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Chinese loans are dropped

New agreement between Russia and China on cancellation of "double taxes" can reduce the cost of credit products for business

Since 1 January 2017, a new version of the agreement between the governments of the Russian Federation and the People's Republic of China on the avoidance of double taxation began to operate. By updating mutual obligations, countries hope to help those entrepreneurs whose business works immediately in both China and Russia to save on tax expenses. Among the most anticipated positive effects are a possible reduction in the value of Chinese loans for Russian borrowers.

Chinese loans are dropped
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After the collapse of the ruble exchange rate at the end of 2014 and the tightening of sanctions by the United States and the European Union against the Russian Federation, the possibilities for Russian enterprises to borrow in the West have drastically narrowed. In response, Russia began to strengthen cooperation with the countries of the Asia-Pacific region, and above all with China. One of the concrete manifestations of this policy is the renewal of the agreement between Russia and the PRC "on the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income." The document, as the name implies, is designed to eliminate double taxation for individuals and legal entities whose main activity is carried out in the legal space of the two states. The previous version of the agreement was adopted in 1994 year, but it did not quite respond to economic realities. The renewed agreement will apply to income received in 2017. We are talking about levying corporate income tax and personal income tax in Russia, corporate income tax and personal income tax in China.

To take advantage of benefits under the agreement, an organization or an individual is required to obtain a certificate of a tax resident ("certificate of permanent residence"). Certificates issued by bodies of one state will not require consular legalization or apostille for application in courts and administrative bodies of another state. Based on the certificate, entrepreneurs will be able to pay taxes on a simple principle: to the state in whose territory the actual management of the business takes place. Another state will also receive the right to tax, but only reduced by the amount already paid in the partner country. This is a common practice in trade relations between countries. Russia has similar agreements with more than 80 states and special economic zones. Among them: Latvia, Lithuania, the USA, Ireland, Denmark, Great Britain, Hong Kong, Macao (with the last two SEZs, although they are part of China, the Russian Federation has separate agreements on avoiding double taxation) and many others.

Both states refused to stimulate business activity, for example, from the previous criterion for determining the residence of a taxpayer (the state has the right to collect basic taxes only from its residents). If under the document from 1994 year the status of the resident of one of the two countries was determined by the location of the head office of the company, then by the new - the place of actual management of the company. In comparison with the agreement-1994, the new reduces the maximum dividend tax rate for the resident company - from 10 to 5%. For example, a company located on the territory of the People's Republic of China, which owns a certain share of the Russian company's shares and received $ 1 million dividends from it, has now to pay from them to the Chinese budget a maximum of $ 50 thousand instead of the previous $ 100 thousand. The same rule applies to the reverse situation - when a Russian shareholder receives dividends from a Chinese company in which he has a stake. Also, the maximum tax rate for royalties decreased from 10 to 6%. This means, for example, that a Russian entrepreneur who wants to work on a Chinese franchise can expect to reduce fees for permission to conduct business from a partner-franchisor.

One of the most significant in the new version of the agreement, according to Russian officials, is the paragraph in this form: "Interest arising in one state and paid to a resident of another state is taxable only in that other state." The measure should make lending to Chinese banks cheaper for Russian business. The latter could to some extent replace the lost access to American and European banks. China still remains one of Russia's key partners, which lost about a third of its foreign trade turnover with it due to the crisis in 2015 (the index fell from $ 95,3 billion to $ 68 billion), but was able to stabilize relations in 2016, At $ 69,5 billion turnover with the PRC.

"For example, a representative office of a Chinese bank located on the territory of Russia lends a loan to a Russian company, under a monthly interest, of course, these percentages are included in the profits of a Chinese bank and taxed.If there is no double taxation agreement between Russia and the PRC, the bank , Withdrawing funds to the PRC, runs the risk of paying a tax on the amount of interest both in Russia and in China, "argues a senior researcher at the Institute of Economic Studies of the Far Eastern Branch of Armenia Н Dmitry Izotov. The agreement on avoidance of double taxation, he continues, gives the bank the opportunity to "maneuver to reduce the interest rate by saving on paid taxes." "The interest payable on loans is exempt from taxation - they are not included in the bank's income base, which can reduce the cost of the loan for some amount.Of course, due to various risks, much depends on the content of specific contracts that may contain provisions for tax refunds, Paid in one of the countries, and much - from the type of loan, "the expert explains.

EastRussia Help. Chinese banks provide foreign borrowers with loans in yuan, US dollars and euros at an average rate of 5-8% per annum up to 15 years. Four state-owned banks in China are lending to major projects in Russia: the Bank of China, the Agricultural Development Bank of China, the China Development Bank and the Export-Import Bank of China. Bank of China). Two last spring last year, Yamal LNG (NOVATEK subsidiary) received 9,8 billion yuan and 9,3 billion euros for 15 years. The largest Russian industrial holding "Gazprom" is a borrower of the Bank of China and the Chinese Construction Bank (the total volume of loans is about 250 billion rubles). "Rosneft" at the end of the year 2016 had a debt on loans to the Development Bank of China in the amount of about 1 trillion rubles, "Transneft" - 491 billion rubles. In November of 2016, the Central Bank of Russia issued a license to the "Industrial and Commercial Bank of China" for carrying out banking operations - issuing loans and attracting deposits of legal entities and individuals in rubles and in foreign currency.

"Under the new rules, any interest on loan, credit and other debt claims is taxable only in the recipient country. This means that Chinese lenders' incomes in terms of interest will increase by 5%," explains Denis Zaitsev, DS Law counselor at DS Law. Now Chinese loans are expensive for representatives of Russia because of the high risks in the country's economy, Dmitry Izotov notes. But the new conditions can "stimulate a reduction in interest rates" and mean "the possibility of agreeing on other, more favorable conditions for Russian business to attract borrowed capital," said Denis Zaitsev. "It should also be expected that the abolition of interest taxation under an agreement with the PRC will reduce the operating expenses of Russian companies to perform the functions of a tax agent," said a representative of DS Law.

Dmitry Izotov, however, sees the likely effect of reducing the cost of attracting and servicing loans from Chinese banks "very small." And the head of the Center for Economic Studies of the Institute of Globalization and Social Movements Vasily Koltashov believes that "Chinese money from the fact that they will become more accessible will not solve the problems of our business." "This accessibility will lead to the fact that the debt of Russian business to Chinese banks will increase.Our companies could quite successfully be credited with domestic banks, the growing dependence on Chinese loans will not lead to anything good," the expert warns.

But in the Russian banking community, the renewal of the agreement is only welcome. Maria Rozbitskaya, head of the international relations department of PJSC Asia-Pacific Bank, states that for banks in the Russian Federation the cost of funds raised from Chinese banks was traditionally higher than from banks in Europe and America. "This, combined with additional taxation in the amount of 10% of the amount of interest payments, made the conditions for raising funds from Chinese banks noncompetitive," said a spokesman for ATB. "The document came into force last April, and over the past time, we have felt a positive effect from it: all funds raised by our bank from the PRC fell by an average of 0,5% per annum. In addition, the gradual decrease in Chinese loans works interest rates set by the People’s Bank of China, ”concludes Maria Rozbitskaya.

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