Russian residents to pay tax on the low interest rates from foreign banks

At the end of February 2012 the Ministry of Finance of the Russian Federation issued a letter of clarification on the subject of whether a Russian resident should declare and pay taxes on the advantage (difference in loan rates) it receives from obtaining a loan with a foreign bank (and therefore, presumably lower than the interest rates such person could have obtained from a Russian bank). The situation may arise, for example, where a Russian resident desires to purchase a property in Estonia and for this purpose obtains a loan from an Estonian bank (at the annual rate of 5%).

The Ministry of Finance of the Russian Federation confirmed that material advantage received by obtaining a lower-interest loan from foreign organizations constitutes taxable income of the taxpayer under current Russian tax laws. An organization has been defined as an international legal entity, company or other corporate entity, validly existing, created pursuant to the laws of foreign countries. Therefore, in the example above, the Estonian bank, as well as any other foreign bank, will fall under this definition of organization.

According to paragraph 2, section 2, section 212 of the Tax Code of еру Russian Federation, the tax shall be payable on the advantage received from a lower-interest loan and shall equal the difference between the interest on the loan received from a foreign bank and the taxable interest base of 9% per annum. Therefore, tax residents of Russia shall pay tax on the income received outside of the Russian Federation, where such income (material advantage) is derived from the difference in interest on a loan.

Moreover, it is necessary to keep in mind the effects of Double Tax Treaties. As in the example above the Double Tax Treaty between Russia and Estonia has not been signed and therefore is not effective. In the example above, the tax payer than will be taxed in 2 countries separately.

Source: Oracle Capital Group