Cyprus: Deoffshorization Law In Russia And Possible Solutions For The CFCs In Cyprus

The Federal Law No 376-FZ dated 24 November 2014 "Concerning the Introduction of Amendments to Parts One and Two of the Tax Code of the Russian Federation (Regarding the Taxation of the Profit of Controlled Foreign Companies and the Income of Foreign Organizations)" (the Law) was signed by President Putin on 24 November 2014 and entered into force on 1 January 2015. The Law introduces significant changes to the rules governing the reporting and taxation of participation interests by Russian tax residents in controlled foreign companies (CFCs) resulting in the profit of a CFC being imputed as taxable profit of a Russian tax resident controlling such a CFC at the usual Russian tax rate being 20 per cent for legal persons and 13 per cent for natural persons.

An overview of the key solutions that may circumvent the effect of the Law is provided below. We should note, however, several points that we consider are of an importance:

  1. At this stage there is no universal solution and the advice we give hereto is always subject to review and confirmation as to its workability in Russian Federation by the Russian legal counsel re Tax position and treatment by tax authorities in Russia;
  2. The Law has been prepared by hundreds of specialists whose sole aim was to cut off all old legal algorithms, which helped to optimize taxation;
  3. The Law is likely to be amended to 'soften' the effect;
  4. Each individual case should be treated on its merits and an individual solution to be found for each separate case scenario and wishes and abilities both monetary and non-monetary of the client to be taken into account.

Below, we are setting out key solutions, as we see them, under following headings:

  1. Public companies– CypCo reconverts into PLC;
  2. CypCo has two classes of shares: Voting and Non-voting Shares;
  3. Creating substance in Cyprus and possible Naturalization via investment root;
  4. Foundations and trusts (non- corporate structures);
  5. Creating a structure, whereby RusCo is a subsidiary of CypCo.
  6. Life Insurance.

1. Public companies– CypCo reconverts into PLC

1.1. Public companies are in the exemption list but they should be listed on one of the recognized stock exchanges. That includes all Russian stock exchanges and all other stock exchanges to be approved by the Ministry of Finance of Russian Federation.

1.2. Otherwise, simply incorporating a public company would not be a solution and one will need to list the CypCo and that can be an expensive task. Also the issue of publicity must be considered in this case.

1.3 No shareholder of a public company should have more than 10% share of the PLC.

2. CypCo has two classes of shares: Voting and Non-voting Shares

2.1. We create a scheme whereby CypCo has two classes of shares: one class will be the managing shares with no right to receive dividends, and the second class of shares will not have any right of voting but right to receive the dividends;

2.2. In this way there shall be a clear division between two classes of shares, whereby, non-voting shares shall have a right to dividends but in no case shall they have powers to vote or any other residual powers attached to them, so that no control, as defined in the Law, is exercised;

2.3. The Articles of Association of CypCo shall be amended accordingly;

2.4. PWC (Russia) has adopted the above scheme for certain clients for which we have assisted them.

3. Creating substance in Cyprus and possible Naturalization via investment root

3.1 For a CypCo

  1. Creating substance in Cyprus i.e., real offices, payroll, real decision making happing in Cyprus (both strategic and day to day), corporate nominee directors not simply executing documents but asking questions etc,.
  2. For the purposes of determining Cyprus tax residency, one needs to pay attention and consider and request the advice in the jurisdiction where protection is thought, as Cyprus tax authorities are not likely to challenge such in Cyprus.
  3. For this purposes, below, we set out couple of considerations re test for the Tax residency for the purposes of taxation in Russian Federation:
  1. The test is the Test of Factual Controlkey criteria:
    1. Board of Directors (over half of all the meetings take place in Russia);
    2. Executive management is predominantly performed from Russia;
    3. Chief Officers perform duties predominantly from Russia;

AND

  1. Additional criteria (for cases where effective place of management qualifies in several countries):
    1. Accounting management accounting and office administration;
    2. Preparing and issuing strategically important corporate documentation;
    3. Operations management of employees.

SO, to determine tax residency in favor of Cyprus:

  1. NOT ALLOWED:
    1. Relative majority of the Board of Directors in Russia;
    2. 'Not substantially smaller' presence of the executive body in Russia;
    3. Authorised people taking decisions in relation to day to day matters in Russia;
    4. Accounting, paperwork/clerical and operative management of the staff in Russia;
  1. ALLOWED:
    1. Preparation and taking decisions at the GM level;
    2. Preparation for the Board Meetings;
    3. Intra-Group functions.
    4. Some practical considerations for the existing corporate structures - risks:
      • UBO controls the activity of the group (CypCo can be treated as a Russian tax resident);
      • Nominee directors, board meetings take place in Russia, no substance (Reduced tax rates under DTT may be denied, reporting obligations in Russia and taxation of undistributed profits in Russia as a consequence);
      • Executive management and key officers perform duties from Russia, as well as accounting and staff management of all companies of the group (CypCo can be treated as a Rus. tax resident);
      • UBO has a PoA for bank accounts and instructions to the bank given by the UBO (triggers obligation to report on participation in a CypCo and CypCo may be treated as Russian tax resident).

