Is the new Russian law likely to affect international financial centers which Russian investors use to invest outside Russia? Are they possible solutions for Russian tax residents?
Russian President Vladimir Putin recently approved a bill to deoffshorise Russian businesses. The law is expected to enter into force on 1st of January 2015.
What is Russian deoffshorisation
Russian Deoffshorisation can be defined as the measures adopted by Russian government to promote transparency and to combat tax avoidance by Russian taxpayers using foreign company structures.
Russian Controlled Foreign Company (CFC) new rules: Main aspects
Russian shareholders will be required to pay taxes in Russia on the retained earnings of foreign companies in which they hold a controlling stake the same way as Russian Companies. Any tax already paid by foreign companies will be given as a tax credit. A Russian shareholder is considered to be a legal/physical person holding more than 25% (50% 2015) of shares in foreign company or more than 10% if together with affiliated persons hold more than 50%.
Exemptions form the Russian Controlled Foreign Company (CFC) new rules
There are a number of exemptions from the taxation of Russian Controlled Foreign Company (CFC) new rules:
– On profits of up to 10 million RUB from 1 January 2017 (50 million RUB in 2015 and 30 million RUB from 2016).
– Active foreign companies with more than 80% of active business income
– Foreign companies controlled and managed by Russian residents which:
- Russia has signed a double tax treaty;
- Meet the effective tax rate test (75% of the average weighted tax rate (calculated on the basis of the formula);
- There is an exchange of information between Russia and foreign country;
- Is a Tax resident of the Russian “white list” (Possibly a list may be compiled in the future by the Russian Ministry of Finance designating the countries that comply with the Russian new laws)
– Other exemptions
For Foreign companies controlled and managed by Russian residents with which Russia has signed a double tax treaty emphasis will be given on:
- Tax residency. The tax residency of both the Russian shareholder and the foreign country.
- Effective management. The company’s place of effective management.
- Beneficial ownership. The ability of the controlling person to exert influence of the decision with regards to the distribution of its profits.
Tax residency will apply for Russian residents who hold shares in foreign companies which are tax residents in foreign country. Reference can be made to the provisions of Double Tax Treaty concluded between Russia and the foreign country.
A foreign company is to be regarded as tax resident company in Russia if the place of effective management is in Russia. The effective management is in Russia if:
- The majority of meetings are held in Russia
- Operational management is taking place often in Russia
- The operational management main offices are in Russia
(Different rules apply on the disposal of Russian property rich companies and on foreign companies managed and controlled from Russia.)
Income earned by foreign company which is derived from activities or investments in Russia will lose the benefit of reduced withholding tax provided for in the double tax treaties with Russia, if such foreign company is not the beneficial owner of such income. The beneficial owner should be person who has power over the usage and distribution of such income.
Russian tax resident deadlines
- Notification by 1 April 2015 for Companies / structures set up prior to Control Foreign Company (CFC) rules
- First reporting date to Russian Authorities is 20 March 2016.
Russian deoffshorisation Solutions
A) meet the criteria of Control Foreign Company (CFC) rules exemptions
Foreign companies controlled and managed by Russian residents should meet the criteria of Control Foreign Company (CFC) rules exemptions i.e.
– Double tax treaty should exist
– Must meet the effective tax rate test
– There is an exchange of information between Russia and the foreign country
– Be a tax resident of a possible proposed “white list”
– Demonstrate economic substance in a foreign country by:
i. Establish independent offices i.e. purchasing or renting office space etc.
ii. Maintain group head offices thus having fully fledged offices with business telephone lines, domains etc.
iii. Own valuable intangibles i.e. intellectual property and performing the most important functions within the corporate structure
iv. Proper allocation of group assets
v. Recruit staff to administer the day to day management work of the company
vi. Appoint qualified directors who will have the ability to make decisions and really understand the nature of business
vii. Maintain business records, minutes of conferences, general meetings, accounting function etc.
viii. Demonstrate additional reasons for presence. I.e. to control activity risks, to improve costs control etc.
B) Obtain tax residency in another country
Obtain tax residency in another country and forgo Russian tax residency. This can be easily achieved with the aid of obtaining visa or citizenship (passport) in a jurisdiction other than Russia.
C) Set up an international trust
Set up an international discretionary trust in which Settlor / beneficiary demonstrates that he does not influence profit distribution and has no rights to revoke assets after their transfer to the trust (except by inheritance etc)
A possible structure could be:
– Set up a written agreement between a service company/ trustee and the settlor / beneficiary.
– Set up an international trust / trust company to hold and manage the assets on behalf of the Settlor / beneficiary. The trust should be a discretionary trust. The international trust / trust company is managed 100% by a service company / trustee.
– Transfer the assets held by the settlor / beneficiary to the international trust / trust company.
D) Set up an investment fund
Set up an investment fund (Alternative Investment Fund (AIF)) structure or transfer the assets to an existing investment fund (Alternative Investment Fund (AIF)) which it can hold multiple categories of portfolios. The investment fund (Alternative Investment Fund (AIF)) could take the form of a company. The Russian investor will hold less than 10% in the investment fund company but will hold 100% of its own assets. Russian investors own asset portfolio can be managed and controlled by a consulting company controlled by the Russian investor.
E) Set up a structure with the combination of 3 and 4 above.
It appears that a large number of Russian interest foreign companies are not covered by the exemptions of the Russian Controlled Foreign Company (CFC) new rules, though the status of such companies will need to be clarified based on the above de-offshorisation criteria. However it is important to emphasize that the double tax treaties with which Russia has concluded with foreign countries cannot be overwritten. Double taxation agreements demonstrate taxing rights between two contracting states which cannot be superseded by any domestic law of any state. New Russian legislation will therefore have effect only to the extent that it is in line with Russia’s double taxation agreements, unless Russia is prepared to terminate them, which seems highly unlikely, given the potential impact of such an action. It should also be emphasized that for those financial centers, with which Russia has concluded a double tax treaty can be an opportunity, especially if they are transparent, well regulated and offer to investors low cost services.
How we can help
– We can help you to demonstrate economic substance outside Russia and recommend appropriate procedures in your structure so you activities are managed and controlled outside Russia. I.e. establishing independent offices, recruit staff to administer the day to day management work, appoint qualified directors, maintain business records, keep minutes of conferences, keep accounting records etc.
– If you are a Russian resident, we can help you to relocate yourself and to obtain residency in another country. This can be easily achieved with the aid of obtaining visa or citizenship (passport) in another jurisdiction.
– We can review your corporate structure (holding, financing and trading) and propose changes to the structures such as setting up of an international trust, investment fund (Alternative Investment Fund (AIF) or a combination of both.
Please contact us for a free personal consultation. All information will be treated in the strictest confidence. We are happy to sign Non Disclosure Agreement (NDA) or any other legal safeguards.