Tax Flash Report by PwC experts
Amendments to CFC rules pass first reading
in State Duma
December 2015 / Issue No. 46
In brief
A bill amending provisions in deoffshorisation legislation has passed its first reading in the Russian State Duma 1.
We described this bill in detail in November 2 and, in this report, we will discuss what will be changed in
deoffshorisation legislation should the current wording of the bill be adopted.
When lawmakers are about to pass the amended text, we will prepare an overview of how the updated
deoffshorisation legislation shall work.
The key variations of this bill from the previous version are:
 No taxable income shall arise upon the transfer of property (cash, property rights) to a structure without
creation of a legal entity by its settler, the settler’s family members and/or close relatives, and CFCs
controlled by such persons;
 Income received by an individual in money and/or in kind from a structure without creation of a legal
entity shall not be taxed within the limits of the value of property (including cash and/or property rights),
which was previously contributed by such an individual, and members or his/her family and/or close
relatives, provided such a structure lacks retained earnings;
 Transfer of control over a structure without creation of a legal entity among family members and/or close
relatives shall not constitute a taxable event for the receiving party;
 Provision on sale by an individual of securities obtained upon the liquidation of a foreign company
(structure) or obtained from a CFC have been amended;
 Provisions on using a CFC's financial statements to calculate profits (losses) of such a CFC have been
amended;
 The provision, whereby transfer of "all or almost all" income down the chain of ownership (as a criteria
for absence of the actual right to income) has been eliminated from the bill. Thus, the wording "in full or
in part" will remain;
 Article 310.3 of the RTC, which governs the taxation of indirect sales of Russian real property between
foreign companies, has been eliminated from the bill.
Please find below a brief description of the key changes introduced into the RTC by the bill.
In detail
Controlled foreign companies (CFCs)
Notifications on participation in foreign companies/structures without creation of a legal entity (hereinafter, the
"Structures")
1
2
http://asozd2.duma.gov.ru/main.nsf/(Spravka)?OpenAgent&RN=953192-6
http://www.pwc.ru/en/tax-consulting-services/legislation/tax-flash-report-2015-37.html
www.pwc.com
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The criteria for filing Structures’ notification shall be limited solely to the settlement of such a Structure,
but will not extend to the actual right to earn income and exercise control over such a Structure. In other
words, the notification would have to be submitted by the settlors, and not the beneficiaries, of said
Structure.
Trustees that are deemed to be Russian tax residents would also have to file notifications on their
participation in foreign organisations or settlement of a Structure, provided that assets under their trust
management had been transferred by them into the capital of foreign organisations or to the Structures in
which they serve as settlors.
The bill clarifies that if an individual, who is not a Russian tax resident, becomes a resident within a given
calendar year, the notification on his/her participation in, or incorporation of, a Structure as of 31
December, must be filed by 1 February of the following year.
The bill relieves persons who participate in foreign companies merely by possessing direct and/or indirect
interest in one or several Russian public companies of their duty to file notifications on such
participation.
The bill extends the list of information to be submitted in notifications on participation in foreign
organizations and the settlement of Structures, as well as CFC notifications. For example, a notification of
the settlement a Structure must specify whether the founder acts as a controlling party of the Structure.
The scope of information to be provided on such Structures would also be expanded (i.e., the bill would
require identification of the legal form of the Structure, as well as details on its incorporation documents
and registration data).
If a taxpayer constitutes a controlling party, as per Article 25.13.3.2 of the RTC, i.e. his interest in a
foreign organisation exceeds 10% while the aggregate stakes of all Russian tax residents in said foreign
organisation exceed 50% (thus, the taxpayer may, in theory, not know that he is a controlling party) but
still submits a CFC notification following the request of the tax authorities, he may submit
comments and/or documents together with a notification confirming that he was unaware of his status as
a CFC controlling party in the corresponding calendar year. If a CFC notification is submitted within the
set deadline, no penalties will be charged (as per Article 129.5 of the RTC (20% of the short-paid tax
amount) and Article 129.6 of the RTC (RUB 100,000 for each CFC, for which a notice has not been
submitted)).
