BGP Litigation senior associate Denis Savin speaks with Interfax about the case involving tax on a debt of subsidiary Zuegg Russia LLC which was forgiven by its Italian parent company, Zuegg S.p.A.

"Zuegg S.p.A. was the parent company and sole participant of the Russian organization. The tax officers took the view that the parent company, by forgiving the interest that was owed by the taxpayer under loan agreements, received income, which is taxable under Art. 309(3) of the Tax Code (Specifics of Taxation of Foreign Organizations That Do Not Engage in Activities Through a Permanent Establishment in the RF and Receive Income from Sources in the RF), and therefore the taxpayer ought to have withheld and paid profit tax, BGP Litigation senior associate Denis Savin told Interfax.

Forgiving a debt that consists of outstanding interest is essentially a waiver by the lender of income it is entitled to, so an economic benefit arises not for the lender – the foreign company – but for the borrower, that is to say, the taxpayer. In this case it was the foreign lender that forgave the debt of the Russian organization, not the other way around. Therefore, the taxpayer, upon being released from the obligation to pay the interest, did not have a duty to calculate and withhold tax on the foreign organization's income, notes D. Savin".