BGP Litigation senior associate Denis Savin speaks with Interfax about the implications of the judgment against a Severstal subsidiary in a dispute with the tax authorities over application of the statutory provisions on controlled debt

"The position taken by the court gives rise to tax risks for Russian companies structured with the help of entities from foreign jurisdictions, says Denis Savin, senior associate at BGP Litigation. "In such structures, loan interest between Russian companies is recognized for tax accounting purposes only up to the threshold values established by Article 269 of the Tax Code. Structuring which involves the use of foreign entities essentially imposes a ceiling on a business in terms of the amount of loans that can be used within the Russian part. Also, it is important to understand that the lender must book the interest income in full, whereas the borrower can do so only up to the amount of the threshold values", he explains".

Expanding on his earlier comments, Denis Savin notes that a key issue considered by the court in the case involving the Severstal subsidiary was whether it was right to apply the provisions on controlled debt in a situation where the loan was provided by a Russian entity to another Russian entity (a 'sister company loan'). The companies in question were affiliated by virtue of being held by the same foreign parent entity. However the lender did not have comparable loan liabilities to the parent. 

The court ruled unequivocally that the provisions on controlled debt are applicable in such situations, finding that this follows directly from Article 269 of the RF Tax Code, says the BGP Litigation senior associate.