The VERBA LEGAL Tax Advisory and Disputes practice team, led by Practice Head Evgeniya Zainchukovskaya and Senior Lawyer Andrey Shepty, concludes its series of publications on the tax intricacies involved in M&A deals and corporate restructurings on the Telegram channel Head of Tax.
The first post addressed the topic of debt-to-equity conversion.
The second edition focused on contributions in kind.
The third discussed the “pitfalls” of dividend payments.
The fourth post covered tax implications when selling companies.
Today, we examine the ambiguous tax consequences of certain corporate transactions.
(1) Increase of authorised capital through retained earnings
Accounting-wise, increasing authorised capital using retained earnings involves changes within balance sheet items and does not constitute income. However, in practice, this transaction can be treated as a dividend payment followed by a capital injection (Tax Authority position in the case Mir Business Bank No. A40-243943/2022).
Tax consequences:
For legal entities: income is exempt from taxation (sub-paragraph 15, paragraph 1, Article 251 of the Russian Tax Code).
For individuals: the approach is ambiguous—for example, the Ministry of Finance considers this income taxable under personal income tax, as the exemption under paragraph 19, Article 217 of the Tax Code applies exclusively to income from the revaluation of fixed assets.
(2) Reduction of authorised capital
Tax consequences arise both for the company and the shareholder.
For the company:
Voluntary reduction of authorised capital gives rise to non-operating income if the shareholder refuses to return their share (paragraph 16, Article 250 of the Tax Code).
Reduction of authorised capital by operation of law entails no tax consequences (sub-paragraph 17, paragraph 1, Article 251 of the Tax Code).
For the shareholder:
Tax treatment depends on status:Resident individual: income is subject to personal income tax at rates of 13–22% with the right to deduction corresponding to their contribution to authorised capital.
Non-resident individual: income is taxed at a 30% rate without the right to deduction (unless otherwise stipulated by international treaty).
(3) Exit from a company: taxation of the shareholder
Taxation of a shareholder leaving a company does not have straightforward interpretation. On one hand, the income received might be classified as dividends; on the other, as income from disposal of shares, potentially qualifying for personal income tax exemption or a 0% corporate profit tax rate.
(4) Payment of dividends in kind
Uncertainty also arises when dividends are paid in property. Income may arise not only for the exiting party but also for the company itself due to receipt of the departing shareholder’s share on the balance sheet.
Therefore, when planning corporate transactions, do not overlook tax matters. All may not be as clear-cut as it appears at first glance.
Read more in detail here.
