Recently, the Ministry of Finance issued Letter 03-08-05/6369, clarifying the tax treatment applicable to interest payments based on the Russia-Spain Income and Capital Tax Treaty (1998).
A Russian limited liability company entered into a 5-year loan agreement with its Spanish parent company that holds 100% in the capital of the Russian subsidiary. Based on the loan agreement the Russian subsidiary was making interest payments on a quarterly basis.
The Ministry of Finance clarified that, according to article 7 of the Tax Code, the provisions of the tax treaty prevail over the domestic legislation. Therefore, the provisions of article 11 of the tax treaty are applicable, based on which interest may be subject to a withholding tax of 5% in Russia. Moreover, the Ministry of Finance clarified that in order for the exemption of the interest provided by the tax treaty to apply, the loan agreement should be concluded with a bank or any other credit institution resident in Spain, the status with which the Spanish parent company did not comply, and the loan agreement should be concluded for a period longer than 7 years.
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