Russian Federation: Controlled Foreign Companies ("CFC") legislation voted by the state duma
21 November 2014
Posted by: Author: Katerina A. Charalambous
Author: Katerina A. Charalambous (Eurofast Global)
A lot has taken place since the Russian President Vladimir Putin had called for the deoffshorization of the Russian economy in order to repatriate capital being channeled in offshore jurisdictions and to combat tax avoidance.
The Draft Law on Deoffshorization was initially made available for public discussion on the 18th of March 2014 and the floodgates had opened. Since then, extensive discussions between the business community and governmental bodies have taken place both in Russia and abroad as this new Law is expected to significantly affect foreign jurisdictions as well. After a prolonged emotional rollercoaster caused by the various revisions of the initial text, the Draft Law was submitted to the State Duma and it was adopted on the 18th of November 2014 in the second and third readings.
The Law establishes a mechanism for the taxation in Russia of incomes of CFCs, in the case where such companies do not distribute their incomes to the benefit of Russian controlling entities, controlling such companies. Thus, according to the Law adopted, the definition of a CFC refers to companies that are not tax residents of Russia and are controlled by individuals or legal entities that are Russian tax residents.
The "control" over the CFC shall be determined both by the ability of the controlling person 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 authorized capital of the company, of 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 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 defines the foreign companies that shall fall outside the scope of the legislation and their profits will be exempt from taxation in Russia:
- Non-profit organizations that cannot distribute their profits to the shareholders;
- Companies from the Eurasian Economic Union;
- Banks and insurance institutions operating in States that have recently concluded International Tax Treaties and have agreed to exchange information with Russia;
- Companies located in States that have recently concluded International Tax Treaties and have agreed to exchange information with Russia and their effective tax rate is not less than 75% of the tax rate in Russia;
- Companies located in States that have recently concluded International Tax Treaties and have agreed to exchange information with Russia and at least 80% of their income arises from active operating activities;
- Issuers of certain traded bonds (i.e. Eurobonds) if the interest income of such bonds is not less than 90% of the issuer's total income;
- Foreign structures without a legal entity (under certain conditions) on the basis that the structure does not have the option to distribute profit as per its own law and its constituent documents;
- Foreign companies that are involved in certain industrial projects (i.e. under agreements with the foreign governments) resulting in income of not less than 90% of their total income;
The Draft Law was almost unanimously voted by the State Duma (439 votes, zero - against, and two - abstentions) without accepting the amendments proposed by the Government. Now the final word lies with the Federation of Council in Russia however it seems that the possibility for further amendments to the Law may still be in play as commented by the Russian Deputy Finance Minister Sergei Shatalov "I very much hope that we will be able to return in the spring to the CFC law, in order to correct it".
This article first appeared on mondaq.com.