The new amendments to the Russian Tax Code regarding de-offshorisation will enter into force on 1 January 2015 (Federal Law № 376-FZ, dated 24 November 2014 and entitled "On the Introduction of Amendments to Parts One and Two of the Russian Tax Code").
We would like to draw your attention to some key provisions of the law.
Taxation of a Controlled Foreign Company
Some new definitions will appear in the Russian Tax Code, including "controlled foreign company" and "controlling person".
A controlled foreign company, unless otherwise stipulated by an international treaty, shall be understood to be a foreign organization that simultaneously meets the following requirements:
- The organization is not recognised as a Russian tax resident.
- The organization's controlling person or persons are Russian tax residents, either companies or physical persons.
Russian tax residents recognised as controlling persons shall pay tax in Russia on the profits of the controlled foreign companies, as well as of foreign structures (funds, partnerships and other forms of collective investment entities).
A controlling person shall be understood as:
- a physical person (collectively with spouse and minor children) or organization that holds a participating interest of more than 25 per cent in a foreign organization (more than 50 per cent between 1 January 2015 and 1 January 2016);
- a physical person (collectively with spouse and minor children) or organization that holds a participating interest of more than 10 per cent in a foreign organization of which Russian tax residents control more than 50 per cent;
- a physical person or organization that exercises any other type of control over a foreign organization for his, her, or its own benefit or for the benefit of a spouse and/or minor children (this condition may be determined by the tax authority, butmay be challenged in court).
The profit of the following controlled foreign companies shall be exempt from taxation in Russia:
- a non-commercial organization that does not distribute profit;
- a company registered in a member state of the Eurasian Economic Union;
- a company both registered in a country with which Russia has a double tax treaty and subject to an effective tax rate in that country of not less than 75 percent of the Russian corporate average weighted tax rate (excluding companies registered in countries that do not cooperate in the exchange of information);
- a company both registered in a country with which Russia has a double tax treaty and having a passive income of not more than 20 per cent of revenues (excluding companies registered in countries that do not cooperate in the exchange of information). Please note that in this clause, passive income also includes receipts from legal, accounting, auditing, marketing, advertising and engineering services;
- a foreign structure whose founder does not have the right to possess assets of this structure or to obtain any profit from this structure either directly or indirectly and cannot transfer his or her rights to other persons;
- a bank or an insurance company registered in a country with which Russia has a double tax treaty (excluding banks and insurance companies registered in countries that do not cooperate in the exchange of information);
- a body that issues marketable bonds, or an organization authorized to secure interest income on such bonds, or an organization to which the rights and obligations of such bonds have been assigned;
- a company that is party to a production sharing agreement or to another similar agreement, provided that the company's share of income from this activity is not less than 90 per cent;
- a new offshore field operator or shareholder (participant) of such an operator.
Profits of a foreign company are exempt from taxation if they do not exceed 10 million rubles in a financial year (50 million rubles in 2015, 30 million rubles in 2016).
An organization recognised as a Russian tax resident
The law imposes a new rule for the determination of a foreign company's tax residence: it shall be the place of the actual management of such companies, unless otherwise stipulated by an international treaty.
The place of actual management of the foreign company is recognized to be Russia if one of the following conditions is met:
- the major part of the meetings of the board of directors or another similar board are held in Russia;
- the executive board regularly carries out its activities in Russia;
- the company's top management mainly operates the company from Russia;
- accounting, book-keeping, or management accounts are maintained in Russia;
- record-keeping activities are conducted in Russia;
- operational human resources management is conducted in Russia.
Recognition of the foreign company as a Russian tax resident means that the profit of this company shall be taxed at the general tax rate of 20 percent.
Changes regarding real estate
It will be not possible to apply a tax rate of 0 percent to income from disposal shares of Russian companies if more than 50 percent of said company's assets directly or indirectly consist of immovable property. The shares of high-tech companies, which are recognised as being circulated on the organized securities market, are excepted.
After the law comes into force, income from the disposal shares (share interests), and from financial instruments derived from such shares, of organizations of which more than 50 per cent of assets consist, both directly and indirectly, of immovable property, shall be classified as income of a foreign organization from sources in the Russian Federation.
In what circumstance should a notification be sent?
Russian tax residents, whether companies or physical persons, shall be obliged to notify Russian tax authorities:
- concerning the Russian tax resident's participation in a foreign company if the share of this participation exceeds 10 per cent;
- concerning establishment of a foreign structure that has the right to carry out commercial activity, or concerning the fact of the Russian tax resident's possession of control over such a structure, or of the right to secure income from such a structure;
- concerning controlled foreign companies in regards to which the Russian tax resident is a controlling person.
Foreign companies and foreign structures shall be obliged to present information about their shareholders, including information about the indirect participation of physical persons or public companies, to the tax authority holding jurisdiction over the location of the foreign company's immovable property, if the physical person or public company's share of direct and/or indirect participation in the foreign company or structure exceeds 5 per cent.
- The notification of participation in a foreign company amounting to more than 10 per cent of the equity of that companyshall be submitted to a tax authority not later than 1 April 2015.
- The notification about controlled foreign companies shall be submitted to a tax authority not later than 20 March 2016.
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.