On January 1, 2015 in Russia introduced the law on controlled foreign companies (CFCs). According to the provisions of the new regulations, Russians had until April 1 to notify the tax authorities about any such companies with shares exceeding 10%. In the case that shares exceed 50% (25% as of January 2016), and the profit of the company exceed 50 million rubles (30 million rubles as of January 2016), corporate taxes will have to be settled. The tax rate for companies is 20% and 13% for individuals.
According to the Paragon Advice Group and corporate finance experts, offshore schemes in Russia are used by up to 70% of entrepreneurs, thus making the new CFC law an important consideration factor as offshore companies are used not only for tax optimization but also to protect assets. In order to comply with the new regulations, companies have to also consider the administrative requirements; the need to disclose detailed information and corporate documents, the filing of paperwork which is required in order to comply with the Russian standards for foreign companies in tax and accounting aspects, and finally the translation of the documentation to Russian.
To avoid the provisions of the CFC law, many Russian entrepreneurs seek for alternative solutions. As the CFC Act only applies to the Russian tax residents, one of the most popular alternatives according the Paragon Advice Group to is to change their tax residency country to that of a more favourable tax jurisdiction: “We conducted a survey among customers and the majority was inclined to believe that losing their Russian Tax Residency would help in keeping a foreign ownership structure without the tax burden or disclosure issues”, states Mr. Zakharov from Paragon. According to their estimates, about 40% of those who use offshore schemes now consider such possibility.
To cease being a tax resident of Russian, one has to remain outside of Russia for 183 days during the calendar year. Should a Russian citizen cease to be a tax resident of Russian, the CFC laws would not apply to them in respect of the foreign companies that are directly owned by them.
Among the countries with favourable tax regimes, Russians consider the UK, Switzerland, Monaco, Cyprus and Malta: “When choosing a jurisdiction for tax residency, customers look at the level of the tax rate on income as well as the agreements for the avoidance of double taxation with Russia”, states Mr. Voronkov.
There is another option available for those not wanting to spend half the calendar year in another country: one may redomicile their business to a country belonging to the Eurasian Economic Union (EEU) which today includes Russia, Armenia, Belarus, Kyrgyzstan and Kazakhstan. As the law stipulates, any CFC profits from the member countries of the EEU are exempt from taxation - a fact that acts as an additional incentive to conducting business in these countries.
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