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The last version of the Russian deoffshorization law was approved on 18 November 2014. The law introduces concepts new to Russian tax law: tax residency for legal entities, controlled foreign companies (“CFC”), and expanding Russia’s taxing rights in connection with profit from indirect sales of Russian real estate. The law will be applicable as of 1 January 2015 with a one year transitional period.
 
A CFC is a foreign company or structure which is:

• not a Russian tax resident, and
• is controlled by individuals or legal entities that are Russian tax  resident

A taxpayer that is a controlling person if such person’s participation interest is at least 50% during 2015 and over 25% thereafter (with the threshold falling to 10 percent, if total participation of all Russian tax resident in the CFC is at least 50%).
 
Exempt CFCs are:

• a foreign company resident of a treaty country with exchange of information and has an “effective” tax rate that exceeds 75% of the “average weighted” Russian tax rate (in most instances the effective tax is 15%)
• companies which produce active income of over 80% of their activities
• foreign structures that do not comprise legal entities such as non-profit organizations, that do not distribute profits to shareholders (members, founders) or other persons
• banks or an insurance companies permanently domiciled in a treaty country
• issuers of listed bonds or an organization authorized to receive corresponding interest income; if the interest on them is at least 90 percent of the issuer’s income
• takes part in projects under a product sharing agreement (PSA) provided that income from activities represents at least 90 percent of total income
• the profit of companies participating in certain foreign industrial projects, primarily oil and gas (at least 90% of income). 

CFC profit is taxed in Russia if it exceeds the threshold of RUB 10 million as of January 1, 2017. Transitional thresholds will apply in 2015, RUB 50 million and in 2016, RUB 30 million.
 
Notification requirements
Russian residents must notify the tax authorities of their controlling interests in foreign companies and structures one month after the grounds for such notification arise. The deadline is 20 March of the year following the tax period in which a share profit of a controlling person of a CFC arises.
 
Applicable tax rates
CFC income 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. Russian tax will be imposed only on the profits of CFCs determined in periods starting in 2015.
 
Gains on disposal of shares in property-rich companies
Foreign companies are currently under an obligation to pay Russian income tax on the sale of non-exchange-traded shares/participation interests of a Russian company if more than 50% of the assets of such Russian company constitute real estate situated in Russia.
 
The rules extend this obligation on the sale of shares/participation interests of Russian companies also to foreign companies if more than 50% of their assets “directly or indirectly” constitute Russian real estate.
 
Income from disposal of shares of companies holding Russian real estate (50% capital) is exempt for:

• Shares of listed companies in any recognized stock exchange
• Shares of companies/interest in non-corporate structures with at least 50 shareholders/participants, provided that each of them hold not more than 5%
• Shares (interest, units) in companies owned over five years (continuously)

 Also any exemptions applicable to the relevant income, under certain double taxation treaties (such as that between Russia and the Netherlands, Russia and Cyprus until January 1, 2017) will prevail even if this rule is introduced.
 
Tax Residence of legal entities by Place of Management
Starting from 2015, foreign organizations managed from Russia can be recognized as Russian tax residency. Russian tax residency means that worldwide income of such companies will be taxed in Russia. A company incorporated overseas is to be regarded as tax resident in Russia if:

• it is tax resident in Russia under an international taxation agreement or
• its place of effective management is in Russia.

The rules sets three key criteria and three additional criteria, which, if met, is sufficient for a foreign company to be regarded as effectively managed in Russia:

1. Meetings of the board of directors (or other executive management body) are predominantly (over 50% of meeting in a year) are held in Russia
2. High-level executive management is predominantly performed in Russia
3. The Chief (Executive) officers (persons authorized to perform and responsible for planning, management and control over the entity’s activities) operate predominantly in Russia with respect to the given foreign organization

If the criteria are met in relation to a number of states, additional criteria for determining the place of effective management of a foreign company are as follows:

1. The accounting or management records are maintained in Russia
2. The company's records are managed in Russia
3. The place from which operating and administrative procedures (HR management) relating to the company’s operations (as opposed to any group operations) are issued in Russia

The concepts of the "actual right to receive income" and “actual recipient (beneficial owner) of income”
The Law allows the actual owner of income to apply the provisions of a treaty or domestic law to income paid from a Russian source to a foreign person resident in a treaty jurisdiction which is not the actual owner, provided that in the event of the actual owner being resident in Russia the tax authority in the place of registration of the company which is the source of payment is notified. This applies to both dividends and other types of income. The Law also states that if tax on income of a foreign company is withheld as a result of tax control measures, the actual owner of income may subsequently apply for a refund of excess tax withheld.
 
We would be happy to help if you should have any questions about the potential impact of the new rules on your business from a Cyprus perspective and would be glad to suggest solutions, bearing in mind that we are not Russian tax advisors, therefore any proposals have to be reviewed and confirmed by your local tax consultant.
 

 

More information:

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