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The Controlled Foreign Companies (CFC) regime introduced recently in Russia, is becoming a significant subject as the first reporting moment gets closer. The existing shareholdings of more than 10% in foreign companies must be reported by the Russian taxpayers to the tax authorities by 1 April 2015.
 
Numerous questions remain unanswered as to the application of the law.
 
Some of these questions relate to the actual regulation. For instance, the misalignment between the tax and the Companies Laws with regards to the requirement of mandatory audited financial statements, in order to qualify for exemption from the CFC status. Further, the operational model for disclosure has not yet been explicitly defined. Questions also come from Russian tax residents who are eager to know what their options are. Obviously, it is widely understood that the traditional offshore jurisdictions and standardised solutions are now both redundant. However, taxpayers are anxious to understand what is next and how they should proceed. Nevertheless, one can decide not to wind down its offshore company but rather redomicile it to an EU jurisdiction like Cyprus.
 
Even though there are still grey areas in the law and more answers are expected from the regulator, the "sit and wait" strategy is inappropriate and risky. Risks include:

• penalties for failing to comply with the CFC regime
   
• administrative charges and criminal liability
   
• Russian tax residency risk

Russian tax residency risk refers to the situation where an entity, although registered in a foreign jurisdiction, is treated as Russian tax resident and therefore taxed by the Russian tax authorities. By law, foreign companies may be deemed Russian tax residents with subject to taxation on worldwide income in Russia if any of the below criteria are met:
 
Main criteria:

• the majority of the board of directors' meetings take place in Russia, or
   
• the management of the day-to-day activities is performed in Russia, or
   
• key management decisions are taken in Russia

Secondary criteria:

• accounting (including management accounting) is performed in Russia, or
   
• document management takes place in Russia, or
   
• operational HR management is exercised in Russia

The above risks need to be considered very carefully and proper arrangements need to be put in place. The below considerations, from our experience, seem to be the most common and material ones:

• cost optimisation: there is no need to bear the cost of a structure that provides no benefits anymore
   
• asset protection: it seems that, following the new regulation, the focus has now shifted from tax minimisation to asset protection
   
• ease of doing business: a holding structure in a foreign jurisdiction might achieve this
   
• tax optimisation: achieved by fully understanding the effective tax rate and how does this compare to the blended tax rate under the CFC rules
   
• redomiciliation of structures
   
• CFC compliance

We have considered a number of options and we can offer potential solutions after consultations with clients. The below options, alone or in combination, are a good starting point when considering how to go about the new CFC regime. Maintaining the group's holding company outside Russia, to achieve asset protection, while moving voluntarily its tax residency to Russia:

1. maintaining the group's holding company outside Russia, to achieve asset protection, while moving voluntarily its tax residency to Russia
    
2. setting up real presence and maintaining tax residency of a holding company registered outside Russia in its home country. While one achieves all benefits of point 1 above, one really needs to closely consider the effective vs the blended tax rate under the CFC rules
    
3. redomiciling your holding company to another jurisdiction which will qualify for the exemption on additional CFC taxation. This way you do not just enjoy the benefits of 2 above but you optimise your tax position
    
4. considering possible solutions through insurance vehicles, trusts and fund structures. Through such solutions you embed your estate plan into your arrangements
    
5. considering new residency by relocating the beneficial owner and changing tax residency to another country. CFC rules apply only to Russian tax residents. Of course such solutions are not for everyone and there are numerous considerations, like family, business activity, etc one should think about.

 
The deadline for submission of notifications related to the deoffshorisation legislation will eventually be deferred from 1 April to 15 June. Submissions of notifications on participation in CFCs must have actual information as at 15 May 2015.  For companies that are liquidated or control ceased prior to 15 June 2015, no notification is filed. The bill is expected to be approved by the Upper House of the Russian Parliament soon.
Meanwhile, in a separate development, it has been reported that the Russian Ministry of Finance is still working on the draft law on taxpayer-friendly amendments to the de-offshorisation legislation. That said, the idea is to adopt the relevant law also by June.
 
It is reported that taxpayer-friendly amendments to the de-offshorisation legislation may include exemption from CFC rules for irrevocable trusts and certain additional exemptions from CFC taxation for active holding companies. Also, Russian domestic tax exemption for dividends received from a non-Russian company if profit of this company has already been subject to CFC taxation and an extension of the number of cases where a CFC may calculate its profit based on its financial statements (as opposed to Russian domestic tax rules).

With rerefences to: Offtax.com 2015

 

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