From 2022, loans between related parties are controlled by the tax authorities through two main mechanisms
– thin capitalization
– transfer pricing
Since the loan amount itself is neither income (for the borrower) nor expense (for the lender), the goal of the regulatory authority is to restrict understatement of the tax base through interest on the loan. Let’s take a closer look at each of the mechanisms.
The so-called thin capitalization rule is provided for in Article 172 of the Tax Code. The essence of the rule is to restrict the ability to recognize the loan interest as the expenses when calculating income tax. The restriction applies if the company faces a capital shortage. Capital shortage is determined by calculating the capitalization ratio. At the same time, the rate of interest itself does not matter at all. Belarusian companies that apply general taxation system and have received loans from related parties (Belarusian or foreign) fall under control.
Transfer pricing mechanism (Chapter 11 of the Tax Code) aims to prevent understatement of the tax base by manipulating the interest rate on loan agreements. Both transactions involving attraction of loans and granting of loans fall under control. In this case tax control is focused on compliance of the interest rate with market values. Accordingly, the analysis is carried out for overstatement the costs of the borrower and understatement the income of the lender. The mechanism is applied to Belarusian companies that apply general taxation system and have entered into loan agreements with related non-residents or residents that apply special tax regimes. The total amount of granted/received loans is under control, if the threshold of 400 thousand BYN per year is exceeded.
Please also note that companies are required to notify the tax authorities of transactions that are subject to transfer pricing by sending electronic tax invoices to the portal.