Worldwide: According To The Russian Law Which Foreign Entities – Cyprus Entities Might Not Be Considered Controlled Entities?

Last Updated: 28 November 2017
Article by Kypros Kyprianou

What is Russian Controlled Foreign Company (CFC) legislation?

Russian Controlled Foreign Company (CFC) legislation can be defined as the measures adopted by Russian government to promote transparency and to combat tax avoidance by Russian taxpayers using foreign company structures. The Federal Law No 376-FZ dated 24 November 2014 "was entered into force on 1 January 2015 with the aim to tax participation interests by Russian tax residents in controlled foreign companies (CFCs) at the rate applicable in Russia currently 20 per cent for legal persons and 13 per cent for natural persons.

Russian Controlled Foreign Company (CFC) rules: Main aspects

Russian shareholders will be required to pay taxes in Russia on the retained earnings of foreign companies in which they hold a controlling stake the same way as Russian Companies. Any tax already paid by foreign companies will be given as a tax credit. A Russian shareholder is considered to be a legal/physical person holding more than 25% of shares in foreign company or more than 10% if together with affiliated persons hold more than 50%.

Exemptions form the Russian Controlled Foreign Company (CFC) new rules

There are a number of exemptions from the taxation of Russian Controlled Foreign Company (CFC) new rules on:

–   Profits of up to 10 million RUB as from 1st of January 2017 or,

–   Active foreign companies with at least 80% of active business income as mentioned in clause 4 of Article 309.1 of the Russian Tax Code  or,

–   Foreign companies controlled and managed by Russian residents which:

  • Russia has signed a double tax treaty or;
  • Meet the effective tax rate test (75% of the average weighted tax rate (calculated on the basis of the formula) or;
  • There is an exchange of information between Russia and foreign country or;
  • Is a Tax resident of the Russian "white list" ((States or territories not included in "offshore list" according to the Order of the Russian Ministry of Finance № 108n dated 13.11.2007 (with amendments))

–   Other exemptions

For Foreign companies controlled and managed by Russian residents with which Russia has  signed a double tax treaty  emphasis will be given on:

  • Tax residency. The tax residency of both the Russian shareholder and the foreign country.
  • Effective management. The company's place of effective management.
  • Beneficial ownership. The ability of the controlling person to exert power over the usage and distribution of income.

Tax Residency

Tax residency will apply for Russian residents who hold shares in foreign companies which are tax residents in foreign country. Reference can be made to the provisions of Double Tax Treaty concluded between Russia and the foreign country.

Effective management

A foreign company is to be regarded as tax resident company in Russia if the place of effective management is in Russia. The effective management is in Russia if:

  • The majority of meetings are held in Russia
  • Operational management is taking place often in Russia
  • The operational management main offices are in Russia

(Different rules apply on the disposal of Russian property rich companies and on foreign companies managed and controlled from Russia.)

Beneficial Owner/controlling person1   

Income earned by foreign company which is derived from activities or investments in Russia will lose the benefit of reduced withholding tax provided for in the double tax treaties with Russia, if such foreign company is not the beneficial owner of such income. The beneficial owner should be person who has power over the usage and distribution of such income.

1A person who exercises control over an organization, for instance, exerts, or has the ability to exert, a decisive influence on decisions adopted by that organization in relation to the distribution of profit (income) earned by the organization after taxation by virtue of direct or indirect participation in that organization, participation in an agreement (accord) concerning management of that organization or other arrangements between a person and the organization and (or) other persons)

A)  Those companies who meet any of the criteria of Control Foreign Company (CFC) rules exemptions

Foreign companies controlled and managed by Russian residents should meet any of the criteria of Control Foreign Company (CFC) rules exemptions i.e.

Double tax treaty should exist (Cyprus has signed a double tax treaty with Russia)

– Must meet the effective tax rate test

– There is an exchange of information between Russia and the foreign country

– The above exemptions plus exemptions according to the Russian Tax Code. In brief non-commercial organizations, permanent establishments in Eurasian Economic Unions, banks or insurance organizations, issuers of circulated bonds where an agreement with Russia exists and not included on a "offshore list", participates in mineral extraction projects with Russia, operators or direct shareholdings in a new offshore hydrocarbon deposits.

