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Russia Clarifies the Tax Treatment of Income Resulting from a Reduction in Capital of a Subsidiary

The Russian Ministry of Finance recently published Letter No. 03-03-06/1/40557 of 14 June 2018, which clarifies the tax treatment of income received by a Russian parent as a result of a reduction in the authorized capital of a subsidiary. The letter notes that under Article 251 of the Tax Code, taxable income does not include assets or property rights received in proportion to the value of contributions to a company's capital when the company's capital is reduced. However, this only applies in respect of a Russian subsidiary and not a foreign subsidiary.

For a foreign subsidiary, the receipt of income equivalent to a capital contribution would be considered a gratuitous transfer of assets by a subsidiary, which under another provision of Article 251 may be exempt. The conditions for the exemption include that the contribution of capital made by the company receiving the assets represents at least 50% of the transferring company's capital on the day the transfer is made, and in the case of a foreign subsidiary, the foreign subsidiary's jurisdiction of residence must not be included in Russia's list of states and territories that provide preferential tax treatment and/or do not provide the disclosure and provision of tax information to Russia.

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