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Accounting for Advertising Expenses in Russian/German Company


Letter of the Ministry of Finance #03-08-05/6124 from March 1, 2013, in response to a private inquiry, addressed an issue of tax base deductions for advertising expenses of a Russian company in light of the Double Taxation Treaty between Germany and Russia from May 29, 1996.

According to Paragraph 3 of the Agreement Protocol, advertising expenses of a company which is a tax resident of one of the signatory states with participation of a tax resident of the other signatory state, are subject to unlimited profit tax base deductions. The deductions, however, must not exceed the amount that companies would usually spend in comparable conditions. 

An organizations which is a tax resident of the Federal Republic of Germany joined the ranks of inquiring company’s shareholders in the fourth quarter of 2012.

According to Article 318 paragraph 3, proceeds from sales for tax purposes of standardized expenses are calculated on an accrual basis as a year-to-date total. Accordingly, the taxpayer calculates the total of standardized advertising expenses on the last day of the fiscal period (December 31).

Thus, advertising expenses may be deducted in an unlimited amount on the condition that at the time of calculation (December 31, 2012) the company fulfils requirements for participation of a German tax resident as a shareholder of the Russian company and the total amount of advertising expensed does not exceed the amount that would be paid by other companies in comparable conditions. 

At the same time, the Ministry of Finance notes that within the framework of Article 25 states that these norms will not be applied if there is no real economic basis for the capital participation and it takes place only for the purpose of receiving the tax benefits prescribed in Article 3.

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