Exemption of CFC profits
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When determining the share of passive income for the purpose of applying the tax exemption of a CFC’s
profits in Russia as provisioned for "active" companies, holding companies and sub-holdings, foreign
exchange gains and income listed in article 309.1.3 of the RTC will be excluded from calculation (i.e.,
amounts from the revaluation of securities).
The bill amends tax exemption on profits earned by CFCs that issue traded bonds.
Determination of CFC profits
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The new rules would exclude the requirement for obligatory audit of the financial
statements of foreign companies for their use in calculating CFC profits. The amended bill allows using
a CFC's financial statements, which are prepared in accordance with its personal law, to calculate its
profits, as long as that (1) the CFC is located in treaty country (with the exception of those countries that
do not share tax data with Russia), or (2) an audit report does not contain an adverse opinion or refusal
to state an opinion. Thus, a certain ambiguity in the language of a previous version of the bill has been
eliminated.
The bill also clarifies the requirements for a CFC's financial statements. It would allow for the use of
stand-alone financial statements prepared in accordance with the standards set by personal law of CFC
or, if no such standards have been set, in accordance with IFRS or other international standards. For
CFCs that are not located in treaty countries such financial reports must be audited either on an
obligatory basis or on a voluntarily basis under international audit standards.
Calculation of a CFC's profits under Russian tax rules (i.e. not based on the CFC's financial statements)
may be done on a voluntary basis, but the option of declining to calculate profits under Russian rules is
possible only after five years from the date of initial application.
Furthermore, the bill clarifies that when calculating a CFC's profits in accordance with Russian tax rules,
the profit amount shall be expressed in the relevant national currency and then converted into Russian
roubles at the average annual rate of the Central Bank of Russia. As a result, the effect of currency
fluctuations would be partially negated. In addition, the profit amount must be supported by
documentation (e.g. bank account statements, source documents, etc.).
While calculating a CFC's profits (losses), the bill proposes not taking into account not only
income/expenses from revaluations of securities and financial instruments, costs of formation and
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income from the reversal of provisions, along with profits (losses) of subsidiaries as reflected in the
financial statement (with the exception of dividends).
If a CFC's profits are calculated based on financial statements, profits (losses) from disposals of shares,
interest, securities and derivatives on the part of the CFC shall be adjusted according to their revaluation
amounts (including impairment) as assessed starting from 2015. Revaluation made as of 1 January 2015
will be considered.
A CFC's profits will be recognised in the possession of a controlling party in a share corresponding to the
party's interest in the CFC as of:
o the date of the decision to distribute the profits taken in the year following the tax period of the
controlling party; or;
o if such a decision has not been taken, 31 December of the year following the tax period for the
controlling party.
The bill specifies that the profits of a Structure (or of a legal entity, for which is not provided an equity
participation) can be reduced by the amount of profits distributed by said Structure. Such profits may be
distributed not only to the Structure's controlling party. Please note that the proposed amendments do
not contain any requirement that such profits are taxed at the side of the receiving party.
Income of a Structure constituting property (cash, property rights) received as
contributions from said Structure's settlors and members of their families and/or close
relatives, and as a contribution from a CFC controlled by at least one of the above-mentioned persons,
will not be included in calculation of the Structure's profits. Such property will not be expensed by the
contributing CFC. This provision shall not apply if the transferred property is the result of the profits of
the contributing CFC generated in a financial year, during which said CFC was liquidated.
Calculating participatory interest in a CFC
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If a controlling party’s participatory interest in a CFC's capital and the share of profits to which it is
entitled do not match (e.g., the controlling party holds preference shares), this party’s share in the profits
must be taken into account when calculating the CFC's liabilities.