– Foreign companies that can demonstrate that the company is an active foreign company as stated in clause 4 of Article 309.1 of the Russian Tax Code and demonstrate business substance in that foreign country by:

+ Establish independent offices i.e. purchasing or renting office space etc.

+ Maintain group head offices thus having fully fledged offices with business telephone lines, domains etc.

+ Own valuable intangibles i.e. intellectual property, performing the most important functions within the corporate structure and demonstrate economic business reason

+ Proper allocation of group assets

+ Recruit staff to administer the day to day management work of the company

+ Appoint qualified directors who will have the ability to make decisions and really understand the nature of business

+ Maintain business records, minutes of conferences, general meetings, accounting function, bank account administration etc.

+ Demonstrate additional reasons for presence. I.e. to control activity risks, to improve costs control etc.

+ Consider other factors that might affect adversely Cyprus business substance like:

–  Majority of board of Directors' meetings are held in Russia.

– Management is effectively performed from Russia and mostly by Russian employees.

– Accounting and office administration is performed in Russia

– Important documentation is drafted and performed in Russia

– Russian ultimate beneficial owner involvement in management of the Company

– Russian ultimate beneficial owner involvement in bank accounts management and on instructions given

B)   Russians obtaining tax residency in another country(Cyprus) (Citizens of the Russian Federation who are not the Russian tax residents)

Russians that will obtain tax residency in another country like Cyprus and forgo Russian tax residency may not be affected. It is considered that a Russian is not considered a tax resident of Russia if stays in Russia for less than 183 days during 365 consecutive months and stays more than 183 days in another country (Cyprus). Russian individuals ready to move to Cyprus and spend at least 183 days in Cyprus can qualify for tax residency in Cyprus and be taxed in Cyprus on their worldwide income. This can be achieved with the aid of obtaining visa (permanent residency) or citizenship (passport) in Cyprus.

Cyprus is also encouraging High-net worth individuals including Russian individuals to move to Cyprus by giving personal taxation incentives like exempting Russian individuals from personal taxes. Russian individuals will need to declare Cyprus as their taxable jurisdiction and receive an exemption from Cyprus personal taxes (Special Contribution for Defense) on rents (3% on 75% on rent income), interest (30%) and dividends (17%) which are applicable to Cyprus domiciled individuals. The exemption on Russian individuals will apply for 17 years as from the date of declaring Cyprus as their taxable jurisdiction.

C)  International Trust (Cyprus International Trust)

International discretionary trust (Cyprus International trust) in which Settlor / beneficiary demonstrates that he does not influence profit distribution and has no rights to revoke assets after their transfer to the trust (except by inheritance etc). However Russian Settlor/founder must report participation in such structure irrespective of the residence status of the beneficiary; Other important considerations.

– a settlor and a beneficiary of a trust should not  be the same person,

– In the event of termination / liquidation of the trust, the settlor of the trust should not be entitled to the assets originally contributed to the trust,

– the settlor should not have the right to receive income from the trust, to give orders/instructions on income distribution or dispose of the trust income.

– A beneficiary should not receive income from the trust regularly/permanently, and the beneficiary and settlor should not be linked with each other

D)   Investment funds (Cyprus Alternative Investment Funds (AIFs)) having the form of a legal entity

Investment funds (Cyprus Alternative Investment Funds (AIF)) having the form of a legal entity in the context of clause 2 of article 11 of the Russian Tax Code and If all persons – Russian tax residents  (in the case of physical persons – together with spouses and minor-age children) own participating interests (directly or indirectly) in the fund, amounting to less than 50%, but at the same time every investor (contributor) – Russian tax resident owns participating interest, amounted to less than 10%

A Cyprus fund which is registered and governed by Cyprus Securities and Exchange Commission (CyCec) having LEI and ISIN number recognized worldwide as a traded security is considered a well regulated entity which is outside the control of any investor.  Cyprus Investment funds are fully managed and controlled by its directors and they need to abide by the Cyprus Securities and Exchange Commission Laws and Regulations. A Cyprus fund having its units – shares adequately dispersed to investors might not be considered a foreign controlled company (CFC) under Russian Law.

