CFC legislation came into force as of 01/01/2015. First reporting is scheduled on the 20/03/2017 and must cover 2015 tax year. It is quite complicated and usually requires individual case-by-case approach as the analyses of the ownership structure, determination of the tax residency of the persons involved, checking of the compliance with Tax Service notice of participation in CFC and etc. are needed.
Generally, controlled foreign company (CFC) is a company that simultaneously meets two requirements:
1) It is not a tax resident of the Russian Federation;
2) Controlling person of this company is an entity and (or) individual who are (is) tax residents of the Russian Federation.
Profit of CFC is exempted from tax if it does not exceed:
- 50 mln Rubles (equivalent thereof) in 2015;
- 30 mln Rubles (equivalent thereof) in 2016;
- 10 mln Rubles (equivalent thereof) as of 2017.
Each Russian tax resident must notify Russian Federal Tax Service of:
- his participation in foreign entities, including trust, funds and other similar structures, if his participation degree exceeds certain threshold (10% usually);
- the fact that he is a controlling person, definition and criteria for determination of which are stipulated by the Tax Code.
Person may be found CFC controlling person not only via certain proportion of shareholding (25% or 10% if he holds shares with his family members or other persons found tax residents of the Russian Federation (if their total shareholding exceeds 50%)), but also depending on the leverage he has on CFC management and profits distribution.
CFC’s profit (loss) amount may be determined by one of two options:
- By financial report drafted in compliance with lex societatis (personal law of the legal entity) of the said CFC for the financial year, if at least one of the below requirements is met:
- CFC is domiciled in the country, which has active double taxation avoidance treaty (DTAT) with Russian Federation, excluding countries (territories) that do not provide exchange of information for the tax purposes with Russian Federation (list is approved by Federal Tax Service and includes almost all offshore jurisdictions), or
- This financial report must include audit report that has no negative opinion or waiver to express opinion;
- By rules, established for the taxpayers – Russian entities, i.e. in accordance with Russian reporting standards. However, if CFC chose this option, it may switch to another only after a five years’ period.
At the same time, CFC’s profit may be released from taxation. The said relief is granted in particular:
- CFC is an active foreign company, which is a foreign company regardless of domicile (i.e. including offshores), whose share of the passive income in certain financial period, for which financial report is drafted, forms not more than 20% of the total profits.
Tax Code names several types of profits that are regarded as passive, e.g. dividends, interest, royalties, income from rental of property, income derived from the sale of shares and securities of whatsoever nature, income derived from transactions with financial instruments of whatsoever nature, income from rendering of consulting, legal, accounting services and etc.
In other words, profits of the offshore company, which is involved in, eg., trading activity and willfully drafts audited financial report and whose 80% of the profits are derived from “active” business activity, may be released from tax.
If you have any queries with regards to new Russian Regulations implementation in terms of requirements for audits for offshore companies, we are ready to provide you with more detailed legal advice and be of assistance of yours on other queries pertaining business structuring in Russia.
Written by – LLC DSL-Service, Russia.