November 2018: CFC rules
Starting from January 1, 2015, the controlled foreign companies (CFC) rules have been introduced into Russian legislation. In the newsletter below you may find the information on CFC rules: controlling person, responsibilities, penalties.
Starting from January 1, 2015, the controlled foreign companies (CFC) rules have been introduced into Russian legislation. The changes imply taxation of undistributed profit of foreign companies (unincorporated foreign structures) to its Russian shareholders – controlling persons.
Prior to the adoption of these rules, the shareholders of foreign companies accumulated profits in the companies’ accounts, due to the absence of its taxation under the Russian legislation. Furthermore, the distribution of such profits as dividends was not advantageous as it was necessary to pay taxes in Russia. Resulting from the CFC rules introduction, it is much more to advantage now for legal entities to distribute dividends (unless the profit falls under the tax exemption). For individuals the effect in both cases will be equal - 13% will have to be paid.
Controlling person is an individual and a legal entity recognized as Russian tax resident directly or indirectly owning more than 25% of the CFC (more than 10%, if the shareholding of all Russian tax residents exceeds 50%), as well as a person having control over a foreign company (unincorporated structure), i.e. its beneficial owner. Earlier, in 2015, the threshold of ownership for the recognition of a controlling person was 50% instead of 25%.
In unincorporated foreign structures such as, for example, a foundation (usually incorporated in Liechtenstein) or a trust, the founder is assumed as the controlling person. At the same time, if after the establishment of the company founder has not reserved the rights to receive and dispose of the property and profit of a foreign structure, he is not a controlling person.
Due to the introduction of the CFC rules, the controlling person has the following responsibilities with respect to the CFC:
- to declare the fact of participation in foreign companies - to submit a notification of participation in foreign organizations;
- to declare the fact of qualifying a foreign company as CFC - to submit a CFC notification (annually);
- to include the CFC profit in the personal income tax / profits tax base - to submit the appropriate tax return (annually);
- to submit financial statements on CFC annually, together with the tax return (audit report is also should be submitted if statutory audit is required by the personal company law or an audit is undertaken by the foreign organization on a voluntary basis);
- pay tax (13% for individuals, 20% for legal entities) on CFC undistributed profits (annually).
Meanwhile, within the framework of the CFC regime, there are a number of concessional provisions that allow not to pay or reduce the amount of tax on undistributed profit of CFC in Russia. The applicability of such provisions should be determined in respect of each situation.
For the failure of obligations in respect of the CFC sufficiently large fines are provided:
Failure to submit a notification of participation in foreign company/ structure (not CFC) - 50 000 RUB;
Failure to submit a notification of CFC / submission of inaccurate notification – 100 000 RUB;
Failure to submit documents on CFC (financial statements / other documents, audit report) - a fine of 100 000 RUB;
Failure to file a tax return - from 5% to 30 % of the amount of unpaid CFC income tax, but not less than 1 000 RUB;
Non-payment / incomplete payment by the controlling person of the CFC income tax - 20 % of the amount of unpaid CFC income tax, but not less than 100 000 RUB (not applicable for tax periods from 2015 to 2017 inclusive) + interest (approximately 10% per annum).
How Mazars can help?
We could conduct the analysis of the tax implications and tax risks in relation to the ownership of the company in accordance with the Russian legislation including the opportunity to apply tax concessions and exemptions.
We could also prepare relevant documents for annual reporting on the CFC, and submit them to the tax authorities on behalf of the controlling person by the power of attorney.