Russia to tax residents on income from controlled foreign companiesUpcoming changes to Russian tax regulation will affect Russian companies and citizens that own shares in a foreign company in an attempt to bolster the Russian economy and tackle offshore tax avoidance.
The Ministry of Finance has predicted that Russia will face around a US$20bn deficit in 2015 due to falling oil prices and Western sanctions. The Russian Government is therefore seeking ways to increase revenues through taxes and establishing an anti-offshore tax policy is part of that plan.
Earlier this year, the Ministry of Finance published a draft law on controlled foreign companies (CFC) but encountered strong resistance from the business community. Lobbyists failed to soften the law and have since strived for a transition period of several years instead.
On 24 November a revised draft law was passed amending the tax code and introducing the concept of CFC. The law came into force on 1 January 2015 with a transition period until 2019. Russian companies and individuals who are the actual beneficial owners of a controlled foreign company as of 2015 will pay taxes based on that company’s revenue.
Definition of a controlled foreign company
The definition of a CFC includes companies, funds, partnerships, trusts and “other forms of joint investments or asset management”. “Structures” that meet the following criteria should be treated as CFCs:
- not tax resident in Russia
- controlled by Russian tax residents (companies or individuals).
If a Russian tax resident individual, together with his family members and inter-dependent persons directly or indirectly controls more than 25% of the foreign company, he or she is considered a “person controlling the foreign company”. The same rule applies if the individual controls more than 10% but there are other Russian tax resident individuals with a combined share of more than 50% (owned directly or indirectly). For the transaction period up to 1 January 2016 it is 50% of shares instead of 25% and 10%.
Some CFCs will not be taxable, including:
- non-profit organisations or any other organisations that do not distribute their profits among shareholders, participants, founders or other persons
- companies or residents of the Eurasian Economic Union (Russia, Belarus, Kazakhstan)
- companies or residents of countries that have tax information exchange arrangements with Russia and have an income tax of more than 15%
- banks and insurance companies.
A legal entity may be considered Russian tax resident based on the place of “effective management”, where:
- meetings of the Board (or other governing body of the organisation) are mainly held in Russia
- the company is mainly managed from Russia
- the main (senior) company’s officials primarily operate from the Russian Federation.
Russian residents must pay tax on the income of their CFC that is not distributed as dividends. Tax rates for legal entities will be 20% and 13% for individuals. There will be a threshold for taxable income of US$280,000.
The Ministry of Finance wants Russian taxpayers that are in control of a foreign structure to disclose such information. The exact procedure remains unclear.
All penalties for violating the law will come into force in 2017. Taxpayers will be fined 20% of the tax amount they fail to pay on time. The fine for not providing information on CFCs is set at US$2,155 for each company.
A foreign company or structure that owns real estate taxable in Russia will be obliged to disclose information on its beneficial owners. The penalty for not disclosing such information
will be equal to 100% of the property tax on that real estate. This will allow the Government
to tax hidden transactions, such as when, instead of selling the real estate itself, the company
that owns it is sold.
For more information, contact:
T +7 495 221-24-15
T +7 495 221-24-15