Property Given To Russian Subsidiary By Foreign Company Is Subject To VAT

24 March 2017

The Ministry of Finance of the Russian Federation in its Letter of December 26, 2016 (No. 03-07-08 / 77 947) has clarified the situation when  a foreign organization, which is not registered with the Russian tax authorities, acquires property in Russia and transfers it (without changing the share capital) to its Russian subsidiary, the transaction is applicable to VAT taxation.
VAT is applicable to sales of goods within the territory of the Russian Federation (Sub-clause 1, Clause 1, Article 146 of the Tax Code). It is applied even to sales for which no compensation is given. According to Article 147 of the Tax Code, property sales are recognized as having occurred in Russia if the property is located there.
 Clause 2 of Article 146 and Article 149 of the Tax Code list operations that are exempt from VAT. These do not include transfers of property as contributions to subsidiary assets. Thus, such transfers are subject to VAT, which must be paid by the Russian organization, acting as tax agent (Article 161 of the Tax Code). The subsidiary remains eligible for tax deductions if that property is then used for a VAT-applicable transaction.