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25 November 2014

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New Russian CFC Rules Signed into Law

Russia's new controlled foreign company (CFC) rules were signed into law by Russian President Vladimir Putin on 14 November 2014. Federal Law No. 376-FZ, introduces several amendments to the Russian Tax Code regarding the taxation of the profit of CFCs. The following summarizes the main rules introduced by the new law.

Controlling Person

Under the new rules, criteria for determining if a Russian resident is a controlling person of a CFC will be transitioned as follows:

  • In 2015, a Russian resident with 50% or greater participation in a foreign company will be deemed a controlling person
  • In 2016 and subsequent years, a Russian resident with 25% or greater participation in a foreign company will be deemed a controlling person - a 10% participation rule also applies in the case of an aggregate participation of 50% or more in a foreign company by Russian residents

Conditions for CFC Profit Exemption

CFCs meeting any of the following conditions will be exempt from taxation in Russia:

  • Companies whose income is comprised of at least 80% active income
  • Companies registered in a jurisdiction with an effective tax rate applied to the CFC of at least 75% of the comparable Russian tax rate
  • Certain foreign structures without the formation of a legal entity as long as the structure does not have the option of distributing profit under its own private law or foundation documents
  • Bank and Insurance companies located in jurisdictions with which Russia has entered into a tax information exchange agreement
  • Issuers of Eurobonds when the income from such bonds represents at least 90% of the issuers income
  • Certain qualifying companies engaged in foreign industrial projects, including oil and gas projects, and the income from such projects represents at least 90% of the companies income

Effective Tax Rate Comparison

When comparing the effective tax rate on the profits of the CFC with the Russian tax rate, the Russian rate is determined as:

  • Total profits of the CFC less dividends paid and received (0 if negative) at a rate of 20%, and
  • Dividends received by the CFC at a rate of 13% (expected increase to 13% from 9% in 2015)

When the effective tax rate applied to the CFC in its registered jurisdiction is not at least 75% of the comparable Russian tax rate, the CFC rules apply unless the foreign company is otherwise exempt (above).

CFC Notification Requirements

Russian residents are required to provide notification to the Russian tax authority within one month after the conditions arise whereby the resident is deemed a controlling person of a CFC. For residents that would be considered a controlling person prior to the entry into force of the new rules (1January 2015), notification must be provided by 1 April 2015.

Computation of CFC Profit, Carry Forward of Losses, and Tax Offset

The profits of a CFC will be computed based on the financial statements of the company if the statements are subject to mandatory audit and the CFC is tax resident in a jurisdiction that has entered into a tax treaty with Russia. Otherwise, the profit will be computed in accordance with Chapter 25 (Tax On The Profit Of Organizations) of Russia's Tax Code.

CFC loss may be carried forward indefinitely as long as notification of the CFC has been provided in the tax period the losses arose.

Controlling persons are allowed to offset tax paid on a CFC’s profit under the laws of a foreign country and/or Russia.

Tax Residence Determination

The determination of tax residence in Russia for the purpose of the CFC rules is based on the place of effective management, which is determined to be Russia if one or more of the following conditions are met:

  • A majority of the board of director meetings are held in Russia
  • Executive management is ordinarily exercised in Russia, or
  • The chief officers carry out their management functions in Russia

Certain exclusions from tax residency are provided, including:

  • Foreign companies incorporated in jurisdictions that have entered into a tax treaty with Russia under which companies are treated as tax resident in the jurisdiction of incorporation
  • Foreign companies whose primary activities involve participation in production sharing agreements, concession agreements, license agreements or service agreements on a risk basis or other similar agreements with the government of the corresponding state or with institutions authorized by that government
  • Foreign holding companies subject to certain conditions
  • Foreign companies that are operators of new offshore hydrocarbon deposits or direct shareholders in the operators of such deposits

Entry into Force

The new law enters into force 1 January 2015.

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