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The taxation of intra-group services: The start of a new chapter for Russia

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Evgenia Veter of EY outlines the Federal Tax Service’s guidelines on taxing intra-group services in Russia and considers its potential impact for businesses and taxpayers.

There is a long-standing perception among many multinational organisations that it is extremely difficult, if not impossible, to ensure the tax deduction of intra-group service charges in Russia.

The topic of intra-group services continues to be on top of the agenda for multinationals doing business in Russia. Where transfer pricing (TP) policies of those organisations require a charge towards a Russian subsidiary, it is quite common to hear that the head offices face difficulties or even resistance from their local entities when it comes to the tax deduction of the charges.

The issue is quite controversial and is probably one of the hottest issues in the Russian tax practice to date. There have been many instances over the last few years where tax authorities have challenged the tax deduction of intra-group charges, and even reclassified them into hidden dividends. Large multinationals have faced significant tax liabilities as a result. The question arises – what drives such tax treatment?

Practical complications

Russian tax law is not specific about intra-group charges. There is a general principle that expenses can be treated as deductible for profits for tax purposes, if they are economically justified, relate to income generating activity, and are properly documented. In practice, however, it is common to see debates around these criteria.

The most common practical issues have been:

  • A failure of service recipients to demonstrate a reality of the services (that the service was actually provided to them);

  • Lack of documentation support, which can serve as evidence of the services;

  • Lack of benefits, which a local entity obtains as a result of services;

  • Duplication of services with the in-house functions of the service recipient;

  • Charging costs which relate to the shareholding functions; and

  • Disproportions between the amounts of the service fees charged to the Russian entities and benefits that the latter can demonstrate.

The complication of this was a lack, for a long time, of any specific guidance from the tax authorities in relation to their approach to auditing the intra-group services.

Guidance on taxing intra-group services

The situation changed in 2020 when the Federal Tax Service of Russia issued guidelines to clarify its approach to tax audits of intra-group services. This guidance was to some extent a breakthrough document in the taxation of intra-group services in Russia, as it was the first time that the Federal Tax Service outlined its view on the exact tests which any intra-group service charge should pass in order to accept its tax deduction. These tests are summarised below.


A taxpayer should demonstrate that the services factually took place as described in the contract. For example, if the contract refers to management services such as finance, human resources, legal and other, there is an expectation to see a Russian taxpayer’s interaction with each of the specified functions of the service provider in terms of the activities that are undertaken by the respective functions in favour of the Russian taxpayer.


A Russian taxpayer should demonstrate specific economic and commercial value (benefit) as a result of the services and that a third party would be willing to buy such services or to invest in building similar functions in-house.

The availability of benefits should be assessed considering the taxpayer’s intentions to obtain an economic effect. To the relief of many taxpayers, the guidelines confirmed that a negative financial result of the taxpayer’s activities cannot be the only reason for recognising expenses as unjustified.


There should be no duplication of costs for identical services at the level of the service recipient. When assessing whether the service provided is duplicative in relation to the functions of the service recipient, the tax authorities should analyse the functionality, experience and competencies that the Russian taxpayer obtains as a result.

For these purposes, they may request, for example, an organisational structure, staff list, job descriptions, internal regulations and other similar documents. It is specifically highlighted that experience and competencies that go beyond the needs of the economic activity of a Russian organisation (for example, those necessary in order to comply with the accounting standards of the multinational group or the requirements of foreign legislation) cannot be recognised as economically justified for a Russian taxpayer.


A taxpayer should present tangible evidence of the services received from a service provider. This is probably one of the most challenging tests from the perspective of many multinationals, since the level of detail that is usually expected in tax audits of their Russian subsidiaries is often viewed as too exhaustive.

On the positive side, the guidelines state that the tax auditor’s requests for documents should be reasonable and in line with the objective of the requests and the volume of services subject to audit. It also admits that documentation support may vary depending on specific service arrangements in place: upon request, by way of access to services for a predetermined fee, by providing resources that the Russian organisation does not possess, as well as in other forms.

For example, if the contract assumes that the service recipient outsources some of its business processes to the service provider – there is no need for any formalised requests for each individual service. A taxpayer may provide documents and information from which it follows that the service was expected to be received (for example, a business process description which outlines its interaction with the service provider).

As for the documents needed to secure tax deduction, the list is open-ended. However, there are examples included which may give some flavour in terms of the level of detail to be expected: business correspondence and electronic correspondence, details of telephone calls, meeting minutes, timesheets, reports outlining specific actions of the service provider, presentations, printouts from the taxpayer’s internal electronic systems, printouts of an electronic calendar, computer screenshots, a list of the counterparty’s employees who participated in the process of providing services, and a list of a taxpayer’s employees who participated in the acceptance services, written explanations of the parties, comparison of the services with internal functions of the service recipient etc. Tax auditors are also allowed to validate their findings by way of interviewing the taxpayer’s personnel.

Arm’s-length pricing

The services should comply with the TP requirements as set out by the Russian tax law. The guidelines remind that the TP matters are out of scope of a regular tax audit and should be analysed in detail as part of a separate TP audit. At the same time, since the TP approach is an inherent element of intra-group services, tax auditors are encouraged to ensure that there is a transparent methodology for determining the price of the services and it is consistent across the whole multinational group. In order to address such requests, taxpayers have an option to provide tax auditors with a TP documentation or its individual components.

