A number of very important taxation-related draft laws capable of significantly affecting the position of Russian taxpayers, their participants, and CEOs have been announced recently.
New version of the draft law on CFCs
The RF Finance Ministry has published a new version of the draft law on controlled foreign companies (CFCs), a key element of its widely discussed "anti-offshore package", on its website. The Finance Ministry has submitted this version to the RF Government.
Although the new version of the draft law contains a number of significant changes for taxpayers and the text of the draft law has been substantially reworked in accordance with instructions from the RF Prime Minister, it must be noted that the Finance Ministry has not accepted any of the proposals concerning the general conception of Russian law on CFCs reflected in the alternative draft law by the RF Ministry of Economic Development.
The most significant, in our view, differences between the new draft law and the previous version are as follows:
- the threshold of control over foreign organizations for RF tax residents and their related persons on the basis of direct or indirect participation in the organization has been increased from 10 percent to 25 percent (50 percent until January 1, 2017). However, if the share of direct or indirect participation in such an organization of all RF tax residents and their related persons exceeds 50 percent, a single resident (together with its related persons) exceeding a 10 percent threshold will be sufficient to deem the organization controlled by such resident (after January 1, 2017);
- Russian taxpayers must give notice of equity interests in foreign organizations if their share exceeds 10 percent (25 percent until January 1, 2017);
- the list of foreign organizations/structures that cannot be deemed controlled has been expanded. These organizations/structures include
- In certain conditions – non-commercial foreign structures without the establishment of a legal entity, which do not distribute profit among their participants and beneficiaries;
Banks and insurance companies permanently located in states/territories providing information exchange in accordance with the RF Finance Ministry list;
Issuers of marketable bonds and recipients of interest income on such bonds, subject to compliance with the requirements established in subclause 8 of clause 2 and clause 2.1 of article 310 RF TC, if the income on the said bonds exceeds 90 percent of the income of such foreign organization;
Parties to production sharing agreements, concession agreements and similar agreements with state authorities or state companies of a foreign state;
recognition of a management company or manager (individual) of a foreign investment fund or mutual fund as an RF tax resident does not as such enable the recognition of the said fund as an RF tax resident or CFC of the management company or manager;
a CFC's profit for a reporting period is included in the tax base of the controlling entity if it exceeds 50 million rubles in 2015, 30 million rubles in 2016, or 10 million rubles in subsequent tax periods (the previous version specified 3 million rubles);
for the purpose of determining relatedness in certain conditions (art. 105.2 RF TC), rights conferred by securities received by the taxpayer under repo agreements or securities loan agreements are not considered;
for the purpose of determining the CFC's profit from active operations, the Russian taxpayer has the right to attribute income and expenses in accordance with the CFC's personal law, rather than chapter 25 RF TC;
the obligation of a foreign organization (foreign structure without formation of a legal entity) owning immovable property in the Russian Federation to inform the Russian tax authority of the participants in the said foreign organization (founders, beneficiaries, and managers for a foreign structure without formation of a legal entity) has been introduced. A foreign organization failing to comply with this obligation may be fined an amount equal to 100 percent of the tax payable with respect to its immovable property, pro-rata the share of the participant that did not submit notice, or their number, if the share of such participant cannot be determined;
the list of criteria for recognition of a foreign organization as an RF tax resident has been revised. In particular, if a foreign organization carries out commercial activities using its own qualified staff and assets in the state/territory of its permanent establishment with which the RF has an international treaty on tax matters, or if its principal activity in the said state comprises participation in a production sharing agreement, concession or other such agreement, the said organization cannot be deemed an RF tax resident (in the case of a concession operator, it can, but only at its own initiative).
the right under certain conditions of a Russian beneficiary owner of dividends paid by a Russian organization to a foreign person to have such dividends taxed at the rates established for dividends paid to Russian organizations, including zero rate, has been established. This procedure is applicable if the foreign recipient of the dividends acknowledges that it has no actual right thereto and, as a result, no right to apply the respective RF international tax treaty;
liability for non-payment or incomplete payment of tax as a result of not including CFC profit in the tax base (introduced to art. 129.5 RF TC by the draft law) does not apply in the 2015 – 2017 tax periods (the taxpayer cannot be obligated to pay a fine).
The text of the draft law can be found here.
Draft law on amendments to art. 199 RF Criminal Code
On September 9, a group of Federation Council members (including Federation Council Speaker Valentina Matviyenko) introduced draft law No. 599584-6 to the State Duma providing for amendments to art. 199 of the RF Criminal Code. The draft law has been generally well received by the RF Government and the RF Supreme Court (with certain directions as to required revisions).
The draft law provides for two new qualifying elements for the offense provided for in art. 199 of the RF Criminal Code (tax evasion by an organization) in clause 3 of the article:
commission of this offense using legal entities established using a front;
commission of this offense involving the concealment or misrepresentation of information with respect to CFCs or controlled transactions (art. 199.4 RF TC).
The draft law also proposes an additional penalty for an offense under art. 199.3 of the RF Criminal Code in the form of the confiscation of the property of legal entities, including banks, used to facilitate tax evasion if the founders/participants or executive bodies of such legal entities knew or should have known of the use of the capabilities and property of the said legal entities for the commission of the offense.
In our opinion, the amendment with respect to controlled transactions and CFCs is more of a hint from the state to stop the use of CFCs, rather than the introduction of an effective new legal tool to counter them, since there is nothing to prevent criminal prosecution for failure to include a CFC's profit in a tax return under the current version of art. 199 of the RF Criminal Code, including with qualifying elements (group of persons by prior agreement).
The draft law provides that the amendments will enter into force within 30 days of official publication, which gives rise to the question of how this amendment would play with the transitional provisions in the RF Finance Ministry's draft law on CFCs, which provides that taxpayers will be prosecuted for non-payment of tax on CFC profit only from 2018.