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Limitation of Deductions on Services

Limitation of Deductions on Services

On July 11, 2022 the President signed amendments to the Tax Code. One of these amendments is the limitation of deductions for so-called intangible services provided by a non-resident-related party.

According to the amended version of the Tax Code, amounts paid to a non-resident related party for the following services are not deductible:

  • management
  • consulting
  • auditing
  • design
  • legal
  • accounting
  • advocacy
  • advertising
  • marketing
  • franchising
  • financial (except for interest expenses)
  • engineering
  • agency services
  • provision and (or) processing of information
  • royalties
  • access to informatization objects and Internet resources
  • technical maintenance
  • software updates
  • transfer of rights to use intellectual property objects.

However, it is permitted to reduce taxable income (i.e. taxable revenue less allowed deductions) by the amount of the above expenses subject to the limit of 3% of taxable income.

For these purposes, the following persons are recognized as related parties:

  • those specified in Article 1 Paragraph 2 of the Tax Code;
  • legal entities belonging to the same group of companies.

A group of companies is a structure of commercial and non-profit organizations, which includes the parent company and companies, which shares, participation interest and other equity instruments are owned by such parent company directly or indirectly. Individuals and/or legal entities, when the relationship between such persons has signs of being related, regardless of the conditions specified in this part. If the taxpayer does not acknowledge being related to a non-resident service provider, the such acknowledgment shall be established by the court based on the claim of the tax authority.

This amendment will enter into force on January 1, 2023.

We recommend that you analyze your existing service contracts with your non-resident related parties for further planning of your activities.