Russia's Thin Capitalisation Rules in light of the Russia-Cyprus Double Tax Treaty

Russian thin capitalisation rules do not permit a tax deduction for excessive interest payments between related parties. The rules set a maximum debt to equity ratio of 3:1 meaning that if the amount of the controlled debt is three times greater than the borrowing entity's own capital as of the last day of the relevant reporting/ tax period, then Russia's thin capitalisation rules are applicable.

A controlled debt under loan obligations accrues in the following cases:

1) the Russian entity is indebted to a foreign entity controlling more than 20% of the Russian entity's registered capital;

2) the Russian entity is indebted to a Russian entity recognised as an affiliate to the above foreign entity under Russian law; and

3) the above affiliate and/ or foreign company is/are a surety or guarantor for a debt obligation of a Russian entity or otherwise undertake to ensure the performance of its debt obligation.

If all of the conditions for applying these rules are met, a Russian entity...