A new version of the draft CFCs law

Indeed, the CFC rules have been eased significantly comparing to the former version of the draft law:

1.  A threshold interest in CFCs which will be covered by the new rules is to be lifted fr om 10% to 50% in 2015; in 2016 it will be 25% for a single person or 10%, if Russian residents hold an interest of more than 50% in aggregate.

In the international practice a threshold value eligible for recognizing a foreign company as controlled varies by country, as a rule, within a range of 10 to 50%. In some countries CFC rules provide for summing interest in the capital or voting shares owned by related (affiliated) persons.

Obviously, if the threshold is set, as the business community suggests, ‘50% + 1 vote’ then only a few of actually controlled companies would be recognized as such, because shareholders will only need to share their shares in proportion of 40-30-30 or 50-50 to be able to avoid control for sure. A threshold of 25% seems to be quite reasonable.

2.  The amount of CFCs profit which must be declared will increase from Rb 3m to Rb 50m in 2015 and Rb 30m in 2016. Later the amount is to be gradually reduced to Rb 10m.

Since it won’t be easy for tax authorities to monitor taxpayers’ observance of the CFC rules, this trade-off will be safe for the state, at least in the short-run: it just sets a reasonable threshold of “materiality” during audits.

3.  In 2015-2016, taxpayers who have failed to pay the profit tax from CFCs profit will be released from a fine equal to 20% of the outstanding amount of tax liability, but not less than Rb 100,000.

This fiscal loosening is similar to that which was in effect during the first two years after the new transfer pricing rules came into effect in 2012. The period will be sufficient for taxpayers to adjust themselves to the new rules and possibly rearrange the structure of ownership of foreign assets with a view to avoiding the CFC rules.

As far as we understand, the new version of the draft law still provides for the division of CFCs income into income from active and passive activity, as well as application of the new rules to the CFCs in the jurisdictions wh ere the effective income tax rate, as calculated subject to specific rules, is less than 15%.

In our opinion, the rules proposed by the Ministry of Finance are reasonable and not tougher than the CFC rules which have long been in effect in states with developed systems of taxation.

The Ministry of Finance suggests that the draft law should be considered as soon as possible and the CFC rules introduced at the beginning of 2015. The draft law will definitely be further considered and the business community will make efforts to ease the new rules as much as possible. The success of the CFC rules will depend largely on effective exchange of information between tax authorities at various countries.
 
Svetlana Shatalova, Senior Researcher