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One of the most discussed legislative initiatives of 2014 has become a law. The changes effected by the new law cover the following areas:
- Controlled foreign company rules (CFC)
- Determination of tax residency of companies
- The concept of “beneficial ownership”
- Indirect sale of immovable property
Below we provide a summary of new rules to be applied starting from 2015. Please note it is possible the law may be amended in 2015.
Controlled Foreign Corporation (“CFC”) rules
The new CFC rules introduce Russian taxation of profits of foreign companies and non-corporate structures (including trusts) which are not Russian tax residents, but which are controlled by Russian tax residents (controlling parties). A controlling party of a CFC means:
(i) an individual or legal entity with a direct or indirect interest in the CFC (for individuals — jointly with spouses and minor children) holding over 25%. For 2015 there will be a transitional period, during which the participation share threshold of 50% will be applied
(ii) over 10%, if total participation interest of all Russian tax residents in the CFC is over 50%
Profits of certain CFCs will not be taxed in Russia, while the obligation to provide respective notification will remain in place. The list of exceptions includes:
(i) a CFC permanently domiciled in a treaty country, except for those countries that do not exchange tax information with Russia and has an effective tax rate of at least 3/4 of average weighted Russian tax rate or
(ii) banks and insurance companies operating in a territory that exchange information with the Russia
(iii) active companies, ie companies which have at least 80% of their income from active business. Passive income is widely defined and includes services income
The income of the CFC will be subject to a 20% rate (if the CFC is controlled by a legal entity) and a rate of 13% (if it is controlled by an individual). The amount of the profit can be reduced by the dividends paid out of the CFC’s profits. Russian tax will be imposed only on the profits of CFCs for the years in 2015. Such profit will be declared for the first time by Russian legal entities in 2017 in their corporate income tax returns for 2016.
The CFC profit is taxed in Russia if it exceeds the threshold of RUB 10 million (for 2015 the threshold is RUB 50 million and for 2016 RUB 30 million).
The profits of a CFC to be taxed in Russia will be determined on the basis of financial statements prepared in accordance with CFC country’s law on the condition that these financial statements are subject to a mandatory audit under the CFC's country’s law and that the company is permanently domiciled in a treaty country. In all other cases financial statements should be prepared under Russian Tax Code rules.
Taxpayers will have to file several types of notifications to the tax authorities.
Foreign companies and structures owning taxable property in Russia ie real estate in Russia, will have to report on their participants (founders, beneficiaries, managing parties, etc.).
Tax residency rules
Tax residency rules for legal entities changed. Starting from 2015, foreign organisations managed from Russia can be considered as Russian tax residents. If a company is considered to be Russian tax resident, it means that the worldwide income of such companies will be taxed in Russia.
The new rules set three basic criteria for determining place of management:
(i) a relative majority of meetings of the board of directors takes place in Russia
(ii) the company’s executive body regularly conducts company – related activities in Russia
(iii) the company’s chief executive officer primarily performs executive management duties in Russia)
There are also three additional criteria for determining place of management.
“Beneficial ownership” concept
The ability to apply lower tax rates under a DTT will depend on whether the company receiving the income is the beneficial owner of such income, i.e. whether it has the right to determine its future economic use.
In order to answer this question, the entity's functions, powers, assumed risks and how the income was actually transferred (fully or in substantial part) to third entities are considered.
The income in question includes dividends, interest and royalties.
Indirect sale of immovable property
All sales of Russian immovable property in a form of sale of shares of Russian and foreign companies owning such property, regardless of a number of ownership levels, will be taxed. However, the law does not provide a specific mechanism for paying this tax in Russia.
For example, in a situation when one foreign company sells shares of a second foreign company, which indirectly owns immovable property in Russia (a threshold of 50% of assets applies), to a third foreign company, the Russian tax on income received from sale must be paid, but the procedure of payment is not clear.
