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2014.06.06 - Russia: Law on Controlled Foreign Companies

 

On 27th May 2014, the Government of the Russian Federation published a draft Federal Law on amendments to Parts 1 and 2 of the Tax Code of the Russian Federation regarding taxation of the profit of controlled foreign companies and income of foreign organisations.

The draft law introduced into the legal system of the Russian Federation the concept of a Controlled Foreign Company (CFC) which, unlike many other countries of the world, did not exist in Russia earlier. The draft law therefore largely brings the business legislation of the Russian Federation into conformity with the current situation in global business practice.

The draft law provides for the following amendments to be introduced in the Tax Code of the Russian Federation (RF TC):

  • In accordance with amendments to Article 7 of the RF TC, in the case of distribution of income from the Russian Federation, where provisions of international double tax treaties apply, no benefits shall be allowed if a foreign person receiving such income further distributes it, in full or partially, to another person that would not be entitled to such benefits in case if such income were derived from sources in the Russian Federation directly.
  • In accordance with the new Article 25.13 of the RF TC, a foreign company is considered a controlled foreign company if the controlling persons of such a foreign company are organisations or individuals being Russian tax residents.
  • In this regard, the term “control” means actual or possible influence on the decisions made by a person who manages the assets of the entity, especially in matters related to the distribution of profit of the entity.
  • This means that the appointment of foreign trustees or other managers does not change the status of a controlled foreign company if the final instructions may be given to such managers by a person who is recognised as a Russian tax resident.
  • In accordance with the new Article 25.14 of the RF TC, Russian tax residents, whether individuals or legal entities, shall notify the local tax authorities about their direct or indirect participation in foreign legal entities within twenty days of the date when the reason for such notification arises.
  • In accordance with the new Article 25.16 of the RF TC, the profit of a controlled foreign company determined in accordance with the Code is deemed to be a profit of a taxpayer recognised as a controlling person of such controlled foreign company and shall be taken into account in determining their tax base.
  • Accordingly, the profit of a foreign company shall be taxed at rate 20% where it is controlled by a Russian legal entity, and 13% if it is controlled by a Russian individual.
  • In accordance with the new Article 309.1 of the RF TC, for the purposes of determining the profit of a controlled foreign company, a taxpayer shall be entitled to reduce the company’s operating income by the amount of expenses related to receipt of such income under the law of the foreign country or territory where the controlled foreign company is located or incorporated. The relevant loss may be deferred without limitation and taken into account when determining the tax base of income.

INTERNATIONAL OVERSEAS SERVICES comments:

  1. The essence of this draft law is to regulate and normalize the operating of foreign companies by Russian tax residents. Generally, the CFC rules have been already in effect in many other countries for a long time so by adopting this law, Russia simply follows the world standards of business regulation.
  2. As a result of this law, it will be less favourable to use classic offshore companies that file no accounts in the country of incorporation. At the same time, the importance of use of regulated companies in the tax jurisdictions that file appropriate financial accounts, which are certified by a licensed auditor if required, will increase.
  3. It may therefore happen that the services of simple incorporation of ordinary offshore companies will be in less demand in the Russian market of registration services. Accordingly, this market may change considerably over the next few years, where only highly competent corporate providers offering incorporation services in solid taxpaying jurisdictions remain, as well as ensuring financial reporting and audit in accordance with the applicable law.
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