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Contribution to Property: A Tool of Tax-Free and Refundable Company Financing

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Contribution to property is one of the most effective tools of replenishing the company’s assets as it is not subject to income tax1.

From January 1, 2019, the Tax Code of the Russian Federation (NK RF) includes amendments in force that allow the shareholders (members) of a business company or partnership to perform a tax-free return of previously made financial contributions2Allowance»).

In this regard, the Tax Code of the Russian Federation implies the following specifics of the application of the Allowance:

1) Contribution to property must be made by the member – a legal entity

At the same time, the form of business organisation of such member and its membership interest do not matter. From this perspective, any organisation (including foreign businesses) with any membership interest can benefit from the Allowance and return the previously made financial contribution without paying income tax.

Upon the return of contribution to a foreign member organisation, the income is also not subject to taxation at the source of payment3.

2) Obligatory financial form of both contribution to property and its return

The Allowance is only applied if the previously made financial contribution is returned to its member also in a financial form. The Allowance is not applied to contributions made by another property/other property rights.

3) Documentary evidence of contribution payment

The amount of contribution must be confirmed by documents including the resolutions (minutes) of the members’ general meeting, payment orders on money transfer. In this case, upon the return of contribution, taxation does not apply to the amount which does not exceed the previously made contribution.

4) The date of contribution transfer does not matter

The Allowance is effective from January 1, 2019 but is applicable with respect to all contributions regardless of the date of their payment4. In other words, from January 1, 2019 it is possible to return contribution to property made before January 1, 2019.

5) The Allowance can be used by legal successors

Shareholders’ (members’) legal successors contributed to the property of a business company or partnership are also entitled to benefit from the Allowance (in this regard, all other conditions of use of the Allowance must be respected). Similarly, the Allowance is retained in case of the member’s reclamation of their previously made contribution from the legal successor of a business company or partnership to which the contribution was made.

6) Contribution return procedure

Despite the absence of an explicit reference in the Tax Code of the Russian Federation, it appears that in view of applying the Allowance, financial contribution to property must be returned according to the procedure similar to that of contribution to property provided by Article 27 of the Federal Law “On Limited Liability Companies”5. In order to minimise tax risks, it is recommended to specify in the relevant resolution (minutes) the amount, the period of return and a reference to the document under which the funds were initially accepted as contribution to property.

Due to a number of conditions and restrictions on the use of the Allowance, it is recommended before applying it to obtain the opinion of qualified advisors which would be based on the analysis of the actual circumstances of your situation. Lawyers from Flightman and Priest specialising in tax issues have vast practical experience and are willing to advise you on any issues related to the application of the Allowance.


1Subparagraph 3.7 of paragraph 1 of Article 251 of the Tax Code of the Russian Federation.
2Subparagraph 11.1 of paragraph 1 of Article 251 of the Tax Code of the Russian Federation – introduced by the Federal Law dated 27.11.2018 N 424-ФЗ«On Amendments to Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation on Taxes and Tax Fees».
3Paragraph 2.3 of Article 309 of the Tax Code of the Russian Federation.
4Letter of the Ministry of Finance of Russia dated 14.02.2019 N 03-03-06/1/9345.
5Federal Law dated 08.02.1998 N 14-ФЗ (ed. dated 23.04.2018) “On Limited Liability Companies”.

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