The bill also amends the procedure for calculating participatory interests of a taxpayer in a foreign
organisation, which is realised through a Structure (e.g. when such an organisation is owned through a
trust), as long as that such taxpayer is the Structure's controlling party. The proposed new rules also
clarify the procedure for determining participatory interests in other specific cases.
Exemption provisions
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The tax-free liquidation exemption applicable to foreign organisations or Structures has
been extended for individuals and legal entities for one more year until 1 January 2018 (in certain
circumstances, this term may be extended further).
If a controlling party of a CFC or its Russian-related entity acquires securities from the CFC at the same
price at which the CFC itself had previously acquired them (but not in excess of their market value), the
individual will then not possess any economic benefit (imputed income) that is taxable in Russia. That
said, such a CFC must be liquidated before 1 January 2018 (this deadline may be extended if a resolution
on liquidation is taken before 1 January 2017, but for certain reasons, this procedure cannot be
completed).
Upon further sale of securities obtained by an individual upon liquidation of a foreign organisation
(Structure) or acquired from a CFC, such an individual may reduce his/her income by the lesser of: (1) the
value of securities determined on the basis of the CFC's accounting data, or (2) the arm's length value of
the securities on the date when the title thereto was transferred by the CFC.
Income received by an individual in money and/or in kind from a Structure or from a legal entity, for
which is not provided an equity participation, shall not be taxed within the limits of value of property
(including cash and/or property rights), which was previously contributed by said individual, members or
his/her family and/or close relatives, except when the Structure has retained earnings at the time when
such income is distributed.
If the controlling party has already paid tax due on a CFC's profits in Russia, then, if such profits are
further distributed in the form of dividends to the controlling party, the relevant dividend income shall
not be taxed in Russia.
Obtaining control rights with respect to a Structure or a legal entity, for which is not provided an equity
participation, through transfer of rights among family members or close relatives, is not considered to be
a taxable income or accrual of a right.
Corporate tax residency
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Only foreign organisations that have been voluntarily recognised as Russian tax residents may apply the
0% tax rate under the exemptions stipulated in Article 284.3.1 of the RTCs.
The list of foreign organisations that can only be recognised as Russian tax residents on a voluntary basis
has been supplemented with companies engaged in leasing or subleasing of sea vessels, mixed river-seagoing vessels, and/or international cargo, passenger and luggage transportation, as well as other services
related to such transportation, with the share of income generated from such activities constituting at
least 80% of such companies' total income.
The bill clarifies that registration (de-registration) of foreign organisations as Russian tax residents shall
be performed through submission of an application.
The bill also clarifies the procedure for identifying the first tax period for foreign organisations with no PE
in Russia that have voluntarily recognised their Russian tax residency (from 1 January of the year when
application was submitted, or from the moment of submission until the end of a calendar year; if an
application is submitted in December, from said submission date until the end of the following year).
The exemption, under which a foreign company shall not be deemed a tax resident if it has been
liquidated before a certain date, was extended for another year up until 1 January 2018 (in certain
circumstances, this term may be extended further).
Actual right to income
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The bill extends the application of all provisions of Article 7 of the RTC with respect to the concept of
beneficial ownership to Structures.
In addition, the actual owner of income may be a person for which another person (entity, Structure)
disposes of such income.
If an individual or a legal entity receives payments from a foreign organisation, which are sourced from a
Russian organisation, and has the actual right to such payments, the Russian taxpayer should then not
pay tax on these payments. In such cases, the individual must provide documentary evidence that (1) tax
was withheld by a Russian organisation acting as an agent, and (2) he/she actually has the actual right to
such income (before the date of its payment).
The provision, whereby the transfer of "all or almost all" income down the chain of ownership constituted
the criteria for the absence of an actual right to income, has been eliminated from the bill. Thus, the
wording "in full or in part" will remain in effect.
Sales of real property in Russia
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The proposed new Article 310.3 of the RTC, which governs taxation of indirect sales of Russian real estate
between foreign companies, has been eliminated from the bill. It is possible that lawmakers will again
discuss a taxation mechanism for such situations at a later date.
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