Given the close ties between the two countries, our
Cyprus experts have produced this overview of Russia's
impending tax code amendments.
Russia's "deoffshorisation" law - which introduces
amendments to the Tax Code of the Russian Federation - comes into
force from 1 January 2015. It should be noted, however, that the
legislation still remains a work in progress and further amendments
will likely be required during the course of 2015 to provide
further clarifications on its provisions.
In a nutshell,
deoffshorisation introduces four principal changes to Russian
tax landscape; the basics of these new "concepts" are
briefly covered below.
Controlled Foreign Companies (CFC)
The law establishes a mechanism for
Russia to tax the income of CFCs where such companies do not
distribute their income to the benefit of Russian controlling
entities. As per the law adopted, the definition of a CFC refers to
companies which are controlled by individuals or legal entities
that are Russian tax residents.
Control over the CFC shall be determined both by the ability of
the controlling persons to exert influence on the decisions of the
CFC with regards to the distribution of its profits and by their
level of participation in the authorised capital of the company if
more than 25%.
Also, in the case where the overall share of Russian tax
residents in the company is more that 50%, then the level of
participation in the company in order to determine a controlling
person shall be reduced to 10%. It is important to note that the
transition period which was previously set from 1 January 2015
until the end of 2017 has now been reduced. As such, a level of
participation of 50% shall apply for the purposes of determining a
controlling person up to the end of the year 2016.
The law also provides for a number of exceptions from taxation
of certain categories of CFCs, including non-profit organisations,
banks and insurance institutions, and companies from the Eurasian
The beneficial owner according to the law is a person who has an
actual right to income or authority to dispose the income in
question. If deemed to be a tax resident of Russia, foreign
companies directly or indirectly controlled by Russian beneficial
owners (individuals or companies) will be subject to tax on profits
The introduction of the concept of beneficial ownership aims to
reduce abuse of double tax treaties by structures and back-to-back
arrangements circumventing Russian withholding tax.
The law extends the principle of effective management and
control to foreign entities such that, if it is determined that a
foreign entity is effectively managed and controlled from Russia,
it will become subject to Russian corporate income tax. The place
of effective management will be governed by specific rules set in
Russian domestic law rather than international practice and
The effective management and control is established by a
combination of various criteria, with much weight given to
record-keeping and record management in determining the place of
Real estate rich
Russian capital gains tax will apply to the disposal of shares
in foreign companies if more than a half of value of such shares is
attributed to real estate in Russia. It is worth noting that Russia
has been working with other jurisdictions since 2007 to amend its
double tax treaties and thus acquire the right to tax such
disposals and prevent circumvention of Russian taxation simply by
using two-tier offshore structures.
Such relevant amendments to the Russia-Cyprus double tax treaty
will come into effect in 2017.
In view of the new law coming into force next year, foreign
structures must prepare for changes without delay. Consider an
analysis of management processes and an assessment of Russian tax
residency risks, as well as development of related risk management
Inevitably a significant number of Russian-held international
corporate groups will undergo revision of current structures to
ensure compliance with the law; these will likely include
structuring of joint ventures with Russian partners as well.
While it is very Russia-heavy, deoffshorisation will impact the
Cyprus business community, too, due to the strong business ties
between the two countries.
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.
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