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Russia to soften its stance on Controlled Foreign Corporations

Russia’s upper chamber of parliament, the Federation Council, has ratified a draft law that will soften its position on Controlled Foreign Corporations (CFC). This comes after amendments to the Tax Code of the Russian Federation in late 2014 that tightened the screws and increased taxation on foreign-owned businesses.

-> Russia toughens up on Controlled Foreign Corporations

Controlled Foreign Corporations are foreign companies that are not tax residents of the Russian Federation, but whose controlling parties are considered Russian residents. In the government’s drive for comprehensive business de-offshorisation, CFCs will be required to disclose their foreign assets and subject to stricter scrutiny than before.

Changes to the CFC law "On amendments to Part One and the Part Two of the Tax Code of the Russian Federation (with regard to taxation of controlled foreign companies' profit and foreign organisations' revenues)" were agreed during the meeting of 10 February 2016. The bill is expected to be signed by president Putin and enacted in the course of February.

The most important changes provided for in this new law are as follows:

  • The deadline to alert tax authorities regarding the participation in (or withdrawal from) foreign organisations has been extended from one to three months.
  • The provision for double taxation of CFC revenues has been eliminated.
  • Tax liability is now applicable to businesses that have independently declared themselves tax residents of the Russian Federation.
  • Provisions for tax exemption have been refined to include specific requirements for bonds and debt obligations as well as conditions pertaining to the incorporation of a CFC in country bound by bilateral/international agreements with the Russian Federation.
  • Income contributed by family members and close relatives of CFC controlling parties (but who do not constitute legal entities) in the form of assets (including funds), will not be taken into account during the fiscal assessment of the company.
  • Rules for assessing CFC profits and losses have been refined to meet financial data reporting rules as well as regulations established in Chapter 25 of the Tax Code of the Russian Federation.
  • The period of liquidation for CFCs and foreign companies that do not constitute legal entities has been extended by one year, from 01 January 2017 to 01 January 2018. For liquidations decided before 01 January 2017, in which the company is liable to bond and shareholders, the period can be prolonged for another year or until their fulfillment in the case of court proceedings.

The previous version of the CFC law came in force on 01 January 2015. Its sweeping definitions allow tax authorities to pursue any Russian citizen residing abroad and earning revenue off business activities. Therefore, it is important to stay abreast of changes and submit documents to regulatory bodies in a timely manner.

According to Vedomosti, a major national newspaper, Russian citizens engaged in activities overseas are now required to submit a CFC notice copy (or a consultant´s conclusion that no notice is needed) in order to open accounts at Swiss banks, including UBS, Credit Suisse and Rothschild Group. In the absence of this document, the request can be denied.

The law approved in 2015 requires Russian residents to disclose transactions on personal and foreign accounts. "Under the new rules, individuals must submit cash flow statements by 01 June after the fiscal year’s end. The reporting procedures have already been laid out", says Tranio lawyer Ekaterina Shabalina.

On 29 December 2015 Russian lawmakers also adopted a law "On amendments to the Article 5 of the Federal Law ‘On voluntary declaration of assets and bank accounts/deposits by individuals and on introducing amendments to certain legislative acts of the Russian Federation’". According to Ms. Shabalina, the deadline for voluntary declaration of assets and bank accounts/deposits has been extended to 30 June 2016, from 31 December 2015.  There are specific forms provided for individuals recognised as the controlling parties of CFCs to declare assets, accounts and deposits.

Tranio recommends seeking well-informed advice as scrutiny and overheads will no doubt increase. In any case, any company or individual who may meet the criteria of a controlling entity in the future would do well to monitor the situation and make sure paperwork is submitted in due time.

Yulia Kozhevnikova, Tranio

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