New Deoffshorization Law Signed by the Russian President
The amendments to the Russian Tax Code containing the Controlled Foreign Company (CFC) rules and other measures aimed at deoffshorisation of the Russian economy were signed by the Russian President on November 24, 2014. The new rules will apply starting from 2015.
The Controlled Foreign Company (CFC) law introduces taxation of income of foreign companies and non-corporate structures (including foundations and trusts) controlled by the Russian tax residents (i.e. controlling parties).
A controlling party shall mean an individual or a Russian legal entity with has direct or indirect interest in the CFC over 25%; or over 10%, if the total interest of all Russian tax residents in the CFC exceeds 50%. There will be a transition period during 2015 when a higher participatory share threshold of 50% will be applied.
Russian tax residents will have to file two types of notifications to the tax authorities, including (1) notification on participation in foreign companies (if direct or indirect interest is above 10%), as well as on incorporation \ control of foreign non-corporate structures and (2) notification on participation in CFC.
CFCs profits will be subject to taxation levied on a controlling party at a rate of 20% if the CFC is controlled by a legal entity and a rate of 13% if it is controlled by an individual.
Profits of certain CFCs will be exempted from taxation in Russia, for example, if a CFC is permanently domiciled in a "good" jurisdiction (treaty country) and has an effective tax rate of at least 75% of average weighted Russian tax rate OR the CFC's income from passive operations amounts to no more than 20% of its income.
The profits of CFCs to be declared for the first time by Russian legal entities on March 28, 2017 in their corporate income tax returns for 2016 (individuals, respectively, will declare CFC profits on April 30, 2017).
CFC profit is taxable in Russia if it exceeds the threshold of RUR 10 million (other thresholds will apply in the transition period: in 2015 – RUR 50 million; in 2016 – RUR 30 million).
Profits of a CFC taxable in Russia shall be determined on the basis of financial statements prepared in accordance with its personal law (if the company is permanently domiciled in a treaty country) or under the Russian Tax Code rules in other cases.
A fine for underpayment of the CFC tax is set at the level of 20% of the underpaid tax amount, but in any case no less than RUR 100,000.
A tax relief is proposed for the Russian corporations which decide to liquidate foreign structures falling under the CFC rules.
Tax residency rules
Starting from 2015 foreign legal entities managed from Russia can be recognized as the Russian tax residents. The Russian tax residency means that the worldwide income of such companies will be taxable in Russia.
The new law sets certain criteria for determining the place of management (among other things, they determine the place where the majority of meetings of the board of directors takes place).
Tax residency of individuals will continue to be determined on the basis of the number of days of their stay in Russia (more or less than 183 days per year).
“Beneficial ownership” concept
The right to apply lower tax rates under applicable tax treaties will depend on whether or not an entity receiving income is the beneficial owner of such income (i.e. whether it has the right to determine its future economic use).
The new law does not elaborate on the test for beneficial ownership. It only states the tax agent's right to request a confirmation of whether a foreign legal entity is a beneficial owner of income