“Deoffshorization” draft law passed by the State Duma Tax Alert

19 November 2014
Tax Alert
“Deoffshorization” draft law passed
by the State Duma
EY’s Russian Tax & Law practice
was named a leading Tax firm in
Russia in “World Tax 2015,” an
annual guide published by the
International Tax Review.
On 18 November Draft Federal Law No.630365-6 "Concerning the
Introduction of Amendments to Parts One and Two of the Tax Code of the
Russian Federation (Regarding the Taxation of the Profit of Controlled
Foreign Companies and the Income of Foreign Organizations)" (the Law)
was passed in the second and third hearings at the plenary meeting of
the State Duma. The current wording of the Law is final. This week the
Law will be submitted to the Federation Council. It is expected that the
Law will be approved by the end of the week and will come into effect
from 1 January 2015.
The text of the Law has not undergone any significant amendments
compared to the Draft Law submitted to the State Duma.
The main amendments concern the duration of the transition period in
which fewer Russian residents are to be recognized as controlling
persons of a controlled foreign company (CFC). The criterion of
recognition of Russian residents whose participation in a CFC exceeds
50% as a controlling person will be applicable only during 2015. From
2016 the threshold will be 25% and an alternative “aggregate”
participation criteria will also be in force (a 10% threshold in cases where
at least a 50% participation interest in aggregate is held by Russian
residents).
In addition certain technical amendments were introduced in the
calculation of the effective tax rate and the blended rate of profits tax
applicable in Russia (corrections of inaccurate references and the
addition of missing formulae) as well as to the duration allowed for taxexempt liquidation procedures.
Below follows a summary of the key provisions of the Law.
1. Controlled foreign company rules
Foreign companies are to be treated as
controlled if:
1) they are not Russian tax residents, and
2) they are controlled by individuals or
legal entities that are Russian tax
resident.
A Russian resident is to be recognized as a
controlling person of a CFC if his participation
interest is at least:
 50% during 2015, and
 from 2016, 10% if his participation interest
together with those of other Russian
residents constitutes a 50% interest in the
CFC and 25% if it does not.
Certain types of controlled companies are to
be exempt from profits tax in Russia. In
particular, the profits tax or income tax base
of controlling persons will not include:
 the profit of active companies (i.e.,
companies that have more than 80% active
income);
 the profit of companies registered in a
country where the effective tax rate
applicable to the CFC is at least 75% of the
blended tax rate of Russian profits tax;
 the profit of certain types of foreign
structures without the formation of a legal
entity (profit will not be tax exempt if the
structure has the option of distributing
profit under its own private law or
foundation documents);
 the profit of banks and insurance
companies if they operate in a territory
that exchanges information with the
Russian Federation,
 the profit of issuers of certain types of
Eurobonds, if the interest income on such
bonds is at least 90% of the issuer’s
income;
 the profit of companies participating in
certain foreign industrial projects, primarily
oil and gas (at least 90% of income).
The effective tax rate is to be compared to the
blended rate of profits tax applicable in Russia.
The threshold for the effective rate is 75% of
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the blended tax rate calculated for two types
of income:
1) the CFC's total profit, minus dividends
paid and dividends received by the CFC
or zero if the result is negative (taxed
at a rate of 20%) and
2) dividends received by the CFC (taxed
at a rate of 13%).
The profits of CFCs registered in jurisdictions
that have a tax treaty with Russia are to be
calculated based on the company's financial
statements prepared in accordance with its
personal law (provided that the financial
statements are subject to a statutory audit). In
all other cases, profits are to be calculated in
accordance with the Profits Tax Chapter of the
Russian Tax Code.
The Law permits a CFC's losses to be carried
forward indefinitely provided that the
controlling entity submits a CFC notification
for the period in which losses arose.
The Law explicitly allows individuals and legal
entities to offset tax paid on a CFC's profit
under the laws of a foreign country and/or
Russia.
During a transitional period, nonpayment or
incomplete payment of tax due to failure to
include CFCs’ profits in the tax base in 2015
to 17 will not entail criminal liability, provided
that the resulting loss to the Russian budget is
compensated in full.
The deadline for notifying the tax authorities
of participation in a foreign company is one
month after the grounds for such notification
arise.
The deadline for notification of a CFC is 20
March of the year following the tax period in
which a share profit of a CFC is required to be
taken into account for a controlling person.
Therefore, the first deadline for notification of
a CFC is 20 March 2016.
If grounds for notification of participation in
foreign companies have arisen before the Law
enters into force, the tax authorities must be
notified by 1 April 2015.
