Taxation of controlled foreign companies

Information agency Credinform has often covered the subject of deoffshorization of the Russian economy. In connection with the adoption of a number of legislative acts in 2014-2015 it will be useful to revert to this actual topic and describe briefly the adopted laws.

The Federal Law №376-FZ of November 24, 2014 «On Amendments to Parts I and II of the Tax Code of the Russian Federation (regarding the taxation of profits of controlled foreign companies and profits of foreign companies)». This law has obliged the organizations registered in foreign countries, which profit exceeds 10 mln RUB, to pay income tax to the Russian budget. In case of nonpayment or understatement of tax by hiding a part of income, significant fines are prescribed, which will take effect from the tax period for 2018. Also, the criteria are specified to determine a controlled foreign company and a foreign structure with no corporate status, for which it is necessary to pay taxes on the territory of Russia. The law has obliged Russian citizens to report their participation in foreign companies to tax authorities.

The Federal Law №150-FZ of June 8, 2015 «On Amendments to Parts I and II of the Tax Code of the Russian Federation and the Article 3 of the Federal Law «On Amendments to Parts I and II of the Tax Code of the Russian Federation (regarding the taxation of profits of controlled foreign companies and profits of foreign companies)». This law has introduced the concept of controlled foreign company and controlling person. Controlled foreign company is recognized as a foreign organization, that is not registered in Russia, but controlled by a person, who is a Russian tax resident. Controlling person is recognized as a Russian citizen or a legal entity, whose share in a foreign company is 25% or more. If a person together with marriage partners and minor children owns a half of foreign business, this share is dropped to 10%.

It is introduced the concept of "place of real management" of a foreign company. If the company is managed from Russia and by Russian tax resident, it is determined the mechanism of profit taxation of this organization.

The profit of a controlled foreign company is exempt from tax, if the organization is a non-profit one or it is established in accordance with the law of a state-member of the Eurasian Economic Union.

The law prescribes that by voluntary declaration of foreign assets, an owner–natural person is exempt from tax payment by re-registration of property from nominee to its own name. The effect of this so-called "capital amnesty" is determined until December 31, 2015 by the Federal Law №140-FZ of June 8, 2015 «On the voluntary declaration of assets and bank accounts (deposits) by individuals and on amendments to certain legislative acts of the Russian Federation». Since July 1, 2015, the Federal Tax Service has been taking special declarations, the submission of which is prescribed by this law.

At the present time, for the development of a legal base on deoffshorization the Federal Tax Service (FTS) has prepared the draft of the Order, which declares the "List of states and territories, which do not ensure the exchange of information for tax purposes with the Russian Federation." The list includes 119 countries, which are not considered as traditional offshore companies, with which there is an agreement on the exchange of tax information, however, its quality is not satisfactory for the Russian part. Among them are the tax jurisdictions, for example, Austria, Great Britain, Israel, Switzerland and Estonia.

Earlier, the «List of states and territories, that provide preferential tax treatment of taxation and (or) do not require the disclosure of information by financial operations (offshore zones)» has included only 40 offshore. The list was approved by the order №108N of the Ministry of Finance of the Russian Federation from November 13, 2007.

If foreign structures of Russian companies, which accumulate profit transferred from Russia in the form of passive income, operate in the countries, that are got shortlisted in the list of the FTS, then natural and legal persons-members of these structures are obliged to pay the tax of 13% or 20%, respectively, from the retained earnings to the Russian budget.

According to experts, in the case of the adoption of this List of restrictions for Russian organizations, in particular of banking and insurance sector, as well as mining companies, they may be deprived of the opportunity to receive a benefit on the effective income tax rate, at which a controlled foreign company pays tax abroad. These rules apply to profit earned already in 2015. 

In general, the adopted innovations are focused on reducing of a number of companies, which are registered in countries with lower tax rates, that can significantly affect the increase in tax revenues to the Russian budget.

To review on-line the information about foreign companies, including enterprises with Russian participation, as well as to get to know special features of the disclosure of corporate information in all countries of the world, you can by making a subscription to the information and analytical system Globas-i®.