Review of key "deoffshorization" concepts in Russia Taxation of controlled foreign companies 03 Taxation of Russian tax resident foreign companies 08 Definition of beneficial owner of passive income 09 Taxation of capital gains from indirect sale of Russian-based real estate 10 Review of key "deoffshorization" concepts in Russia The Russian “deoffshorization” agenda • this person has decisive influence over Apart from settlors/founders, any sets the new rules for taxation of foreign the company’s decisions regarding its other person that exercises control entities’ income. This publication profit distributions. over a foreign non-legal entity provides an overview of the rules. (i.e. has a decisive influence over profit An individual or an entity will not be distribution decisions) may be treated Taxation of controlled foreign recognized as a controlling person as a controlling person if at least one companies of a foreign company, if this person’s of the following conditions is met: Under the controlled foreign direct and/or indirect interest companies (the “CFC”) rules, a tax in the company is held exclusively via • The person is a beneficial owner on the CFC’s undistributed profits may a Russian public company (companies). of the entity’s income; be charged to its controlling person at 13% (if the controlling person A settlor/founder of a non-legal entity • The person is entitled to dispose is a Russian tax resident individual) is normally deemed a controlling person of the entity’s property; or 20% (if the controlling person of such entity. However, the settlor/ is a Russian tax resident organization). founder will not be deemed a controlling • The person is entitled to liquidation/ person, if all criteria below are met: termination distributions of the entity. CFC definition A CFC is a foreign tax resident • The settlor/founder is not entitled The above criteria applicable company or non-legal entity, controlled to receive/demand for, directly to controlling person of non-legal by a Russian tax resident. or indirectly, a share in such entity’s entities also applies to legal entities profit (income); with no share capital (e.g. foundations). A Russian tax resident entity and/ or an individual will be recognized • The settlor/founder may not dispose Taxation of CFC profits as a controlling person of a foreign of such entity’s profit (income); Starting from 2015, CFC profits not company if: distributed are subject to inclusion • The assets were irrevocably in the controlling person’s taxable • this person’s direct and/or indirect transferred to such entity income pro rata to the person’s interest interest in the company exceeds (i.e. the settlor/founder is not entitled in the CFC and are taxable in Russia 25%; or to seek reinstatement of the ownership at 13% (for individuals) or 20% (for legal in the assets transferred, including entities), if the CFC’s profits exceed • this person’s direct and/or indirect in the event of liquidation/termination RUB 10 million1. interest in the company (for of the entity); individuals – jointly with spouses The controlling person’s interest and minor children) exceeds 10%, • The settlor/founder does not exercise in the CFC is determined as at the date provided that overall the Russian control over such entity (i.e. is of the profit distribution decision made tax residents hold more than a 50% unable to exercise decisive influence in the calendar year following the year interest in the company; or over profit distribution decisions when the CFC’s fiscal year ends, or, of the entity). if no such decision has been made, as at 31 December of the year following the year of the CFC’s fiscal year end. 1 RUB 50 million in 2015 and RUB 30 million in 2016. 03 Review of key "deoffshorization" concepts in Russia NB: For the CFC's fiscal periods starting Calculation of CFC profits after 1 January 2017, if a controlling The CFC profits subject to tax in Russia person’s interest in the CFC differs from are calculated based on the financial the share of profit which the controlling statements of the CFC, if at least one person has a beneficial ownership right of the conditions is met: to, it shall be the latter which is taken into account for CFC tax purposes. • The financial statements were audited and the auditor's report The CFC profits subject to does not contain an adverse opinion tax in Russia can be reduced or a disclaimer of opinion. by the amount of dividends paid by the CFC (for non-legal entities, • The CFC is a tax resident of a country by the amount of distributed profits). that Russia has a double tax treaty and exchanges tax information with. The CFC profits are deemed received on 31 December of a year following The CFC profits shall be calculated based the year in which the CFC’s fiscal year on the standalone financial statements ends. prepared under the CFC’s governing laws, if applicable, or under IFRS or any NB: In other words, the first time other reporting standard recognized the taxpayers were obliged to recognize by foreign stock exchanges or depositary the CFC’s undistributed profits (earned organizations. in 2015) for tax purposes was in 2016. The CFC’s profits earned in 2016 fiscal year If the conditions for calculating CFC (if such CFC’s fiscal year corresponds with profits based on its financial statements, the calendar year) shall be subject to tax or if an election is made by the taxpayer, in the controlling person’s hands in 2017. the CFC profits shall be determined in accordance with the provisions The tax liability on CFC profits can be of Chapter 25 “Corporate Income Tax” reduced by the amount of taxes paid of the Russian Tax Code. If the taxpayer by the CFC on its profits. elects to calculate CFC profits under the Chapter 25 rules, such an election must The dividends paid by the CFC from be preserved for five consecutive tax the profits previously taxed in Russia periods. can be exempt from tax in the hands of the controlling person when CFC profits calculation specifics received, if the CFC profits from There are certain specifics of calculating which the dividends are paid were CFC profits subject to tax, irrespective declared by the controlling person of whether they are calculated based and the corresponding tax was on the CFC’s financial statements paid (documentary proof must be or under the rules of Chapter 25 maintained). of the Russian Tax Code, namely: NB: Please note that the above rule applies • Russian-sourced dividends are not solely to dividends. Thus, any distribution included in the CFC profits subject other than in the form of dividends to tax, if the beneficial owner (e.g. a distribution from a trust) made of the dividends is a Russian tax from the previously taxed CFC profits resident controlling person of the CFC; is unlikely to qualify for tax exemption. Therefore, in these cases, a risk of double taxation exists. 04 Review of key "deoffshorization" concepts in Russia • A non-legal entity’s income • Gains (loss) of subsidiaries If the CFC profits are calculated under in the form of property (including and associate entities (except for the rules of Chapter 25 of the Russian cash) received as a contribution from dividends), recognized in the CFC's Tax Code, the calculations shall be made such entity’s founder/settlor and/or financial statements in accordance in an official currency of the CFC’s tax his/her close relatives and/or family with the governing laws (accounting residency jurisdiction and converted into members, or from the CFC that at policies); Russian Rubles at an average exchange least one of the above is a controlling rate based on the rates set for this currency person of, can be excluded from • Provisioning-related expenses by the Central Bank of Russia during the CFC profits subject to tax. and income from provision reversal the calendar year, for which the CFCs However, this rule does not apply (the expenses charged to earlier made profits are calculated. to the transfers originating from provisions are deducted from the CFC profits of the transferor derived profits; if the CFC reports a loss in its The average exchange rate is computed in a fiscal year in which the transferor financial statements, the expenses as an arithmetic mean of the respective was liquidated (dissolved). Similar rules charged to earlier made provisions FX currency exchange rate to the Russian apply to legal entities with no share will add to such loss). Ruble for all days in the respective period. capital (e.g. foundations). NB: The calculation of the CFC profits If the CFC profits subject to tax are In addition, when calculating the CFC based on its financial statements is calculated on the basis of its financial profits based on its financial statements, made in the currency such financial statements and the calculations result the following is not taken into account: statements are denominated in and is in a loss, it may be carried forward subject to conversion into Russian Rubles to reduce future CFC profits subject • Gains (losses) from the revaluation at the average exchange rate based to tax without limitations. Losses of equity stakes, co-op and mutual on the rates set by the Central Bank incurred by the CFC before 1 January investment funds units, securities and of Russia during the period, for which such 2015 can also be carried forward derivatives at fair value in accordance CFC’s financial statements are prepared to the extent they do not exceed with the applicable financial reporting in accordance with its governing laws.