3.2. For an Individual - tax resident for the purposes of local tax laws and Naturalization via investment root

  1. In relation to the physical person the tax resident for the purposes of Cyprus tax Laws is liable to income tax in accordance with the Income Tax Law ( Law No. 118(I) of 2002 , as amended) in respect of their worldwide income. An individual is resident in Cyprus, if he/she resides therein for a period or more which in aggregate exceed 183 days.
  2. Other words, if an individual or his family members or his/her trusted person is/are prepared and ready to move to Cyprus and spend at least in aggregate exceeding 183 days in Cyprus he or she would qualify as a tax resident for the purposes of local tax laws and shall be taxed on his/her worldwide income in Cyprus.
  3. We also consider naturalization via Investment root as a great option for the high net worth individuals, who would want to invest in the Island. Depending on the magnitude of the proposed investment, the applicant can be granted with Cyprus nationality in the shortest periods of time. Please note that condition in 3.2 (b) above must, nonetheless, be satisfied. In this regards, we can provide further information upon request.

3.3 New Tax Law in Cyprus for Non-Domicile Persons

Cyprus Republic will soon adopt a new tax law (the so called 'Non-Dom Tax Law') pursuant to which a foreign person who would not spend more than 183 days in Cyprus, may be taxed in Cyprus, with a lower tax rate based only on his income collected in Cyprus (i.e. same tax laws as applied in certain cantons in Switzerland and other countries.)

The above law will make more attractive the implementation of the above scenarios.

4. Foundations and Trusts (non- corporate structures). Cyprus International Trust with no residual powers on the settler and beneficiaries.

Foundationsand Trusts (non- corporate structures)are still in the Exemptions to the Law, but there are conditions:

  1. A settler/founder has no right to acquire ownership over assets transferred to the structure after it has been established; AND
  2. A settlers/founder's right related to his 'personal status in the structure (including rights to dispose of property, to determine beneficiaries and other rights) cannot be transferred to other persons after the structure has been established' unless by way of inheritance or universal succession; AND
  3. A settler/founder cannot receive directly or indirectly (received by related person in his interest profits (income) of the structure distributed amongst the participants or beneficiaries (including Receipt of income by related person in the interest of a founder) AND
  4. All above in accordance with the governing law and the foundations documents AND
  5. Exemption applies ONLY UNTIL the structure has no possibility to distribute profits (income) among participant beneficiaries, trustees and any other persons. There must exist NOT EVEN A POSSIBILITY of distribution of profits AND
  6. Beneficiaries shall not have any residual power on the management of a trust (at all). For example profits are reinvested by the Trustee so that no funds to pass over to beneficiaries.
  7. Exemption only applies if controlling persons reported participation in structures and provided documents confirming all above conditions are met.

Some practical considerations for wealth planning structures – effect on existing structures:

  • Settler/founder must report participation in the structure irrespective of the residence status of the beneficiary;
  • Russian resident beneficiaries are subject to reporting obligations;
  • Settler/founder and or beneficiaries and/or other Russian resident persons considered controlling persons are subject to taxation of undistributed profits (income) at applicable rates.

5. Creating a structure, whereby a RusCo is a 100% subsidiary of CypCo

In this way the CypCo becomes a 100% shareholder of the Russian company, hence, this particular structure does not give rise to reporting obligations under the Law but it should be kept in mind that nothing prevents Russian tax authorities from approaching Cyprus tax authorities for further information under the Exchange of Information provisions under the current DTT.

6. Put in Place Private Life Insurance

6.1. Firstly, we will use only the largest Swiss Insurance Companies based in the jurisdiction of Luxemburg for maximum Privacy and Security.

6.2. Private Placement Life Insurance has been used for many years in Europe as a compliant means of mitigation tax liabilities and adding security to company structures whilst maintaining privacy.

6.3. It has been used successfully to overcome similar legislation against controlled foreign companies in Europe and there has never been a tax assessment or court decision against Private Placement Life Insurance. All legal systems have contract law which recognizes life insurance policies, whilst not all recognize the concept of a trust or foundation;

6.4. Private Placement Life Insurance works in a similar way to a Trust but adds privacy, security, flexibility and substance;

6.5. The shares of CypCo holding company are transferred to the ownership of the Insurance Company, in return the client receives an insurance policy inside of which are his assets. Legally, all the client now owns is an insurance policy. The Insurance policy, however, belongs to him;

6.6. The structure with an existing trust can be used, nothing changes and the client will need to transfer the assets to insurance policy. The client can assign beneficiaries to the insurance policy to ensure continuity;

6.7. One of the problems of the trusts, foundations and investment funds is that the beneficial owner maintains control of the assets. With Private Placement Life Insurance an Asset Manager is employed by the insurance company (usually a corporate service provider) to manage the assets of the Insurance policy. In this way for legal purposes the client has no control of the assets. The beneficial owner is now the insurance company. The client is not a shareholder or a director of the insurance company and therefore not liable to reporting. This has the added benefit of giving the client creditor protection unparalleled in the corporate world. It is very difficult to legally attack an insurance structure.

Disadvantages/Risks

By adopting the above scheme the client/beneficiary might be held as 'prisoner' of the Insurance Company, because the client would not have any say on the management of the assets, neither any right to reverse the ownership or title of the asserts to him.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.