E)   Foreign entity (Cyprus Company) with two classes of shares

A foreign entity (Cyprus Company) with two classes of shares, the first class of shares is assigned the management and control of the company with no rights to receive dividends, and the second class of shares is with no rights of management and control but instead assigned rights to receive dividends. The second class of shares might not be considered control as defined by the Russian Law. Classes of shares shall be demonstrated in all companies' statute documents accordingly. Consideration must be taken for shares eligible to receive dividend, as they may indicate the existence of special relationship between the foreign – Cyprus company and the Russian shareholder

F)   Issuance of preference shares by a foreign entity (Cyprus Company)

Issuance of preference shares by a foreign entity (Cyprus Company) purchased by a Russian company or an individual. Management and control of Cyprus Company rests with non Russian tax residents legal or physical persons. Russian persons (legal or physical) will have the right to receive dividend or interest on preference shares held. A Russian person holder of the preference shares might not be considered as controlling person as defined by the Russian Law. Issuance of preference shares shall be fully documented and demonstrated in all Cyprus Company's statute documents accordingly. Consideration must be taken for preference shares eligible to receive dividend, as they may indicate the existence of special relationship between the foreign – Cyprus company and the Russian shareholder

G)   Issuance of registered private bond or issuance of bond listed in a recognized stock exchange (Cyprus Emerging Companies Market ("ECM")) by foreign entity (Cyprus Company)

Issuance of registered private bond or issuance of bond listed in a recognized stock exchange by foreign entity (Cyprus Company) and purchased by an independent Russian company or an individual. Such an instrument in the hands of the Russian investors is considered an investment and not granting of a loan. Management and control of Cyprus Company rests with non Russian tax residents legal or physical persons holding the controlling shares of the Cyprus Company. Russian persons (legal or physical) will have the right to receive bond interest. A Russian person holder of a bond might not be considered a controlling person as defined by the Russian Law. Bond enlistment or issuance of a registered private bond shall be fully documented and demonstrated in all companies' statute documents accordingly. Article 11 of Double Tax Treaty between Russia and Cyprus on bond interest must also be taken into consideration.

H)   Foreign entity (Cyprus company) holds 100% of a Russian Company

Foreign entity (Cyprus company) holds 100% of the Russian company, the structure is not reportable under Russian Law but it should be considered that the Russian taxation authorities according to most double tax treaties concluded by Russia (Cyprus has concluded a double tax treaty with Russia), and based on the exchange of information clause, have the right to request information provided such information is foreseeable relevant. That is to provide for exchange of information in tax matters to the widest possible extent but at the same time not at liberty to engage in 'fishing expeditions' or to request information that is unlikely to be relevant.

Conclusion

It appears that a large number of Russian interest foreign companies are not covered by the exemptions of the Russian Controlled Foreign Company (CFC) rules, though the status of such companies will need to be clarified based on the above criteria. However it is important to emphasize that the double tax treaties with which Russia has concluded with foreign countries including Cyprus cannot be overwritten. Double taxation agreements demonstrate taxing rights between two contracting states which cannot be superseded by any domestic law of any state. Russian legislation therefore has effect only to the extent that it is in line with Rus­sia's double taxation agreements. It should also be emphasized that for those financial centers, with which Russia has concluded a double tax treaty (Cyprus has concluded a double tax treaty with Russia) can be an opportunity provided they are transparent and well regulated.

How we can help

–   We can help you to obtain visa  or citizenship (passport)  in another jurisdiction.

–   We can assist you to move to Cyprus and obtain personal taxation incentives provided under Cyprus Laws

–   We can review your corporate structure (holding, financing and trading) and propose changes to your structure.

http://www.pkf-cyprus-nicosia.com.cy/

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
Similar Articles
Relevancy Powered by MondaqAI
 
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 Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions