Contribution to property has become repayable. Will he become an alternative to a loan in a group of companies
Making a choice in favor of one or another reason for tax-free cash flow in a group of companies, the possibility of their return without taxes is often a key criterion. If we add to this the efficiency of processing, we get the expected result – loans are the most popular tool for the flow of money.
The closest alternative to a loan – a contribution to property without increasing the authorized capital – has long been virtually irretrievable. The return on investments was possible only in the form of dividends or upon sale of a share in the business, with appropriate taxation.
Since the beginning of 2019, the situation has changed – the participant has the opportunity to return previously made contributions to the property of a subsidiary without additional taxation.
1. When determining the tax base, the following incomes are not taken into account:
11.1) in the form of cash received by the organization free of charge from a business company or partnership, of which such an organization is a shareholder (participant), within the amount of its contribution (contributions) to property in the form of cash previously received by a business company or partnership from such an organization.
The business company or partnership and organization (their successors) indicated in the first paragraph of this clause are required to keep documents confirming the amount of the respective contributions to the property and the amount of money received free of charge.
Thus, this is a great opportunity for situations where:
funds are provided for a long period, but on a refundable basis;
funds are provided free of charge, that is, there is no intention to receive interest on the use of funds;
there is a desire to reduce tax risks inherent in loan agreements.
For the correct application of the new option of contribution to the property – its repayment – we will analyze in detail the conditions under which the tax exemption will apply:
1) The privilege is valid only for organizations that are members of other companies
Only the contribution made by the parent organization can subsequently be returned without additional taxation.
Moreover, the norm 11.1. Clause 1, Article 251 of the Tax Code of the Russian Federation speaks of all types of organizations that may be participants in other companies. It:
all Russian legal entities, including JSC, LLC, cooperatives and partnerships;
foreign legal entities.
Thus, if cash contributions to business entities / partnerships were made by any organization with any share of participation, then they can return their previously made cash contribution back without paying corporate income tax / tax on STS.
Contributions to property: fresh analytics and practical application features
If the contribution to the property was made by the participant – an individual, then when you return it you will have to pay a tax.
2) The deposit must be made and returned exclusively in cash
Not all previously made contributions to property upon their return are exempted from taxation, but only those made in the form of cash.
This means that if contributions to the property of the Company were made not by money, but by other property (buildings, land, equipment, shares (stocks) in the authorized capital of the Company), then return these assets back to the contributor without paying tax on the basis of the provisions of paragraphs. 11.1 p. 1 Article 251 of the Tax Code does not work.
The return of the deposit must also be made in cash.
This excludes situations of possible abuse related to the disproportion of the initial contribution and the method of its tax-free return.
3) The exemption from taxation is valid within the limits of the previously made contribution
In this regard, it is important for the participant to keep documents that would confirm the amount of their contributions. These are decisions (protocols) of the general meeting of participants, and payment orders on the transfer of funds.
4) It does not matter when the contribution was made. Tax-free return is possible after 01.01.2019
The norm on tax exemption for the return of previously made contributions to property entered into force on January 01, 2019. And it applies to all “old” contributions to property. The main requirement is their monetary form.
5) Assignees may benefit from tax exemption
The privilege extends to the assignees – both the participating organization and the subsidiary. So, if a subsidiary that received a contribution to the property was merged with another company, then this other company will also be able to return funds to the participant.
All other conditions apply to the assignees – the availability of supporting documents and the monetary form of the initial deposit.