Legal Update on Russian De-Offshorisation Law
A Russian law (the Law) on controlled foreign companies (CFCs) came into force on 1 January 2015. A CFC is a foreign company or trust that is not tax resident in Russia and is controlled by Russian tax resident organizations or individuals.
The key changes are:
• the effect of the Law is to treat the undistributed profit of a CFC as taxable income in Russia for Russian-resident controlling persons;
• such controlling persons are required to disclose interests in CFCs to the Russian Tax Authority by 15 June 2015 with fiscal and possible criminal penalties applying for non-disclosure; and
• not only Russian, but also foreign companies may now be classified as Russian tax residents if they have their place of effective management in Russia.
Companies Not Considered to be CFCs
Under the Law, certain types of foreign companies are not considered to be CFCs. Examples include qualifying companies with at least 80% of “active” income, licensed banks and insurance companies, special purpose issuers of Eurobonds and companies with their place of registration in a country which has a double tax treaty with Russia and a tax information exchange agreement with Russia and the local effective tax rate for the CFC is no less than 75% of the Russian rate.
Controlling Persons and Beneficial Owners
Controlling persons are persons owning:
• more than a 25% interest in a foreign company from 2017 (or more than 50% up to 2016); or
• more than 10%, if the total participatory interest of all other Russian residents in such a company exceeds 50%.
However the above is not exhaustive since a beneficial owner is also recognised as a controlling party. Beneficial owners may not own any interest in the CFC but are considered as controlling persons since they actually control the CFC, including with respect to possessing, using and disposing of any income gained.
CFC Profit Threshold
A CFC’s profits will be considered as part of the tax base of a controlling party only if they exceed 10 million Roubles from 2017 (or 50 million Roubles in 2015 or 30 million Roubles in 2016).
The profit of a CFC which is registered in a jurisdiction that has a double tax treaty with Russia is to be calculated based on the company’s financial statements prepared in accordance with local law on the condition that such financial statements are subject to a statutory audit.
Tax Risk Relating to Effective Management
Under the Law, a foreign company is to be regarded as tax resident in Russia if the place of effective management of the foreign organization is in Russia.
A foreign company will be deemed to have “effective management” in Russia if one of the following criteria is met:
• the majority of meetings of the Board of Directors (or equivalent) are carried out in Russia;
• the executive management of the foreign company is frequently and regularly carried out in Russia; or
• senior officials of the company manage the foreign company while being located in Russia.
The foreign company may also be considered to be tax resident in Russia if its accounting functions are carried out in Russia, day to day records are stored in Russia or management of personnel is undertaken in Russia.
Generally, the management of a foreign company will be considered to be exercised outside Russia if it carries out business from a permanent location using its own qualified personnel and assets in its resident country and such country has a tax treaty with Russia. The foreign company should provide documentary evidence of the above.
A foreign company which is deemed to be a Russian tax resident will be subject to taxation in Russia on worldwide income.
Proposed amendments to the Law are expected to be submitted to the State Duma in Autumn 2015 in order to clarify certain ambiguities in the current version of the Law. The proposed amendments include:
• participation in foreign companies does not need to be reported if it is carried out solely through Russian public companies;
• a foreign company's profit already taxed under Russian CFC rules should result in dividends paid on such profit not being taxed in Russia again; and
• possibility to calculate the amount of a CFC's profit based on its financial statements if the CFC is located in a treaty country, OR if its financial statements are subject to mandatory audit as per the CFC's local law or corporate documents, or if a voluntary audit was performed.
14th July 2015
This article was authored by Stavros Panayi, a partner of Loft Consulting in Moscow, a partner firm of Antis Triantafyllides and Sons LLC