The amended draft law regarding controlled foreign companies and other anti-offshore measures has done most valuable changes in the field of foreign tax structures and tax avoidance. This law has publicly available on 27 May, 2014. It highlights some important points, such as:
- Controlled foreign companies;
- Foreign assets notification;
- Beneficial ownership;
- Determination of residency by company’s place of management;
- Taxation of indirect real estate sale.
Controlled foreign companies
In contrast with the previous draft law, discussions concerning trusts involvement in the scope of controlled foreign companies (CFC) legislation have been suspended and they fall within the scope of the legislation and are directly stated now in the draft law.
Additionally, methods for determination of companies coming with the provision of law have been changed. Instead of the ‘black list’ principle, the principle of the law enforcement in respect to all companies excluding separate groups of companies is being introduced now.
According to the new rule, the following companies will not be subject to CFC rules:
a) Company and their subsidiaries which have undergone listing procedure and are listed on exchange from the list of the Central Bank or the Ministry of Finance of the Russian Federation.
b) Resident companies of the Eurasian Economic Union and Russia, Belarus and Kazakhstan are within its members.
c) Companies from the ‘white list’ paying taxes efficiently at the rate no less than 15%.
Foreign assets notification:
This law describes Russian tax resident has to pay CFC income tax remains at the level of 10% and gives the importance to notice any events of ownership of foreign company for 1% or more, or control over a company/structure or similar structure, other than the ownership of foreign companies.
Beneficial Ownership:
The amendments determine the beneficial owner (individual/entity) can use and disclose income under considering the functions and risks for individual/entity. The individual/entity will not be introduced as a beneficial owner and will not be able to use benefits under the international tax agreements if they have limited authority and exercises only intermediary functions without exercising other functions or bearing risks. Burden of proof will be actually charged on the tax agent paying income.
It must be noted that the current rules relates not only the benefits that directly provides the rules for the status of beneficial owner, but also it accumulates all benefits under the international tax agreements. It counts as technical shortcomings, but in practice similar approach of Ukrainian legislator has resulted in application of the present test, particularly, Fenix-Capital and Niko cases. This decision is to review the features providing foreign companies with the real functions and risks, to allocate qualified specialists, i.e. to establish the real business abroad.
Determination of residency by company’s place of management
The implementation of the current will be an easy way to detect offshore and other non-resident companies as the Russian taxpayers, if the real management of such companies is carried out in Russia. In particular, in Belarus the similar provision is exercised in practice within the framework of tax and operational procedures, including top management. If it is find out that the effective management of offshore company governed by Belarusian company, the extra tax is charged.Accordingly, delegation of self-decision powers to foreign company and waiving the company’s direct management from Russia may be resolve the present issue.
Taxation of real estate transactions
According to the article 309 of the amended tax code of the Russian Federation, income tax not only from sale of shares/interest of the Russian companies which assets consist of the Russian real estate for more than 50%, but also any companies which assets, directly or indirectly, consist of the Russian real estate for more than 50% and it will prevent selling the Russian companies under the pretence of foreign companies. These changes have been introduced to the international tax agreements made by Russia with Cyprus, Luxemburg and Switzerland, and are expected in relation to the tax agreement with Netherlands. Accordingly, this changed rules in Russian taxation may not be threaten to tax agreement most frequently being used.
These are the most urgent amendments only and these will make impact on the majority of the Russian and non-Russian residents.
Roustam Vakhitov
Head of Tax, Baker Tilly Ukraine
E-mail: Roustam.vakhitov@bakertilly.ua
