Client Information

In August 2020, the Russian Federal Tax Service issued a Letter detailing the tax authorities’ approach to the analysis of in-house services. In particular, it drew attention to the fact that in-house activity can be considered as service if it provides economic benefit to the company-taxpayer, is not a shareholder activity and similar services can be purchased from the third parties.

In-house services include administrative support, financial services, legal advice, internal control and audit, services related to the development of production and sales, and information technology support.

Nevertheless, taxpayers still have questions regarding shareholder activities.

In February 2021, the Federal Tax Service published another Letter further defining the term “shareholder activity”.

As defined by the Federal Tax Service, shareholder activity:

• is based on the needs of the shareholders themselves, not the individual members of the group of companies;
• economic benefit from such activities is evident for the whole group;
• the members of the group of companies would not engage third independent parties to provide such services against payment.

In addition to the characteristics, the Letter also included a list of specific functions related to shareholder activity.

Strategic management functions:
1. drafting of the development strategy of the group of companies;
2. market research;
3. evaluating the relevance and costs in implementing investment projects.

Business planning and control functions:
1. strategic planning and budgeting;
2. consolidated financial and management accounting;
3. analysis of the effectiveness of investments in the group of companies;
4. controlling of the financial and business activities of the group;
5. financing of the group of companies;
6. developing standards, methods, guidelines and/or other internal regulations to be applied to group of companies;
7. implementing and controlling compliance with such standards, methods, guidelines and/or other internal regulations;
8. approval of significant decisions and transactions.

However, in practice, some of the functions mentioned above may not be related to shareholder activity. Taxpaying organizations in Russian Federation should take an individual approach to each specific case.

The test to identify shareholder activity includes three questions:

• Has the subsidiary in Russia received a benefit from the service rendered, and if so, what kind of benefit?
• Is the benefit obvious and defined, and how is it expressed?
• Would a subsidiary in Russia pay an independent company to provide a similar service?

Please note that if the nature of payments abroad is disputed, expenses may be excluded from the income tax base and the relevant payments may be reclassified as dividends or other passive income with an additional withholding tax charge in Russia (up to 15% for countries without a signed CIT). It is also possible that fines and penalties of up to 20% of the underpaid tax will be imposed.

Our experts are ready to provide you with expert assistance in analyzing the current situation with regard to in-house services and assessing the need for changes in documents and processes.

In March, www.karenina.de published an interview with Dr. Georg Schneider, “Geschäfte mit Russland? Aber ja!”.  Journalist Peter Kopf asked the General Director of swilar a number of questions about opportunities and problems of business-cooperation with Russia.

The key issues of the interview:

•  Whether import substitution policy in Russia is a problem for German companies;

• Whether it is possible to say that the state runs the economy in Russia;

• How German companies may use the huge gap which exists in Russia between individual and serial production;

• How to gain the trust of business partners in Russia and why it is so important to conclude a framework agreement;

• Whether banks hinder German companies from doing business in Russia;

• How customs issues affect business;

• How risky it is to invest in Russia at the moment;

• U.S. sanctions and the rate of their impact on German-Russian business;

• Pharmaceutical industry and the Sputnik V vaccine as the oil of tomorrow – fantastic opportunities for economic cooperation.

The full text of the interview is available on the website. Enjoy reading!

For reference

KARENINA www.karenina.de is the online edition of the German-Russian discussion forum “St. Petersburg Dialogue”, which began to develop during the pandemic. The goal of the online platform is to establish internal communication between forum members and working groups, as well as to make the association, founded in 2001, visible to the outside world through its own journalistic activities

On February 24, 2021 the President of Russia signed a law which allows conducting of general meetings (including also annual) in 2021 for JSCs and LLCs by a form of absentee voting.

According paragraphs of Federal Law No. 208-FZ of 26 December 1995 “On Joint Stock Companies” and Federal Law No. 14-FZ of 8 February 1998 “On Limited Liability Companies” which do not allow holding general meetings of shareholders/participants in form of absentee voting on several issues, were herewith suspended till the end of 2021.

Thus, the general meeting of LLC participants, the agenda of which includes approval of annual reports and annual balance sheets, in 2021 can also be held in the form of absentee voting (by questioning).

Meanwhile, the new regulation does not extend the deadline for annual meetings, as it was done in 2020 (at that time the deadline for annual meetings was extended up to September 30).

In this regard, when planning the annual meeting and approval of the financial statements for 2020, standard terms stipulated by the legislation should be taken into account: the general annual meeting shall be held not earlier than 2 months and not later than 4 months after the end of the financial year (i.e. within the period from March 1 to April 30).

Proceeding of the annual meeting by a form of absentee voting shall be approved by the executive body of the LLC. The procedure for convening the meeting and its protocol shall fully comply with the conditions applicable for the year 2021.

 We will be glad to answer your questions and to support you on the issue if needed!

RECOMMENDATIONS

• Due to the continuing restrictions on cross-border travel, we recommend to consider the possibility of holding general meetings (including annual meetings) in 2021 by absentee voting.

• When planning the meeting to approve the results of 2020, please note that the deadline (differently than in 2020), remained standard: from 01.03. to 30.04.2021.

• We also recommend to pay special attention to the execution of the relevant documents when holding the general annual meeting in the form of absentee voting.