2. Determination of tax residency of foreign
legal entities by place of management
If any of the following criteria is met a
company's place of effective management will
be considered to be Russia:

A relative majority of board meetings
(more than in any other country) are
held in Russia;

The company's executive body or bodies
regularly conduct company-related
activities in Russia (activities are not
regarded as regularly conducted in
Russia if they are carried on there to a
substantially lesser extent than in
another country or countries);

The company's chief (executive) officers
primarily perform their executive
management duties in Russia.
Several exclusions from tax residency are
provided:
 foreign companies incorporated in the
jurisdictions that have tax treaties with
Russia under which the companies are
treated as tax resident in the jurisdiction of
incorporation;
 foreign companies whose core activity
involves participation in production sharing
agreements, concession agreements,
licence agreements or service agreements
on a risk basis or other similar agreements
with the government of the corresponding
state (territory) or with institutions (State
authorities, State companies) authorized by
that government;
 foreign holding companies subject to
several conditions being met;
 foreign companies that are operators of
new offshore hydrocarbon deposits (shelf
projects) or direct shareholders
(participants) in the operators of such
deposits.
3. The concepts of the "actual right to
receive income" and “actual recipient
(beneficial owner) of income”
The Law allows the actual owner of income to
apply the provisions of a treaty or domestic
law to income paid from a Russian source to a
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foreign person resident in a treaty jurisdiction
which is not the actual owner, provided that in
the event of the actual owner being resident in
Russia the tax authority in the place of
registration of the company which is the
source of payment is notified. This applies to
both dividends and other types of income. The
Law also states that if tax on income of a
foreign company is withheld as a result of tax
control measures, the actual owner of income
may subsequently apply for a refund of excess
tax withheld.
4. Miscellaneous
 The Law includes a provision that would
exempt income in the form of property
transferred to a Russian company without
consideration by a shareholder (participant)
individual or legal entity that has an equity
interest exceeding 50%. Property received
from a foreign company must pass an
additional test to qualify for exemption
under the Law; the foreign company must
not be permanently resident in a
jurisdiction blacklisted by the Ministry of
Finance.
 Income from sales of shares in companies
more than 50% of whose assets consist,
directly or indirectly, of immovable
property in Russia (subject to certain
exceptions) is to be taxable for Russian
nonresidents and for residents. It should be
noted that the mechanism for tax payment
is not established in the Law and remains
unclear.
 For the purposes of calculating an entity's
interest in a CFC in order to establish
whether it is a controlling person, any
interests held via foreign structures that
are not legal entities is to be taken into
account.
 The risk that a CFC's profits will be subject
to double taxation cannot be ruled out if
dividends are paid out of retained earnings
of prior years as a CFC's retained earnings
are included in the tax base of the Russian
controlling person and subject to profits
tax/personal income tax in Russia. If
dividends are subsequently paid out of this
profit, such dividend income will be taxable
as well.
WHAT DOES THIS MEAN FOR
RUSSIAN TAXPAYERS?
It is extremely likely that the Law will enter
into force on 1 January 2015. It will apply to
CFCs' profits beginning with periods starting in
2015. The Law has been passed by the State
Duma in all three readings. Therefore,
preparations for the changes in tax law should
be initiated as a matter of urgency if not
already underway.
We will be glad to assist in such areas as:
 Analyzing a group's corporate structure in
order to identify companies affected by the
CFC rules, including the proposed
exemptions;
 Calculating the effective/blended tax rate
for CFC purposes and the taxable profit of
CFCs in compliance with the new
legislative requirements (including
determining the percentage of a CFC's
passive income)
 Preparing and submitting CFC notifications
and notifications of participation in foreign
companies;
 Introducing centralized collection of
information needed to calculate CFCs'
profits for Russian profits tax or VAT
purposes, including assessing the need to
engage an outside provider to coordinate
this process;
 Assessing the quality of reporting in
countries where CFCs are located
(including for previous periods) as well as
the need to engage an outside provider to
check and/or prepare reporting in these
countries (including for any previous
periods in respect of which losses may be
used);
 Analyzing the need to outsource reporting
in accordance with the standards of the
countries in which CFCs are located
(applicable to CFCs whose reporting is
outsourced);
 Implementing your own or acquired
software to support these informationgathering and reporting processes;
4
 Review of the foreign component of
holding, financial, licensing and
commercial structures as well as the
management structure of a group's foreign
assets in the light of the provisions of the
Law;
 Development of foreign or Russian
structures as an alternative to back-toback ownership, financing and licensing
structures;
 Review of foreign corporate structures,
with a view to streamlining them and
reducing the overall costs involved in
administering them;
 Development of options for consolidating
assets at the level of companies that have
a sufficient presence at their location;
development and implementation of step
plans;
 Formalized business valuation, as needed
for restructuring in certain jurisdictions in
order to calculate any exit tax (or the
equivalent of exit tax);
 Development of solutions to address
deficiencies in the current system of
management, business processes and
document flow between Russian and
foreign group companies; assistance in
implementing the solutions;
 Review of personal holding mechanisms
and foreign structures that are not legal
entities; calculation of the overall tax
burden for various options;
 Analysis of the tax implications of
restructuring for a business's beneficiaries
(Russian tax residents);
 Analysis of the ownership structures of
beneficiaries' personal assets from the
point of view of legal and tax risks;
calculation of the overall tax burden for
various options;
 Development of positions on reviewing the
tax parameters of joint ventures in view of
the new rules.
