Due to various legal and tax problems/ uncertainties leasing has not become as popular a financing tool in
Russia as it is in other jurisdictions. In part this is due to the tax environment in which the leasing industry has to operate in Russia.
The legal framework for leasing is relatively new and the tax laws applicable to leasing continue to evolve. Extensive lobbying efforts in support of leasing have thus far resulted in a generally quite favourable profits tax treatment of leasing under the recently adopted Chapter 25 of the Tax Code on Profits Tax that will enter into force from 2002. However there still remain some inefficiencies and tax anomalies in the tax treatment of leasing. To name a few, the VAT and turnover tax treatment of leasing are a disincentive to using leasing as opposed to other methods of financing. Careful structuring is needed to circumvent some of these inefficiencies. It is hoped that through further lobbying efforts the tax legislation will reform to incentivize the leasing activity in Russia.
Below we briefly comment on the various tax issues relevant to structuring of a leasing transaction in Russia. Given the medium to long term nature of the leasing transactions, emphasis is made on the treatment thereof under the Tax Code as will be in place from 1 January 2002.
Profits tax treatment under the Tax Code
Tax accounting for leased assets. Balance sheet choice
Both current Russian law and Chapter 25 allow the parties to a leasing transaction to decide in the agreement which of them will be the balance sheet holder of the leased asset. This creates possibilities for tax planning, including a possible “double-dip” effect in cross-border leasing where the tax treatment in a foreign country is different to that in Russia.
New Depreciation Rules
The most revolutionary change under Chapter 25 is a complete revision of the Russian depreciation rules.
Firstly, depreciated useful lives of business assets are expected to be significantly reduced resulting in
increased depreciation charges approximating the real economic life of assets. Compare this to the current rates based on Soviet era regulations which are extremely low.
Taxpayers are given the option to apply either: (i) the straight-line; or (ii) the non-linear reducing balance method of tax depreciation (with the exception of buildings and some other long-life assets). Under the second “accelerated” method, the rate to be applied on a monthly basis to the residual value of assets is 2/n, where “n” is the useful life in months.
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