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®.

Innovation cluster development will be subsidized

The first attempts to increase the marketability of the regions by means of innovation development appeared in 1980’s in North Rhine-Westfalia Land, Germany and in Emilia-Romagna province, Italy. That time these regions were not called clusters. However, successful practice of their using generated the extension of cluster development projects in EU countries, the USA, Canada, Japan, Australia, Brazil, India and South Korea. By the mid zero years of the 21st century more than 1500 clusters appeared. Today there are 34 clusters working just in the Silicon Valley and near San-Francisco.

The world experience of the cluster development shows that the support is won first of all by the projects focused on high technologies and developed mainly (from 60% to 80%) by small and medium business. Exclusive effectiveness of using clusters in the economy is characterized by the high growth rates, increase in the number of companies and significant employment creation within a short time. The bright illustration of this may be Germany, where 7 clusters organized in 1995 – 2006 in the sphere of biotechnologies made it possible to create up to 500 new enterprises, tens of thousands workplaces and  in the end brought the country to world leaders of this direction.

In the current complicating geopolitical environment, lowering oil prices, necessity of import phase-out, the Russian economy ever more pressingly faces the issue of change-over to innovation-based development. It may be promoted to a great extent by using the positive world experience of industrial clusters organization, according to experts.

Thus in 2016 the industrial clusters will be subsidized as part of implementation of Decree of the Government of the Russian Federation as of July 31st, 2015 №779 “Concerning industrial clusters and specialized organizations of industrial clusters”. In this regard just released Draft Decree of the Government of the Russian Federation “Concerning Approval of Rules of the provision from the federal budget to the members of industrial clusters on reimbursement of the part of expenses in implementing joint projects on manufacture of cluster industrial products for purposes of import phase-out” was developed.

Provision of subsidies to members of industrial clusters is planned on reimbursement of the part of expenses in implementing joint projects on manufacture of cluster industrial products for purposes of import phase-out. The subsidization will be carried out by the Ministry of Industry and Trade within the budgetary allocations according to directions for the development of technological infrastructure sites; pursuance of the research and developments related to industrial products manufacture; development of training and career development systems for engineers; holding of exhibitions and participation of the industrial cluster members both in Russia and abroad.

The compulsory conditions of subsidies provision will be non-budgetary financing of the industrial clusters members’ joint projects in the volume of no less than 70% of the expenses total amount and actual financing of projects in the volume of no less than 30% at the time of application filing. At the same time by joint project of industrial clusters members is understood the project with two or more industrial clusters members being unaffiliated; with validated expenses of the members; being coordinated by specialized organization of the industrial cluster and included into the program approved by the general meeting of cluster members.

The rules determine the order of bids admitting, selection of joint projects and making a decision on provision of subsidies. Provision of subsidies will be implemented on the basis of agreement between the Ministry of Industry and Trade of the Russian Federation and the specialized organization.

Rate of the subsidy, provided by one specialized organization of the industrial cluster, won’t be able to exceed 40% of budget obligation limits, stipulated by the Ministry of Industry and Trade of the Russian Federation for the corresponding financial year and corresponding aims.

Effectiveness of using subsidies will be determined by the Ministry of Industry and Trade of the Russian Federation till March 1st of the year following the accounting one. The influence will be exerted by the indicator of non-budgetary funding volume into implementation of the investment projects, number of new workplaces, the share of added value, created by the members of industrial clusters, in the rate of final products output.

Unused in the current financial year residual amount of subsidies will be subject to return to the budget.

According to media reports, selection of members of subsidies distribution will begin in November 2015. The first results will be available in the 1st quarter of 2016. 

For the record:

According to experts, nearly 25 clusters are being created in Russia at the moment. For instance, vehicle and pharmaceutical clusters in Kaluga region; unique aerospace cluster, electro technical, petrochemical clusters as well as toys manufacturing cluster in Samara; medical tool engineering cluster and pharmaceutical cluster in Perm; titanium and electro technical cluster, cluster of transport engineering on manufacture of trains, tramway, railway rails in Yekaterinburg; in Saint-Petersburg - clusters for medical and pharmaceutical industries and radiation technologies, IT-technologies, radio electronics, instrument-making and  communication tools clusters, projects on creation of clusters in the sphere of water cleaning and jewelry manufacture; in Tatarstan – clusters of chemical, petrochemical industries and helicopter engineering in Nizhnekamsk, Naberezhnye Chelny and Elabuga; educational cluster in Tomsk; Academic Town in Novosibirsk as a basis for IT-technologies cluster; development of engineering cluster in Cheboksary on the basis of enterprises manufacturing cables, conductors, automatics and relay protection equipment; creation of IT-technologies cluster with call-centers of telecommunication companies in Rostov region. 

One can get acquainted with the activity of industrial clusters, as well as the list of prospective manufacturers of the products for imports phase-out after subscribing for the Information and analytical system Globas-i®.