Ahead of their joint event on Deoffshorisation Compliance on 21 May, TMF Group's Sub Regional Director for CIS and the Nordics Alex Medlock and Artem Toropov, Senior International Tax Associate at law firm Goltsblat BLP LLP (the Russian practice of Berwin Leighton Paisner), outline the key deoffshorisation/CFC compliance requirements and explain how Russian residents and companies will be affected.
Individuals and companies classified as Russian tax residents are facing the tight reporting deadline of 15 June 2015 to comply with the first enforcement of the country's new Deoffshorisation Law - amendments to the Russian Tax Code that came into effect on 1 January 2015.
The initial implementation of the amended Russian Tax Code requires affected individuals and companies to submit a foreign ownership notification form disclosing
- All non-Russian companies in which Russian tax resident individuals and companies hold (directly or indirectly) more than 10%
- Unincorporated structures, including trusts, in relation to which a Russian resident acts either as (a) a settlor, (b) beneficiary or (c) a "controlling person."
If participation in a company is terminated or if a structure, such as a trust, is liquidated between 1 January 2015 and 14 June 2015 inclusively, no notification should be filed.
- A RUB 50,000 fine applies to each company or structure that has not been reported by a taxpayer using a foreign ownership notification form, or for which a taxpayer has submitted false information
- A RUB 100,000 fine applies for each undisclosed company or structure that is regarded as a Controlled Foreign Company (CFC) and for which a taxpayer fails to provide an annual CFC notification (first notification due in 2017)
- A RUB 100,000 fine per item applies to a taxpayer who fails to submit required financial statements and other documents about a CFC to tax authorities, or who provides false information
- A 20% penalty applies (though no less than RUB 100,000) for failure to pay tax on a CFCs' profit (this fine does not apply in relation to periods of 2015-2017).
What is considered a Controlled Foreign Company (CFC)?
A non-Russian company is regarded as a CFC if a Russian tax resident owns directly or indirectly more than 25% of such company (together with spouse and minor children). If a company is jointly owned by Russian tax residents by more than 50%, then it is regarded as a CFC of each Russian shareholder owning directly or indirectly more than 10% of such company. In 2015, a provisional threshold of more than 50% applies instead of the 25% and 10% thresholds that apply starting from 2016. Even if these threshholds are not met, a company can be regarded as a CFC if it is de facto controlled by a Russian tax resident.
Unincorporated structures including trusts are regarded as CFCs if they are controlled by Russian tax residents who exercise or have the ability to exercise decisive influence on decisions taken by a person that manages assets of a structure (trustee) in relation to distribution of income or profit among beneficiaries.
The tax base of CFCs is determined based on foreign financial statements (with certain adjustments), but only if a CFC is located in a treaty jurisdiction and is subject to mandatory audit (this requirement may be changed to voluntary audit by upcoming legislative amendments).
Otherwise Russian taxpayers must perform a full recalculation of tax base using Russian corporate profit tax accounting rules (Russian GAAP) and financial statements or bank account statements and primary documents of a CFC. The relevant accounting documents have to be translated to Russian and provided to Russian tax authorities together with Russian tax returns.
Corporate tax residency rules
Foreign companies, including but not limited to those regarded as CFCs, can be deemed as Russian tax resident companies that are subject to 20% Russian corporate income tax if their "place of effective management and control" is in Russia. If a non-Russian company is regarded as a Russian tax resident vehicle, it is not regarded as a CFC.
A beneficial regime is established for companies that are resident in tax treaty jurisdictions with proper local substance (including having its own sufficiently skilled employees). Substance should be properly documented, and these documents need to be provided to Russian tax authorities.
Taxpayers are advised to consider the impact of corporate tax residency rules on companies that are disclosed by them in foreign ownership notifications.
CFCs located in tax treaty jurisdictions with a high effective tax rate (ETR) or with large share of "active business" income (as opposed to income from "passive" activities) are exempt from CFC tax, but not from CFC filings. Moreover, to apply the exemptions taxpayers need to provide information on ETR and "active business" income to Russian tax authorities.
Corporate taxpayers have time until 1 January 2017 to liquidate CFCs and receive their assets via liquidation or sale tax-free at the level of Russian tax resident company. No exemption is provided for individuals who wish to liquidate their CFCs, as their "onshorisation" is regulated by the special "capital amnesty" (voluntary disclosure program) law.
An amnesty in the form of a voluntary disclosure program offers individuals the opportunity to disclose until the end of 2015 their foreign CFCs, bank accounts, real estate and other holdings with no extra charge in return for guarantees of no criminal, administrative or tax liability for tax, customs and foreign exchange crimes in connection with the disclosed assets.
The guarantees only apply only to pre-2014 actions and do not cover restructurings made in 2014 and 2015. A possible amendment is likely to extend the guarantees to pre-2015 actions.
There is also the ability to transfer overseas assets from nominees to personal ownership without extra tax charges.
Compliance is crucial
Goltsblat BLP LLP's Artem Toropov said: "While this first aspect of the new deoffshorisation rules is now being enforced, other mandatory forms and procedures are yet to be finalised, for example a form for foreign special purpose vehicles (SPVs) to claim themselves as Russian tax resident companies, and a form on "fiscal transparency" for withholding tax and "beneficial ownership" purposes and so on, which slows down the restructurings of groups who want to bring their corporate structures "onshore" to Russia for tax purposes. A number of important amendments to the Deoffshorisation Law are also underway.
"It is strongly recommended that Russian corporate and individual taxpayers seek legal and tax advice on how their international structures are affected by the new regulations and how to mitigate Russian tax risks through restructurings, change of corporate governance procedures and other measures. Any existing or new structures should basically have a defence file and should be ready to withstand the highest degree of scrutiny by tax authorities in tax litigation."
Alex Medlock, sub-regional director CIS at TMF Group, said: "It's becoming more difficult for CFC companies to keep business compliant with Russian regulations. Firstly, it can be a challenge just trying to keep track of the many direct and indirect foreign holdings; now many companies are realising they may need additional support in the form of an Entity Management System. This new requirement to file the foreign ownership notification form is not a one-off; a new form must be filed for every change in participation.
"Secondly, companies have to provide continuous reporting, which may require a lot of information from the overseas jurisdictions, plus the ability to collect it and translate it into Russian GAAP. This requires either additional staff or outsourcing to a service provider. The outsourcing company has to meet several criteria: have experience in Russian GAAP and tax; knowledge and experience in international structuring and financial reporting; and excellent knowledge of English to communicate with the overseas company and provider.
"Working with different outsourcing companies will put extra pressure to submit on time and Russian companies can end up paying extra for the coordination of these services. Ideally, it should be one outsourcing company that has experience on the Russian market, and offices in the overseas jurisdictions, to provide accurate and timely reports."
For more information about compliance with the strict new Russian law, join the webinar co-hosted between TMF Group and Goltsblat BLP LLP.
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