Main modifications to the taxation of transactions associated to property transfers

introduction

On January 1, 2021, a number of tax law changes came into force, which were introduced by Federal Law 374-FZ of November 23, 2020. These changes included the introduction of a tax regime on transactions related to the transfer and acquisition of ownership rights to the tax code. The law now directly provides that property rights along with other property are exempt from taxation. Currently, according to Article 251, Paragraph 1, Number 11 of the Tax Code, a transfer of ownership between companies is exempt from corporation tax if one company has a direct or indirect stake in the other’s initial capital and the stake is at least 50%.

liberation

The introduction of this rule into the Tax Code ended numerous disputes between tax authorities and taxpayers regarding the transfer of property rights (usually the exclusive rights to the results of intellectual activities) between a parent company and its subsidiaries. Previously, after having found such a transfer, the tax authorities had refused the right to the tax exemption provided for in Article 251 paragraph 1 number 11 of the Tax Code for the following reasons:

  • Property rights were not expressly mentioned in the tax code; and
  • According to civil law, property rights are an independent subject of civil rights that is different from property. This would make it unlawful to give them the tax advantage on property transfers.

In general, this approach has been supported by legal practice (e.g. the decision of the Federal Antimonopoly Service of the Central District of August 2, 2007 in case A08-4907 / 06-25 and the decisions of the Rostov Region Arbitration Court and August 15, 2007) Court of Arbitration in Case A53-25 / 2020).

The problem that such a transfer free of charge is taxable was particularly relevant for groups of companies with a research and development unit whose intellectual activity had protectable results that had to be transferred to the parent company for later implementation and use if that group were to be included in such a group was divided into an independent legal entity. Previously, companies had to transfer ownership rights on a refundable basis at market prices or take risks to transfer them for free, as they threatened to receive corporate income tax claims from tax authorities under Article 250 (8) of the Tax Code. Now that Article 251 (1) (11) of the Tax Code has been amended to directly exempt companies from paying corporate tax when transferring property rights, the above problem should be resolved.

Federal Law 374-FZ introduced another important innovation. Both direct and indirect participation in the initial capital are currently taken into account when determining the 50% threshold above which a company is entitled to this benefit. For example, company A transfers ownership rights to company B. Company B does not directly own shares in the initial capital of company A, but 90% of the shares in the initial capital of company C, which in turn owns 70% of the shares in the initial capital of company A. In this case, the indirect share 90 * 70/100 = 63%, which corresponds to more than 50%; Accordingly, Company A is entitled to the tax break.

Exceptions

It should be noted, however, that such a tax-free transfer of property rights is only possible if it occurs between a majority of the parent and subsidiary companies. If property rights between “sister companies” (ie companies whose shares belong to a third company) or from or to a minority company are transferred or the direct or indirect share of the parent company is less than 50%, the tax advantage is granted than in Article 251 paragraph 1 number 11 of the tax code does not apply.

Effective Date

Finally – and this is further good news for taxpayers – the aforementioned changes to the tax code will have a retroactive effect on all legal relationships from January 1, 2020.