On January 1, 2015 the law of the Russian Federation, No. 376-FZ of November 24, 2015 “On introduction of amendments into Parts One and Two of the Tax Code of the Russian Federation” (hereinafter, the “Law”) came into force. The Law is designed to prevent the abuse of “offshore” business structures and obligates Russian Federation tax residents to notify Russian tax authorities of foreign-registered companies they control and to pay taxes on those companies’ profits.
1. Terms and Definitions
1.1. The Law introduced new terms into the Tax Code of the Russian Federation (“Tax Code.”) These terms are: “foreign controlled company” (“FCC”), “controlling person”; and, “tax resident of the Russian Federation” (“Tax Resident”).
1.2. A FCC is a foreign company meeting both of the following conditions:
- the company is not a tax resident of the Russian Federation; and
- the company is controlled by legal entities and/or individuals that are Tax Residents.
A foreign structure which does not have the status of a legal entity is also deemed a FCC subject to taxation.
1.3. A foreign company that meets the criteria of a FCC, may consent to being considered a Tax Resident.
1.4. “Controlling persons” of a FCC includes:
- An individual or legal entity whose ownership of company share capital exceeds 50% for the year 2015. After January 1, 2016, the percentage is 25%; or
- An individual together with their spouses and children under 18 years, or a legal entity whose ownership of company share capital exceeds 10% if the share capital held by all Tax Residents, exceeds 50% of company share capital.
1.5. The following organizations are deemed Tax Residents:
1) Russian legal entities;
2) Foreign companies based upon international treaty; or
3) Foreign companies managed from the Russian Federation.
2. Notification To Tax Authorities
2.1. Taxpayers must notify tax authorities of:
- Their participation in a FCC if the share of their participation exceeds 10%;
- The establishment of foreign structures that do not possess the status of a legal entity, as well as of exercising control over such structures or of the actual right to receive profits obtained from such structures, including cases when the taxpayer acts as a founder of the structure or a person who has the right to receive distributions from the structure;
- FCCs for which they act as Controlling Persons.
2.2. Foreign organizations as well as foreign structures not having the status of a legal entity which have assets in the territory of the Russian Federation subject to Russian taxation must provide tax authorities with information regarding the participants in the foreign organization such as the founders, beneficiaries and managers.
3. Taxation Profit, Tax Rate
3.1. The FCC’s profits are treated as the Controlling Person’s profits based upon his percentage of shares in the FCC. The profits are included in the Controlling Person’s taxable base. FCC profits are taxable when they exceed RUR 50 million per year in 2015; RUR 30 million per year in 2016; and RUR 10 million per year after January 1, 2017.
3.2. A FCC’s profit is defined as the company’s gross revenue before taxation. The following types of revenue are considered:
- Dividends, received by the FCC;
- Revenue received as a result of distribution of profits or assets of organizations, other persons and organizations and other persons and their associations, including distribution in the course of liquidation thereof;
- Interest received from debt obligations of any sort, including profit-sharing bonds and bonds convertible into shares;
- Revenue from the sale of shares and/or concession of rights with regard to a foreign organization that do not have the status of a legal entity in accordance with foreign law;
- Revenue from operations with financial instruments (derivatives);
- Revenue from the sale of real estate;
- Revenue from the lease or sublease of assets;
- Revenue from mutual funds, including paying off of such investment shares;
- Revenue from the performance of any consultancy, legal, accounting, auditing, engineering, advertising, marketing services, procession of information services and research and development services;
- Revenue from out-staffing services and other kinds of revenue alike to the above stated revenues.
3.3. An FCC’s profits are not taxable, if at least one of the following conditions is met:
- It is a non-profit organization that does not distribute profits between shareholders, participants, founders or other persons in accordance with personal law of the foreign company;
- It is established in accordance with laws of a participant of the Eurasian Economic Union;
- It is a resident of a state or territory with which the Russian Federation has an international treaty on taxation matters, excluding states or territories that do not ensure exchange of information for the purposes of taxation with the Russian Federation, and the effective rate of taxation of the profits of such foreign companies is not less than 75% of the average weighted profit tax rate. The effective tax rate is defined as the quotient of division of the sum of the amount of profit tax calculated by the foreign company and its subdivisions in accordance with personal law of the foreign company and the amount of profit tax withheld from the profit of such foreign company at the source of payment of such profit by the amount of profit of the foreign company.
