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At the end of 2009, legislation was passed loosening restrictions on debt restructuring in a company’s charter capital. More specifically, as of 2010, company shareholders or third parties can make monetary claims on the charter capital of an OOO. This decision must be passed by all company shareholders unanimously. Likewise, additional shares of a joint-stock company (AO) may be paid with claims if those shares are sold in a private offering.

Let’s take an example of what this first situation might look like in practice. A company might have a loan and not be able (or not want) to pay it off, while the lender may not insist on having it paid in cash. In this case the company has the right to transfer the debt to the company’s charter capital.

From a legal point of view, this is an advantageous change for companies.

But what are the tax and accounting implications of transferring debt to the company’s charter capital?

The accounting implications are straightforward and simple. After making the changes to charter capital in the company’s foundation documents and in the State Register, the appropriate changes should be made in the financial accounting (the exact procedure for doing so is mapped out in the Russian version of this article).

The tax implications of transferring debt to the company’s charter capital, however, are a little more complicated.

According to Russian tax law, the value of any property, property rights, or other rights which are received into a company’s charter capital, are not calculated as income when determining profit tax. Thus, transferring debt to the charter capital does not entail making any changes to the profit tax base.

However, what happens with accrued interest on such debts?

The Ministry of Finance and the tax authorities have repeatedly declared that accrued interest, which is declared as an expense, when forgiven must be treated as income to offset the previous declared expense.

This must be done regardless of whether or not the loan itself had been recorded as income. The tax authorities explain this on the basis that expenses in the form of accrued interest were counted as an expense, but that expense was never paid. Therefore the company did not undergo any actual loss.

It is extremely likely that the tax authorities will take the same position regarding transferring debt to the charter capital.

The opinion of the tax experts at Alinga Consulting Group, however, holds that this transfer of debt does not result in unrealized profit for the company-borrower. This is because when restructuring debt, the debt itself is not forgiven and, accordingly, is not a gratuitous transfer. 

A founding shareholder who leaves the company can demand the return of his part of the charter capital, which would lead to a realized company expense.

Please note, however, that if a company decides to transfer a debt to the charter capital, and decides not to count the interest as unrealized profit, they should be prepared to defend such a position if the matter is brought to court.

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