar understanding when assessing the right of a foreign recipient of income to apply DTT, the changes due to PPT implementation are unlikely to be revolutionary, but they may still be sensitive.

In 2020 Russia revised DTTs with Cyprus, Malta, Luxembourg. As a result of the amendments, instead of exoneration, 15% withholding tax is now due on outbound payments of interest from Russia to the abovementioned countries. Renegotiations of the DTT with the Netherlands did not reach a positive outcome and Russia unilaterally denunciated the said treaty, which will cease its application from January 01, 2022. Therefore, Russia-sourced interest income paid out to the Dutch resident companies will be assessed to withholding tax at the domestic rate of 20%. It is likely that similar revisions await the DTTs with Switzerland, Singapore and Hongkong.

Deductibility of interest expenses by the Russian borrower

According to the Russian Tax Code, interest paid under a loan agreement is recognized for the borrower as a deductible expense for the corporate income tax purposes.

However, deductibility of interest paid under intragroup loans may be limited by application of the thin capitalization rules and/or transfer pricing regulation.

Russian thin capitalization rules apply to controlled debts if these debts exceed the net equity of a Russian borrower more than three times. A "controlled debt" is defined by Russian tax law as:

  1. either a debt towards a foreign company which has a direct or indirect participation of more than 25% in the Russian borrower;
  2. or a debt towards a company (whether a Russian-based or foreign-based) that is deemed to be a related party of the foreign company specified in paragraph (i) above;
  3. or any debt guaranteed by a foreign company specified in paragraph (i) above and/ or by a company specified in paragraph (ii) above13.

The thin capitalization rules will apply only if the following criteria are simultaneously met: (i) the existence of the controlled debt and (ii) the non-compliance of these debts with 3:1 debt-to-equity ratio.

If a Russian borrower falls under the application of the thin capitalization limits, a special formula is to be used to determine the maximum deductible amount of interest out of the total interest amount incurred by the Russian borrower (the total amount of accrued interests / the capitalization ratio; where the capitalization ratio is the amount of the unsettled controlled debt / the amount of the total equity of the Russian borrower X % of participation of the lender in the Russian borrower, and the result to be divided by three). The excess amount of interests will be treated as distributed dividends and will not be deductible for the corporate income tax purposes. In case of requalification in dividends, withholding tax shall be calculated based on DTT rates, if applicable.

It should be also noted that the calculation of the Russian thin capitalization's thresholds shall be made with regard to the actual controlled debt of the borrower (the "effective borrowing position") for the specific period. In order to calculate the maximum interest amount: (a) all controlled debts shall be aggregated and (b) the calculation shall be made at the end of each reporting period (quarter) discretely with no further adjustments at the end of the year.

Transfer pricing

The Russian tax legislation provides for specific transfer pricing regulation applicable to the transactions recognized as controlled ones in Russia. The arm's-length level of the remuneration paid under such controlled transactions shall be guaranteed and justified by the transfer pricing documentation prepared by the taxpayer and a transfer pricing notification must be filed to the Russian tax authorities on an annual basis.

The cross-border transactions between related parties are deemed as controlled transactions, provided that the annual turnover between the same related parties exceeds the set threshold of 60 million rubles. Domestic transactions between Russian related parties may qualify as controlled transactions and be subject to transfer pricing regulation, if their value exceeds 1 billion rubles. However, domestic transactions are no longer subject to control, except when the parties to a transaction are subject to different tax treatment in Russia. It should be noted that only the interest accrued under the loan agreements (and not the loan principal repayable) counts for determination of the annual threshold14.

The "related parties" concept includes, in the first instance, the companies belonging to the same group, held directly or indirectly by the same shareholder(s) at more than 25% in their authorized capital. However, the definition of the "related parties" under the Russian law is not exhaustive. The parties may be recognized as related under the court decision when "the specifics of relations between them may affect the conditions and/or results of the transactions entered into by such parties, and/ or the financial results of their activities or the activities of parties that they represent"15.

The Russian transfer pricing legislation provides for certain specific "safe-harbor" corridors for the interest to be considered arm'slength. They differ depending on the loan currency and the method of interest calculation16. If the interest under the loan falls within the said corridor, the taxpayer may prepare a simplified transfer pricing documentation demonstrating that the actual applicable interest rate corresponds to the established "safe harbor" thresholds. Second way (to be explored if interest rate exceeds "safe-harbor" upper threshold) is to justify the "arm's length" character of the interest rate in the transfer pricing policy of the Russian borrower.

Current trends

Over the last years Russian subsidiaries of multinational companies have often faced refusals by the Russian tax authorities to acknowledge the deductibility of interest paid under intragroup loans. The tax inspectorates automatically perceive the payment of interest under the loans received from the foreign companies within the same group as a method of aggressive tax optimization and intentional withdrawal of profit from taxation in Russia without analyzing the background and the specifics of each particular case. It is even more upsetting that Russian courts tend to support the said approach17.

Russian business communities await from the Federal Tax Service official clarifications on taxation of cross-border loans with a formulation of "clear and unambiguous criteria" when such loans should be deemed economically justified and, thus, allowing the deductibility of interest for profit tax purpose.

Alternative termination of obligations

Depending on various economic factors, Russian borrowers might be unable to duly perform their obligations under the loan agreements. Under such circumstances, the parties might consider alternative methods of the borrower's obligations termination, including commonly used options of debt forgiveness by the lender or debt to equity swaps.

