The long waited Federal Law has been finally published...
On March 18, 2014 Russia's Ministry of Finance posted on its website Draft Federal Law "Concerning Amendments to Parts One and Two of the Tax Code of the Russian Federation (as related to taxation of profits of controlled foreign companies and increase of efficiency of the tax administration of foreign organizations)."
Issues resolved by the draft bill have been announced in the Key Trends in Russian Federation Tax Policy for several years. The concept of controlled foreign companies (CFC) is introduced in the framework of measures aimed at deoffshorization of the country's economy, and pursuant to "the May decrees" of the President of the Russian Federation. The draft bill fills up the existing legal gap regarding the definition of the term "tax resident" in terms of its application towards the legal entities. Earlier this term only applied to individuals in the Tax Code. Corresponding changes are made to Article 246 of the Tax Code of the Russian Federation.
Foreign organizations will be recognized as tax residents of the Russian Federation, along with the Russian organizations, on the basis of the provisions of international tax treaties, as well as foreign organizations with the place of effective management in the Russian Federation.
The draft provides for a list of features, any of which may be the basis for recognition of the Russian tax residency: holding meetings of the Board of Directors in the territory of the Russian Federation, governing management from the Russian Federation, carrying out activities of chief executives in the territory of the Russian Federation, accounting records maintenance in the Russian Federation, and even location of archives of a foreign organization in the territory of the Russian Federation.
The said innovation extends the tax jurisdiction of the Russian Federation through the use of the foreign element, and is aimed at elimination of tax schemes previously used for tax evasion due to differences in national legislations of the countries upon determination of the tax nationality of legal persons.
Pursuant to the draft a controlled foreign company is a company which is a tax resident of the country (territory) included in the list of states and territories providing preferential profits (income) tax treatment approved by the Ministry of Finance of Russia (i.e., an offshore company) whose shares have not been listed and (or) have not been listed in one or more stock exchanges included in the list approved by the Central Bank of the Russian Federation in coordination with the RF Ministry of Finance. Note that, for instance, pursuant to the laws of Kazakhstan (a member country of the Customs Union and the Common Economic Space), operation of CFC concept is also not limited to offshore companies.
Controller of an organization is a person whose direct or indirect joint participation in the organization exceeds 10%. Pursuant to the international experience this joint participation is sufficiently low. Pursuant to the international experience in most cases a controller is a person whose direct or indirect participation exceeds 10%. At that, joint participation share varies from 25 to 50%.
Terms of notice and liability for breach of duty to provide information concerning participation in foreign organizations are rigid. Failure to submit information to the tax authority consisting in the controller's refusal to submit available documents, as well as other evasion from submission of such documents, or submission of documents containing deliberate misrepresentations shall entail a fine with the controller in the amount of RUB 100,000. Amount of the fine is very significant for the Russian tax system, but compared to, for instance, USA (penalties for failure to submit the information vary from USD 10,000 to 100,000) is not too high.
In general, the draft bill brings a lot of innovations in terms of approaches to taxation, and hot discussions are expected on provisions thereof.
Natalia Kornienko, Natalia Postnikova, Elena Velikova – research associates of the tax system development laboratory