Inquiries may be directed to one of the following executives:
Moscow
Director of Tax
Peter Reinhardt
+7 (495) 705 9738
Tax Policy & Controversy
Alexandra Lobova
Sergei Nosov
Energy Chemical & Utilities
Richard Lewis
Victor Borodin
Alexander Smirnov
+7 (495) 705 9704
+7 (495) 755 9760
+7 (495) 755 9848
Technology, Media & Telecommunications
Vladimir Abramov
+7 (495) 755 9680
Ivan Rodionov
+7 (495) 755 9719
Yulia Timonina
+7 (495) 755 9838
Financial Services
Alexei Kuznetsov
Irina Bykhovskaya
Ivan Sychev
Maria Frolova
+7 (495) 755 9687
+7 (495) 755 9886
+7 (495) 755 9795
+7 (495) 641 2997
Transfer Pricing and Tax-Efficient
Supply Chain Management
Evgenia Veter
+7 (495) 660 4880
Steve Cawdron
+7 (495) 287 6536
Maxim Maximov
+7 (495) 662 9317
Human Capital
Zhanna Dobritskaya
Anton Ionov
Ekaterina Ukhova
Sergei Makeev
+7 (495) 755 9675
+7 (495) 755 9747
+7 (495) 641 2932
+7 (495) 755 9707
Transaction Tax
Yuri Nechuyatov
Richard Lewis
+7 (495) 664 7884
+7 (495) 705 9704
Customs
Yuriy Volkov
+7 (495) 641 2927
Legal Services
Dmitry Tetiouchev
Tobias Luepke
Alexey Markov
Sergey Stefanishin
Georgy Kovalenko
Michael Makhotin
Oleg Shumilov
+7 (495) 755 9691
+7 (495) 641 2935
+7 (495) 641 2965
+7 (495) 755 9872
+7 (495) 287 6511
+7 (495) 648 9627
+7 (495) 662 9338
Industrial Products
Andrey Ignatov
Yuri Nechuyatov
+7 (495) 755 9764
+7 (495) 664 7884
Indirect Tax
Victor Borodin
Vitaly Yanovskiy
+7 (495) 755 9760
+7 (495) 664 7860
International Tax Services
Vladimir Zheltonogov
Alexei Ryabov
Marina Belyakova
Andrey Vostokov
Evgeny Nepomnyashchikh
+7 (495) 705 9737
+7 (495) 641 2913
+7 (495) 755 9948
+7 (495) 755 9708
+7 (495) 648 9626
Real Estate, Hospitality & Construction
Yulia Timonina
+7 (495) 755 9838
Svetlana Zobnina
+7 (495) 641 2930
Retail and Consumer Products
Alexandra Lobova
+7 (495) 705 9730
Dmitry Khalilov
+7 (495) 755 9757
Yuko Fite
+7 (495) 755 9759
Tax Accounting and Risk Advisory Services
Alexei Malenkin
+7 (495) 755 9898
Ivan Rodionov
+7 (495) 755 9719
Tax Compliance
Larissa Gorbunova
+7 (495) 705 9730
+7 (495) 755 9874
Ekaterinburg
Tax and Legal Services
Alexey Korabelnikov
+7 (343) 378 4900
Krasnodar
Tax and Legal Services
Elena Tikhomirova
+7 ( 812) 703 7800
St. Petersburg
Tax and Legal Services
Dmitri Babiner
Anna Kostyra
+7 (812) 703 7839
+7 (812) 703 7873
+7 (495) 755 9901
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a
substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY
organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in
this publication. On any specific matter, reference should be made to the appropriate advisor.
© 2014 Ernst &Young (CIS) B.V.
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© 2014 Ernst & Young (CIS) B.V.
All Rights Reserved.
This publication contains information in summary form and is
therefore intended for general guidance only. It is not
intended to be a substitute for detailed research or the
exercise of professional judgment. Neither EYGM Limited nor
any other member of the global Ernst & Young organization
can accept any responsibility for loss occasioned to any
person acting or refraining from action as a result of any
material in this publication. On any specific matter, reference
should be made to the appropriate advisor.