In case of debt release, the amount of loan principal and accrued but unpaid interest will be included in the Russian borrower's corporate income tax basis. By exception to this rule, loan principal forgiven by a shareholder having at least 50% share in the authorized capital of the borrower or the borrower's subsidiary held at least 50% by the latter will be tax neutral for the borrower18. Interest amount will remain nevertheless taxable in any case.

Loan amount and accrued interest can be eventually offset against contributions of the lender to the authorized capital or additional capital (known as contribution to the assets) of the Russian borrower. Offset of the principal amount will be tax neutral for the parties while offset of accrued interest will be assimilated to effective interest payment and subject to corporate income tax/withholding tax. Should the lender be a foreign entity, the Russian borrower shall act as a tax agent, calculate withholding tax and pay it to the budget, correspondingly reducing the income of the foreign company received in non-monetary form (amount that can be offset)19.


Currency control requirements

In addition to currency control requirements applicable to both inward and outward loans between residents and non-residents, Russian lenders under outward loan agreements shall ensure the repayment to their Russian bank accounts of the amounts in rubles or in a foreign currency due from non-residents in accordance with the terms of the loan agreements (the "repatriation requirement")20. Liability for violation of repatriation requirement is very important.

In this respect, while registering outward loan agreements with the Russian banks Russian residents shall also provide information regarding the terms of the loan repayment and expected terms of money repatriation21.

Tax implications

Interest income received by the Russian lender under an outward loan agreement from Russia-based or foreign borrowers is subject to the Russian corporate income tax at a general rate of 20%22.

If interest is paid by a foreign borrower and withholding tax was retained in the country the borrower's residence, such a withholding tax may be offset against the amount of corporate income tax due in Russia subject to the following terms and conditions: (i) the amount of withholding tax levied in a foreign country complies with the provisions of an applicable double tax treaty (if any); and (ii) the Russian lender is able to produce a confirmation of effective payment of withholding tax issued by the foreign borrower acting as a tax agent (the confirmation being valid during the year when it is provided to the Russian corporate income tax payer). The amount of offset is limited to the amount corporate income tax due in Russia23.

Where an outward loan agreement is not recognized as a "controlled transaction" falling under the Russian transfer pricing regulations, any interest rate agreed between the parties will be considered "arm's-length". Interest free loans will also be possible.

Vice versa, if an outward loan agreement is regarded as a "controlled transaction" and falls under the Russian transfer pricing requirements, there are two possible approaches to justification of "arm's-length" character of an applicable interest rate as described above.

Alternative termination of obligations

Due account taken of the repatriation requirement imposed on the Russian residents by the currency control regulation, they shall ensure that the loans provided to non-residents are effectively repaid to their Russian bank accounts within the time limits stipulated in the relevant loan agreements.

This is generally construed as a prohibition of any other alternative mechanisms of terminating the obligations under the outward loan agreements (including debt write-offs, debt to equity swaps, offsets, etc.), subject to an exception expressly provided by the Currency Control Law, whereby a resident is exempt from the repatriation requirement, if there is a set-off of the obligations under two reciprocal loan agreements between a resident and a non-resident, provided that the resident received a loan from the non-resident to its account with a Russian bank24.


With the legislative changes of the last years and the current approaches of the Russian tax authorities, intragroup loan financing requires from the parties careful planning and documentation for the following reasons:

  1. The Russian residents shall not disregard currency control regulation with respect to transactions with the non-residents and, especially, the repatriation requirement applicable to outward loans. Timely performance of loan repayment obligations by the foreign borrowers or extension of the loan term and submission to the bank of the relevant addenda are essential;
  2. Revision of the DTTs between Russia and low tax jurisdictions traditionally used for setting up holding and financing companies of multinational groups increased tax costs associated to interest income under loan agreements. We await further DTTs' revision with other jurisdictions;
  3. Entry into force of the MLI is likely to complicate the applicability of relevant DTTs. Burden of bringing evidence and properly document eligibility of the parties to DTTs' benefits will increase;
  4. Russian taxpayers shall be prepared to prove the economically justified character of interest expenses as well as absence of tax basis erosion intent when paying out interest to foreign lenders within the same group.


1. Art. 9 of the Currency Control Law

2. Art. 4.1.5, 4.2 and Chapter 5 of Instruction of the Central Bank of Russia No. 181-I dated 16.08.2017 ("Instruction No. 181-I")

3. Art. 5.6 of Instruction No. 181-I

4. Art. 5.5 of Instruction No. 181-I

5. Chapter 8 of Instruction No. 181-I

6. Art. 1-1-9(b) of the Currency Control Law

7. Art. 2.10, 2.22 of Instruction No. 181-I

8. Art. 1.2, 2.1 of Instruction 181-I

9. Art. 2.7 of Instruction 181-I

10. Art. 149-3-15 of the Tax Code

11. Art. 284-1 of the Tax Code

12. Art. 284-2-1 of the Tax Code

13. Art. 269-2, 269-3 of the Tax Code

14. Art. 105-14 of the Tax Code

15. Art. 105.1 of the Tax Code

16. Art. 269-1.1, 269-1.2 of the Tax Code

17. Ruling of the Arbitration Court of the city of Moscow No. A40-251161/15-20-2117 dated 24.10.2016

18. Art. 251-11 of the Tax Code

19. Art. 310-1 of the Tax Code, Letter of the Ministry of Finance of Russia No. 03-03-06/1/77351 dated 29.10.2018.

20. Art. 19-1.1-3 of the Currency Control Law

21. Art. 5.6 of Instruction No. 181-I

22. Art. 284-1 of the Tax Code

23. Art. 311-3 of the Tax Code

24. Art. 19-2-9 of the Currency Control Law

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.