What is Russian CFC legislation ?
Russian CFC legislation 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”
– 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 in 2015 for Companies / structures set up prior to Control Foreign Company (CFC) rules
- Reporting date to Russian Authorities – March 2016.
Who will be the ones that might not be affected by the Russian Legislation (Russian Deoffshorisation)?
A) Those who 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.
– 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) Possibly Russians that will obtain tax residency in another country
Russians that will obtain tax residency in another country and forgo Russian tax residency may not be affected by Russian Deoffshorisation. This can be achieved with the aid of obtaining visa or citizenship (passport) in a jurisdiction other than Russia.
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)
An international trust / trust company which holds and manages the assets on behalf of the Settlor / beneficiary. Discretionary trusts are more likely not to be affected by the Russian Deoffshorisation Law.
Investment funds (Alternative Investment Funds (AIF)) which hold multiple categories of portfolios and Russian investors hold less than 10% in the investment fund.
E) Structures 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 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
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.
PKF / ATCO Limited is a member firm of the PKF International Limited network of legally independent firms and does not accept any responsibility or liability for the actions or inactions on the part of any other individual member firm or firms. This publication is for information purposes only and should not be considered as professional advice.