To the relief of many taxpayers, the Federal Tax Service confirmed that the cost-plus approach to the pricing of intra-group services cannot in itself be viewed as an element of income or losses shifting. However, the guidelines do not address the allocation keys and what would be the expectation of the Russian tax authorities in this respect. In view of a significant focus on benefits which should be received by Russian taxpayers as a result of intra-group services, it would be to the advantage of the taxpayers to explain the reasoning behind the choice of the allocation keys and why they represent the best indication (measurement) of the benefits obtained.

Shareholder activity

The service charges cannot represent a compensation for the shareholder functions. In practice, this topic appears to be one of the most critical for many multinationals since there are many questions as to what exact activities may be viewed as being to the benefit of shareholders.

In response, the Federal Tax Service and the Ministry of Finance issued a joint clarification in February 2021. In this clarification, they refer to the 2017 OECD Transfer Pricing Guidelines and the 2013 United Nations Practical Manual on Transfer Pricing for Developing Countries.

Based on the recent clarification, the shareholder activities have the following main attributes:

  • They are carried out based on the needs of the shareholders themselves, and not of individual participants of the multinational group;

  • Economic benefit from such activities can be traced at the level of the group (or some of its business segments) as a whole, and not at the level of individual group entities; and

  • Individual group entities would not be willing to pay for similar services by involving third parties or undertaking such activities on their own.

The clarifications further go into specific examples of the shareholder activities related to the strategic management, such as:

  • Development of a strategy for the group as a whole or its business segments and (or) markets;

  • Conducting market research, including for the markets in which the group is planning its business, unless such research relates to the ongoing projects in these markets. For example, if the group has an entity in the market which is involved in distribution of certain products, market research costs related to such products should be assumed by the local entity. However, if the market research is aimed at analysing the feasibility of a new line of business in a particular jurisdiction, such research is relevant to the shareholder activity. The same applies to the research on individual products that have not been launched on the market yet; and

  • Feasibility analysis of investment projects, including acquisitions and investments into new business or markets.

The tax authorities also share examples of the shareholding activities that relate to planning and control:

  • Strategic planning and budgeting;

  • Preparation of consolidated financial and management reporting;

  • Analysis of the effectiveness of investments in the group companies;

  • Control over the financial and economic activities of the group, including through internal audit and internal controls in the interests of the parent holding organisation and (or) group shareholders, compliance control as per requirements established by the shareholder itself or its home country legislation, as well as control over the compliance by the group entities with the requirements of the Russian or foreign stock exchange;

  • Organisation of financing for the group in terms of interaction with financial institutions on behalf of the group, obtaining credit ratings, taking measures to reduce the cost of financing for the group, efficient cash management within the group, ensuring financial security of the group;

  • Development of standards, methodologies, policies and (or) other internal regulations that apply to the group, unless they are focused on the activity and profitability of specific group entities;

  • Implementation and control over the implementation of the above-mentioned standards, methodologies, policies and (or) other internal regulations, including the approval of decisions of the group members aimed at establishing uniform operating principles within the group, predictability of the long-term results and managing risks within the group; and

  • Coordination of significant decisions and transactions, including investment programs, not related to the current activities of the group entities.

Impact on taxpayers

It is likely that clarifications issued in 2020, and most recently in February 2021, will have a direct impact on many Russian taxpayers as this is the first time when the Russian tax authorities issued such a prescriptive guidance for auditing the intra-group services. Unless there is a proper support of the charges, a practical impact may not only be in terms of potential denial of tax deduction of the service charges, but also application of the withholding tax on income that is paid for those activities which are viewed as shareholding services.

In order to manage potential tax risks related to intra-group services, multinationals should undertake a thorough review of the intra-group services and examine to what extent they can sustain a potential tax audit in view of the new guidelines. There is clearly a need to improve defense files for many taxpayers. Those should not be limited to an inter-company service agreement and a TP documentation which meets a minimum compliance standard, but extend to a more solid and comprehensive support with evidence supporting the fact that the charges have met all of the requirements (tests) as outlined by the guidelines.


Click here to read the 2021 TP Special Focus guide


Evgenia Veter




T: +7 910 445 6779


Evgenia Veter is a partner and head of the TP practice of EY in CIS and Central, Eastern and Southeastern Europe and Central Asia. She has more than 25 years of professional experience in tax consulting.

Evgenia’s TP experience includes TP documentation and policy setting, operating model design and supply chain reorganisations, intellectual property planning, TP controversy as well as competent authority matters with a focus on advance pricing agreements (APAs). She was the project lead for the World Bank and Russia’s Ministry of Finance in setting up the bilateral APA programme for Russia.

Evgenia graduated from the Finance Academy of Russia as an economist, and holds a master’s degree in economic science. She is recognised as a leading TP advisor for Russia by the Legal Media Group’s Expert Guides and is rated as a highly regarded TP professional by ITR’s World Transfer Pricing guide.

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