On February 15, 2016 the President of the Russian Federation signed Federal Law No. 32-FZ on Amendments to Parts One and Two of the Russian Federation Tax Code (Regarding Taxation of Profits of Controlled Foreign Corporations and Income of Foreign Entities) (the “Law”).
The Law introduces a number of amendments to the RF Tax Code regarding application of the rules on controlled foreign corporations (“CFCs”) that are intended, as the authors of the Law have noted, to resolve issues of applying those rules in practice and to minimize tax hurdles for honest taxpayers.
The following are some of the key amendments presented by the Law:
- The rules for calculating a CFC’s profit/loss for profit tax purposes have been clarified: for example, the taxpayer now has the right to choose between two ways of calculating profit/loss of a CFC (calculation based on financial statements compiled for the financial year according to the domestic law of the CFC or according to the general rules of Chapter 25 of the RF Tax Code), and clarifications have been made on how to use those methods. Also, the requirement of mandatory audit of statements as a condition for using them to calculate a CFC’s profit has been eliminated.
- Clarity has been brought to the definition of “person beneficially entitled to income” which (a) should be used for “the purposes of applying the RF Tax Code” (but not international treaties of the Russian Federation, as the RF Tax Code previously stated), and (b) includes unincorporated foreign structures (“foreign structures”).
- Double taxation at the level of the controlling party of dividends paid by a CFC from profit that was already included in the tax base of that controlling party in accordance with the rules on CFCs in prior tax periods has been eliminated (provided that the person directly holds an interest in the CFC, according to the literal meaning of the amendment).
- The time limit for liquidating a CFC with both the controlling party and the CFC being able to apply special benefits has been extended until January 1, 2018; in addition, separate grounds for extending the time limit for liquidating a CFC have been provided for in Chapter 25 of the RF Tax Code (they are somewhat similar to the existing grounds for getting personal income tax benefits).
- The criteria have been clarified for exempting the profit of CFCs that are issuers of outstanding bonds (or are authorized to receive interest income on such bonds) in connection with the placement of which Russian and foreign entities acquired debt obligations.
- The procedure for determining an entity’s interest in an organization, which procedure is set forth in Article 105.2 of the RF Tax Code, has been updated: when determining the interest, participation via a controlled foreign structure, inter alia, when such foreign structure has more than one controlling party, is taken into consideration.
- Dividends received from a foreign corporation are exempt from personal income tax and profit tax if the actual source of their payment is a Russian entity, and tax has been withheld on the income subject to Article 312 of the RF Tax Code.
- Assets, including funds, and property rights transferred by a foreign structure to its controlling party are exempted from personal income tax up to the value of the assets contributed to such structure (provided a number of criteria are met).
- Changes have been made to the rules for filing notices about CFCs and about participation in foreign entities (about establishing foreign structures):
- There is now a single ground for filing the notice: the establishment of such a structure, while other grounds for filing the notice (in particular, control over the structure or being beneficially entitled to the income of that structure) have been eliminated.
- The deadline for filing a notice of participation (ceasing participation) in a foreign entity (or of the establishment (termination) of a foreign structure) has been extended from one month to three months from the date the ground for filing the notice arises.
- It is expressly stated that timely submission of the CFC notice by a taxpayer at the request of the tax authority is a ground to release the taxpayer from liability (i) for incomplete payment of the CFC’s profit tax (and also from accruing a penalty) and (ii) for failing to file a CFC notice (even if the notice does not contain information about one or several CFCs), provided that the CFC is deemed a CFC because more than 10% of the CFC is owned and the aggregate “Russian” ownership is more than 50% of the CFC.
- Certain provisions of the RF Tax Code having to do with foreign entities that have received the status of a Russian Federation tax resident have been clarified, in particular, it is now stated that only foreign entities that have independently declared themselves to be tax residents of the Russian Federation are entitled to the zero tax rate on dividends.
The Law enters into force as of the date of its official publication, except for some provisions. In particular, a number of amendments are retroactive, applying to relations that arose as of January 1, 2015 (in particular, the new personal income tax benefits and profit tax benefits, the rules of Article 309.1 of the RF Tax Code, etc.). The rules about exempting material gain from acquiring securities from a CFC (according to Article 217.60 of the RF Tax Code) from personal income tax will enter into force only on January 1, 2016.