On 1 January 2015 a new law was passed amending the Russian Tax Code in relation to the taxation of foreign controlled companies and profits of foreign organisations. Nisha Singh of BLP in Singapore and Artem Toropov of Goltsblat BLP in Moscow summarise the key changes and provide a checklist of steps which other advisors may wish to consider with their clients.
The Key Changes
- By 1 April 2015 Russian tax resident companies and individuals are required to disclose participations in all offshore and other non-Russian companies and structures including trusts (the filing deadline may be extended to 1 September 2015 by the State Duma during the spring session);
- Starting from 2017 undistributed profits of controlled foreign companies and structures (“CFCs”) will be subject to annual Russian tax. This relates to profits generated in 2015 and onwards unless it is distributed among shareholders and beneficiaries in 2016 and each subsequent year;
- New rules are introduced in relation to payments through Cypriot, Dutch, Luxembourgish and other non-Russian companies (“beneficial ownership” concept and “corporate tax residency”), under which having tax residency certificates and holding board meetings abroad is no longer sufficient to benefit from tax treaty benefits and to stand against claims from Russian tax authorities.
Failure to comply with the above rules may result in penalties or even criminal liability.
Below is a checklist of the steps which advisors ought to begin to consider with their clients:
- Review group structures from the viewpoint of non-Russian companies and other vehicles, including holding companies, active business companies and companies owning financial assets;Assess implications taking into account personal tax and currency control residency status of UBOs (resident/non-resident);
- Identify CFCs in group structure and apply the exemption tests to all companies and structures;
- Check, assess and revise, if necessary, corporate governance procedures and board compositions of CFCs and other foreign companies, including but not limited to those disclosed in the foreign ownership notifications, in the light of the new tax residency rules;
- Reconsider membership of Russian tax resident individuals in management bodies of foreign companies, enhance substance of foreign companies and structures;
- Revise structures and arrangements of holding personal assets, including but not limited to trusts and foundations, consider options of making a transition to new transparent structures that are subject to disclosure;
- Consider the degree of actual control over foreign companies and structures(including trusts and foundations) and the implication of such control from the perspective of compliance with the CFC rules;
- Review transfer pricing positions and ensure consistent disclosure in TP and CFC notifications;
- Review and revise back-to-back profit distribution, financing and licensingstructures;
- Prepare confirmations that foreign companies are beneficial owners of Russian source income;
- Initiate a group restructuring if necessary and liquidate certain companies and structures;
- Arrange preparation of CFC reporting packages and calculation of tax base under the Russian tax accounting rules of Chapter 25 of the Russian Tax Code (except for companies in treaty jurisdictions that are subject to mandatory audit);
- Develop policies regarding CFC profit distribution up to the level of Russian taxpayers in compliance with the Russian beneficial ownership rules;
- Consider various options for returning equity ownership held through foreign companies (and CFCs) back to Russia with acceptable level of tax leakage and exposure while retaining key asset protection mechanisms;
- Arrange and file foreign ownership notifications by 1 April 2015 (unless the date for filing the first notifications is extended until a later date).