- It is a resident of a state or territory with which Russian Federation has an international treaty on avoidance of double taxation, excluding states or territories that do not ensure the exchange of information for the purposes of taxation with the Russian Federation, and the share of revenue of such FCC is taken into account for the purpose of calculating its taxable profit does not exceed 20% of its gross revenue.
- It is a foreign structure that does not have the status of legal entity meeting all of the following conditions:
The founder of the structure does not have the right to receive assets of the structure in accordance with the personal law of the structure and its constitutive documents;
rights of the founder of such structure linked to his personal title in the structure cannot be transferred to another person after establishment of the structure in accordance with the personal law of the structure and its constitutive documents, excluding cases of inheritance or universal legal succession; and
The founder of such structure does not have the right to receive directly or indirectly any profit of the structure, distributable among its participants (shareholders, trustors etc).
- It is a bank or insurance company performing activities in accordance with its personal law on the basis of a license or another special permission for performance of banking or insurance activity, and it is permanently residing in a state or territory with which Russian Federation has an international treaty on taxation matters, excluding states or territories that do not ensure the exchange of information for the purposes of taxation with the Russian Federation;
- It is an issuer of publically offered bonds or an organization entitled to receive interests revenue due to be distributed on the publically offered bonds, or an organization – successor of rights and obligations under publically offered bonds issued by another foreign company, provided that the share of such profit within a financial year is not less than 90% of all profit of the organization within the financial year;
- It participates in carrying out of projects in accordance with agreements on product sharing, concession agreements, license agreements or service agreements or contracts or alike agreements on product sharing, provided that the share of such profit within a financial year is not less than 90% of all profit of the company within the financial year;
- It is an operator of a new sea deposits of raw hydrocarbons or an immediate shareholder or participant of an operator of a new sea deposit of raw hydrocarbons.
4. Responsibility For Violations Of The Law
4.1. The failure of a Controlling Person to provide tax authorities of the FCC’s financial statements and an auditor’s report with regard to the financial statement (if auditing of financial statements is compulsory in accordance with the personal law of the FCC) or knowingly providing false information, shall be punished with a fine of RUR 100,000 fine.
4.2. The illegal failure by a taxpayer or FCC to provide or to delay to provide to tax authorities information regarding the participants of the FCC shall be punished with a fine equal to 100% of due to be paid by the FCC regarding to asset belonging to it.
4.3. The failure to pay or make partial payment by the Controlling Person or taxpayer (either an individual or a legal entity) of the profit tax due or the failure to include the share of profit of a FCC into the Controlling Person’s taxable base shall be punishable by a fine equal to 20% of the amount of the profit tax due, but not less than RUR 100 000. This provision becomes effective in 2018).
4.4. The illegal failure to provide tax authorities with notice of FCC or providing inaccurate information by the Controlling Person shall be punished with a fine of RUR 100,000 for each FCC for information was not provided or inaccurate information was provided.
4.5. The illegal failure to provide tax authorities with a notice of participation in foreign organizations as prescribed by law; or providing notification of participation in foreign organizations containing inaccurate information, shall be punished with a fine of RUR 50,000 for each foreign organization with regard to which information was not provided or inaccurate information was provided.
4.6. Criminal responsibility for tax evasion committed through the failure to include profits of FCCs into the taxpayer’s taxable base shall not apply from 2015 through 2017, provided that the damage hereby caused to the budget of the Russian Federation is paid for in full.
Limited Purpose Use
The material in this outline is intended for general information purposes only. As such it is not intended to fit for any particular purpose. Before proceeding with any business or commercial decision or investment, you may obtain the advice of independent investment firms, financial, legal and tax advisors, should you wish to do so.