Russia's thin capitalisation rules limit interest deductibility where controlled debt exceeds 3x equity. Excess interest is reclassified as a deemed…
Russia's thin capitalisation rules restrict the deductibility of interest on loans from related parties where the debt-to-equity ratio exceeds a specified threshold. For foreign-owned Russian companies financed through intercompany debt — a common and commercially rational structure — these rules can significantly increase the effective tax cost of the financing and create unexpected withholding tax obligations.
Thin capitalisation rules (правила тонкой капитализации, Article 269 of the Russian Tax Code) apply where a Russian company has "controlled debt" to a foreign related party. Where the amount of controlled debt exceeds the company's equity by more than 3:1 (12:1 for banks and leasing companies), the excess interest is:
Non-deductible for Russian corporate income tax purposes — the Russian LLC pays 25% CIT on what should have been a deductible expense
Reclassified as a deemed dividend — subject to withholding tax at the applicable dividend rate (15% domestic, or treaty-reduced rate where a treaty applies)
This double hit — loss of deduction plus WHT on reclassified interest — makes thin capitalisation one of the most financially significant tax risks for foreign-owned Russian companies.
Controlled debt (контролируемая задолженность) is defined broadly under Article 269. It includes:
Direct loans from a foreign related party (parent company, sister company, any company with more than 25% direct or indirect ownership)
Loans from a Russian company that is itself related to the same foreign group (e.g. a Russian subsidiary of the same parent)
Loans where the foreign related party has provided a guarantee, surety or other security — even if the loan itself is from an unrelated third party (e.g. a bank)
Loans from an offshore company where the foreign related party is the beneficial owner
A common structure — the foreign parent guarantees a Russian bank loan to its Russian subsidiary — triggers thin capitalisation rules even though the lender is an unrelated Russian bank. The guarantee is sufficient to make the debt "controlled." Many foreign-owned companies have discovered this unexpectedly during FTS audits. If the group uses bank debt with parent guarantees in Russia, the thin capitalisation position must be reviewed.
The thin capitalisation ratio is calculated as:
Controlled debt ÷ (Equity × 3) = Capitalisation ratio
Where the ratio exceeds 1 (i.e. controlled debt exceeds 3× equity), only the interest on the permitted portion of debt is deductible. The "permitted interest" is calculated as:
Permitted interest = Total interest × (3 × Equity ÷ Controlled debt)
The excess interest — the amount above the permitted portion — is non-deductible and treated as a deemed dividend.
Russian LLC has equity of RUB 100m and controlled debt of RUB 500m at 10% interest = RUB 50m annual interest.
Permitted interest: RUB 50m × (RUB 300m ÷ RUB 500m) = RUB 30m (deductible)
Excess interest: RUB 20m — non-deductible + reclassified as deemed dividend
WHT on deemed dividend (10% under treaty): RUB 2m
Additional CIT on non-deductible interest: RUB 20m × 25% = RUB 5m
Total additional tax cost of thin capitalisation: RUB 7m per year on RUB 500m of debt
Equity for thin capitalisation purposes is calculated as net assets — total assets minus total liabilities, per the Russian accounting (RAS) balance sheet. Key points:
Equity is calculated at the end of each reporting period (quarterly) — the ratio must be tested every quarter, not just annually
Where equity is negative (accumulated losses exceed paid-in capital), all controlled debt interest is non-deductible — the 3:1 ratio cannot be applied to a negative base
Retained earnings (or losses) from RAS accounts drive the equity figure — see our guide to IFRS to RAS reconciliation for why IFRS equity and RAS equity may differ significantly
If a Russian LLC has accumulated RAS losses that exceed its paid-in capital — resulting in negative net assets — the thin capitalisation rules completely disallow interest deductibility on all controlled debt. This is a common situation for Russian subsidiaries that have been through a loss-making period. The entire interest charge is reclassified as a deemed dividend and subject to WHT. This position should be modelled carefully before financing a Russian subsidiary through intercompany debt.
Practical support for international business in Russia.