Financing options for an LLC in Russia
When setting up a company in Russia, this raises a question about what options are available to finance an OOO (LLC) and what the benefits each brings. In our article we will attempt to explain the basics.
Generally, there are the following options for financing an OOO:
- Debt financing
- Financing on terms similar to equity financing
- Equity financing
- Transfer pricing (intra-group services)
1. Debt financing
The parent company may grant loans to finance the company. It may also establish certain level of interest on this loan which is generally considered as a deductible expense for the Russian subsidiary for profit tax purposes. The amount of deductible interest is, however, restricted to that level. At your request we would be pleased to further advise you on the issue of deductible interest.
2. Financing on terms similar to equity financing
The law allows the right for shareholders to extend financing to their Russian subsidiary on terms similar to equity financing. This financing will avoid the issue of net asset value and nominal share capital as it does not affect the value of share capital. There are two possible alternatives to provide financing to an OOO on terms similar to an equity financing:
- contribution to assets;
- parent company’s aid.
3. Equity financing
In principle, equity financing is tax neutral as an investment in share capital is not subject to tax. However, we would like to briefly address the issue of the ratio between net asset value and nominal share capital.
The law states that a company’s net asset value must always be greater than the company’s share capital. If the company’s share capital is greater than its net asset value for two consecutive years (excluding the first financial year), the company will be required to decrease its share capital to an amount equal to its net asset value. If the company’s net asset value is smaller than the minimum share capital set by law (RUB 10,000, approx. USD 150), the company will be subject to liquidation (Article 30 (4) Federal Law On Limited Liability Companies).
4. Intra-group services
In addition to equity and debt financing, you could consider financing an OOO by paying for services performed by an OOO.
*Please note that in general cross-border transactions, including interest-bearing loans and service agreements, between related parties may be subject to transfer pricing rules. This means that you need to consider transfer pricing rules if option 1 (debt financing) or option 4 (a loan) is chosen. The transfer pricing rules require that the prices applied in controlled transactions should be in line with the prices applied by non-related parties on the market for comparable transactions under similar economic conditions (arm’s length principle). Among other things, these rules put an additional administrative burden on Russian companies trading with their related foreign companies as they require Russian companies to develop and maintain transfer pricing documentation in certain cases, as well as file transfer pricing reports with the tax authorities.
At your request we would be pleased to advise you further on transfer pricing and other tax and legal implications of any of the above options.
Accountor provides “turn-key” services for company registration in Russia. We have been serving both international and local Russian companies with legal and financial administration services since 1992 through our offices in Moscow and St. Petersburg, in which we employ over 200 professionals.