November 14, 2014

On October 25 the Russian government approved amendments to the tax legislation concerning de-offshorization of Russian business.

The main purpose is to introduce a new chapter to the Tax Code of Russian Federation related to the controlled foreign company (CFC) and the controlling entity. The rules aim at taxation of undistributed earnings of foreign companies or structures at the level of their controlling persons in the Russian Federation.

An organization or structure (unincorporated, such as trusts, foundations, partnerships) shall be recognised as CFC if it is not a tax resident of the Russian Federation controlled by an entity and (or) physical person, tax resident of the Russian Federation. The amendments provide a certain number of exceptions. As such, a company registered in a double tax treaty state guarantying information exchange and subject to effective tax rate of more than 15% will not be considered as CFC. It is believed that this exception will allow most Dutch entities of Russian companies to be exempt from new tax amendments.

Worthwhile to note that effective tax rate automatically limits rights of beneficiaries registered in Ireland and Cyprus - both jurisdictions rate is 12.5%. The limitations may also be applicable to some Swiss cantons.

However, all these concessions pale before two facts: Ministry of Finance did not agree on increasing of participation percentage in foreign companies (for CFC qualifying purposes) from 10% to 50% and did not cancel the obligation of individuals to notify the tax authorities on the ownership of shares in a foreign company exceeding 1%.

Norms of the law will gradually become more stringent. For example, in 2015 - 2016, a Russian entity shall be recognised as a controlling entity should the share ownership exceed 50%. In 2017 the threshold shall be reduced twice.